In the low-yield, low-return environment we are likely to be in for a few more years, one would expect a typical multi asset portfolio to return little. 2015 is a case in point – with global equities flat to down YTD (apart from rare exceptions such as Japan), investment grade bonds likewise, and commodities down significantly, the average balanced portfolio has produced uninspiring performance. The Morningstar Moderately Conservative Target Risk index, a gauge for multi-asset investing, is down 1.7% YTD with a 5.1% annual volatility. By comparison, the HFRI Fund Weighted Composite Index was up an unspectacular 0.27% on 30th Nov.
So what should one do, given the critical importance of balanced portfolios to so many investors, especially in the pension space? The first rules to remember are that keeping costs low, allocating carefully using market-tested frameworks and re-allocating systematically will contribute to better performance over time. The second thing to note is that, for those who are able to do so, enabling your portfolio to go long & short within bounds can further help to improve performance and reduce volatility.
The chart below brings this into perspective. It shows both long-only and long/short strategies designed on our platform using a well-known systematic allocation engine which re-balances once a month. The constituents, shown in the charts below, are highly liquid US-listed ETFs linked to US equities, international equities, US treasuries, and USD-denominated corporate bonds.
The first point to note is that the long-only strategy slightly outperformed the Morningstar index net of all trading and management fees, which are assumed here to be 0.4% per annum.
The second point is that allowing the allocation engine to be unconstrained, so that it can go long & short, generated additional performance while reducing volatility, bringing the strategy into positive territory net of fees.
This pattern is not exactly new. Unconstrained multi-asset portfolios able to go long & short have consistently outperformed long-only portfolios on a risk-adjusted return basis in the last fifteen years. But the difference in the current environment becomes starker – as the former produce positive returns while the latter barely break-even.
ALPIMA’s platform enables our clients to generate, analyse and execute such strategies, both long-only and long/short, based on a wide range of liquid instruments ranging from single stocks to dynamic ETFs in a few seconds with a few clicks.
Please contact us with any questions.