Introduction to the investment strategy
This is a multi-asset strategy that provides long, diversified, beta-exposure to a number of asset classes within Equities, Fixed Income, Commodities and Real Estate. The beta-exposure is complemented by allocation to an Alpha Portfolio in the form of different hedge fund strategies.
The purpose of the Alpha Portfolio is primarily to provide non-correlated returns visavi the Beta Portfolio.
The strategy belongs to the investment category Multi-Asset Investing also known as Asset Allocation. Check the Literature List for further details. The strategy is suitable for the conservative global investor, with a strong focus on capital preservation. The long-term objective is to achieve a return above long-dated government bonds, to the same or lower volatility.
Portfolio composition – how are the positions determined?
The strategic portfolio is established using a portfolio simulation technique that involves Monte-Carlo simulation with Latin Hypercube Sampling, mitigation of tail and shortfall risk.
The securities in the portfolios are all exchange traded, meaning that the overall exposure can be increased or decreased swiftly at low cost. Exchange-traded-funds, ETFs, and exchange-traded-notes, ETNs, are used extensively. The products are provided by firms like iShares, Invesco PowerShares, State Street Global Advisors among others.
Entry/exit – when are the positions changed?
The strategic portfolio is reallocated on a semi-annual basis. Tactical adjustments are made between the strategic reallocations.
Merely apply the portfolio weights to determined the exact positions. Depending on the portfolio size, there could be situations when some instruments are traded in odd-lots.
Dynamic, time-varying, leverage is used. The level of leverage is in the range of 0% – 40%, implying a Trading Level of between 0% and 140% of the portfolio value. A margin account is needed to implement the strategy.
The risk of loss due to market movements, market risk, is handled by means of diversification – allocation is made to a number of different asset classes on a global basis. The liquidity risk is lowered by using only exchange-traded instruments.
Results – what to expect?
This is a conservative strategy with an expected long-term return of 10-Year US Treasuries + 200 bps p.a. The expected volatility is equal to or lower than that of 10-Year US Treasuries.
Risk – which types of market environments are detrimental to the strategy?
A situation of a general market down-turn in the short-term for the ‘risky’ asset classes is negative to the strategy, as there is no explicit hedging (no short positions) or protection (no put options) and the correlation often increases in these situations.
Geo-political shocks, like war, terrorism, protectionism as well as distress in the global financial system lead typically to short-term losses for the strategy. Lowering of global growth expectations and of higher inflation expectations are also negative for the portfolio.
The home currency for the portfolio is US$.