Rebalancing a Global Policy Benchmark: How to Profit from Necessity

Transcription

1 Rebalancing a Global Policy Benchmark: How to Profit from Necessity FQ Perspective LISA PLAXCO 1 Introduction Past and simulated performance is no guarantee of future results. Potential for profit is accompanied by possibility of loss.

2 2 Simple Rebalancing Alternatives

3 Focus on Alpha Return and Risk 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 12-Month Return Standard Deviation Information Ratio Buy&Hold Daily 20-Day 60-Day Annual Information Ratio 3

4 4 Rebalancing Strategies Drifting Opportunity- Passive Rebalancing Mix Based Monthly Quarterly Annualized Return ii 13.43% 13.20% 13.26% 13.26% Standard Deviation 9.47% 9.47% 9.43% 10.29% Return/Risk Ratio

5 Percent Allocations 6% 4% 2% 0% -2% -4% stock bond -6% Focus on Risk 5

6 110% 105% 100% 95% 90% 85% 80% 75% 70% 65% 60% at 80% Eqty at B mk -18% -31% 110% -44% -18% -31% 100% -44% Initial Funding Levels solids=110%, stripes=100%, dots=95% -18% -31% 95% -44% Annualized Std Return/Risk Equity Allocation Return ii Deviation Ratio End Average Asset Classes Equities 12.79% 15.23% Bonds 7.94% 10.65% Drifting Mix 11.99% 13.51% Quarterly Rebalancing 11.90% 13.05%

7 7

8 Asset Class Quarterly Drifting Portfolios Rebalancing Mix Equities Bonds Initial Equity Allocation End Equity Allocation Average Equity Allocation Annualized Return 15.07% 16.04% 23.94% 5.78% Naïve VA Assumption 1.85 Actual VA 0.97 Risk-Adjusted Rebalancing Gain 0.88 Quarterly Rebalanced to: Drifting Mix Asset Classes Initial Equity Allocation End Equity Allocation Average Equity Allocation Annualized Return ii 15.07% 16.81% 18.05% 16.04% 23.94% 5.78% Annualized Risk 9.54% 10.56% 11.38% 10.79% 15.93% 8.14% Return/Risk Ratio

9 Conclusion 9

10 Appendix 1: Comparing Rebalancing Alternatives Rebalancing Strategies Periodic Rebalancing Range Rebalancing i Drifting Mix Monthly Quarterly Annual to the Range to B mk Annualized Return ii 13.20% 13.26% 13.19% 13.11% 13.11% 13.26% Standard Deviation 9.47% 9.43% 9.62% 9.71% 9.67% 10.29% Information Ratio i Ranges are ± 5%. ii All returns shown are net of simulated transaction costs of 10 b.p. 10

11 Annualized Standard Return/Risk Equity Allocation Return ii Deviation Ratio End Average Asset Classes Equities 12.13% 15.29% Bonds 8.55% 10.42% Drifting Mix 10.79% 11.23% Monthly 10.63% 10.59% Quarterly 10.68% 10.57% Annual 10.64% 10.65% to the Range i 10.62% 10.63% to Benchmark i 10.56% 10.64% Annualized Standard Return/Risk Equity Allocation Return ii Deviation Ratio End Average Asset Classes Equities 12.17% 14.33% Bonds 9.34% 7.83% Drifting Mix 11.02% 9.78% Rebalancing Monthly 11.00% 9.21% Quarterly 11.09% 9.19% Annual 11.02% 9.23% to the Range i 11.03% 9.25% to Benchmark i 11.14% 9.24% This material is for your private information. The views expressed are the views of First Quadrant, L.P. only through this period and are subject to change based on market and other conditions. All material has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. FIRST QUADRANT, L.P. 800 E. COLORADO BLVD. SUITE 900, PASADENA, CALIFORNIA MARKETING SERVICES INFO@ OFFICE WEB Copyright by First Quadrant, LP, 2014, all rights reserved.