Strategic Asset Allocation: The Global Multi-Asset Market Portfolio
The portfolio of the average investor contains important information for strategic asset allocation purposes. This portfolio shows the relative value of all assets according to the market crowd, which one could interpret as a benchmark or the optimal portfolio for the average investor. We determine the market values of equities, private equity, real estate, high yield bonds, emerging debt, non-government bonds, government bonds, inflation linked bonds, commodities, and hedge funds. For this range of assets, we estimate the invested global market portfolio for the period 1990-2011. For the main asset categories equities, real estate, non-government bonds and government bonds we extend the period to 1959-2011. To our understanding, we are the first to document the global multi-asset market portfolio at these levels of detail for such a long period of time.
From the paper:
In the appendix we describe our data sources and methodology in detail. Here, once again we stress that we focus on the invested market portfolio. This sums up to the opportunity set that is available to investors. We estimate the total market capitalization of the invested global multi-asset market portfolio at USD 83.5 trillion at the end of 2011. Equities represent the largest asset class with a market value of USD 29.0 trillion, or 34.7% of the total market capitalization of all asset classes. Government bonds follow closely with USD 25.0 trillion, which equals 30.0% of the market portfolio. Non-government bonds, primarily consisting of corporate bonds and mortgage backed securities, are worth USD 15.4 trillion or 18.4%. All other asset categories are relatively small compared to these three asset classes. They vary from USD 0.4 trillion (0.5%) for commodities to USD 3.7 trillion
(4.4%) for real estate. The market capitalization of these seven relatively small asset categories adds up to USD 14.1 trillion (16.9%).”
AQR out with a couple new risk parity funds (targeting 10% and 15% vol). I think when the SEC gets comfortable with derivatives an ETF could easily replicate the risk parity funds for 50 bps or so…but nice to AQR launching lots of interesting funds.
We track a handful of alternative funds (this list is a bit outdated) and below are a few graphics on funds and their performance YTD through October. (Disclosure we own some of these.)
Click to enlarge.
As a follow up to our valuation work, this is a fun table of countries and their CAPE values as well as current drawdowns (total returns).
Not surprising if you’ve read our last few blogs, but low value correlates highly to high drawdowns for the most part. ie the average drawdown for CAPE values:
less than 10: -60%
10 to 15: -25%
Typically, over time, value is rewarded.
Those that are on my professional mailing list will realize we have incorporated some value metrics into our global tactical models as well as new stand alone portfolios.
Values are from 10/31/2012.
We added a column of representative ETFs but please realize the ETF listed may not correspond directly to the indexes we used. Also note I own many ETFs in our funds and accounts.
Article & video here on Hedge Fund Letters on some hedge funds doing great this year. Two funds mentioned are Appaloosa & Lone Pine.
Tracking these funds long only stock picks is also doing well, as:
Tepper’s top 10 holdings, equal weighted and rebalanced quarterly 50 days after the quarter end is up ~38% YTD.
Mandel’s top 10 holdings, equal weighted and rebalanced quarterly 50 days after the quarter end is up ~18% YTD.
Other funds long only stock holdings that are doing well (up over 40% YTD) are:
DAFNA & Ridgeback & Baker Bros & RA (biotech related)
Trafalet, Chou, Fortress, SouthShore, and Goldentree.
What is a simple way to generate more alpha? Take your alpha strategy, and do the opposite!
Summary from CXO
Fantastic table on page 16, click to enlarge…
The latest index literature is bursting with new innovations based on quantitative strategies that are predicated on sensible investment beliefs. Empirical studies confirm that these strategies do indeed deliver economically large and statistically significant excess returns over the cap-weighted market benchmarks in nearly all geographical and country studies. To the casual observer, it will be shocking to learn that inverting the portfolio construction algorithms does not reverse the alphas. Embarrassingly, the inverted strategies often outperform the originals.
This paradoxical result is driven by the phenomenon that seemingly unrelated and non-value-based strategies and their inverse strategies often have unintended and almost unavoidable value and small-cap tilts. Even Burt Malkiel’s blind-folded monkey, throwing darts at the Wall Street Journal, would produce a portfolio strategy with a significant value and small-cap bias that would have outperformed historically. The value and small tilts stem from the fact that these new weighting schemes sever the link between a company’s share price/capitalization and its weight in the portfolio. Generally, an investment thesis where price does not drive the weight in the portfolio will have a value tilt and an investment thesis where company size/capitalization does not drive portfolio weights will have a small-cap tilt. As a result, these strategies produce outperformance against the cap-weighted benchmark due to the often unintended value and small cap tilts and independent of the investment philosophies that drive the product design.
From the folks at Orgami out with a new investment $130,000 contest.
Also, another fun Idea Farm email went out last week that has an issue of Manual of Ideas….included is a reading list from de Vaulx that features some books I have never heard of like City of London: 1815-2000 by Kynaston and A Financial History of Western Europe by Kindelberger. Both in the mail…
Somewhat surprisingly, I didn’t receive a single response to my trading systems on drawdowns post. My buddy Wes at Turnkey Analyst commented that investing in drawdowns is likely just the value effect (things get really cheap usually when they are down 50-90%!). So we recreated the chart but with valuations, and lo and behold, no shocker but sectors are cheapest when they are down the most.
Two factors that have consistently worked over time are value and momentum. Lots and lots of research in the archives as well as our work here. We also emailed out a must read debate between Arnott and Asness this weekend on GTAA and factor investing…
On the sector front, the three most undervalued sectors relative to their valuation over the past 20 years are financials, energy, and healthcare. The three best sectors for momentum are financials, healthcare, and consumer discretionary (over a 1-12 month timeframe). Obviously I think financials and healthcare are good spots to be as they combine the nice combo of cheap assets that show nice momentum.
On the country front for foreign some of the best momentum has been Belguim, Hong Kong, Germany, Greece, Turkey, Egypt, Thailand, and Mexico.
The cheapest are Russia, and basically all of the struggling Euro countries. (Greece, Ireland, and Italy lead the pack). The best combo of the two is Belgium as it is trading at a sub 10 CAPE with nice momentum.
More background here.
Disclosure: I own, trade, and will buy and sell stocks, futures, options and ETFs based on these countries and sectors now and in the future for clients. I have said this plenty of times, but 100% of my investable assets are in the funds I manage…
We have posted a lot on reversion and counter trend systems on the blog over the years. One idea Prabhat and I were working on was taking a look at future returns to sectors and industries based on their drawdown level.
Below are a few tables that look at total returns, value weighted, to investors at various timeframes since the 1920s in US sectors. So, the 12 month average real return for Energy at 20% DD means the average return of all the months where energy was in a 20% or worse DD. (Tech and telecom are in the worst drawdowns currently.)
All from French Fama dataset…
My question to you is, what is the best way to turn this into a tradeable system? The best ideas will be tested and posted…We also realized that this will be a bit correlated to the value factor, but we also think that it captures some of the longer term reversion factor that we would like to be able to quantify better…
Obviously it pays to invest in drawdowns, but exactly how one does that without getting burned is the q. Like the famous quote Einhorn mentioned the other day, “What do you call a stock down 90%? A stock that was down 80% and then got cut in half….”
Also here is an older system on short term asset class reversion…(that would have had another successful trade in EAFE and EEM last summer).
If you haven’t been to Hedge Fund Letters in awhile, stop by. I’ve found a solid group of writers for the site, and in addition to the 200 or so hedge fund profiles we now have a blog that updates a few times a week.
Here is a good summary and video of the always entertaining Hugh Hendry.
If you have any suggestions, let us know!
It looks like the 5th! Edition of Stocks for the Long Run will be out in a month or two. I am highly curious to see if Jeremy will admit that trendfollowing works in this edition. He has a chapter in the book where he examines trends on stocks, shows statistical evidence that it does work then concludes it doesn’t work. This edition will have the 2008/2009 bear market in the update, so hopefully he will also report max drawdown numbers as those matter more to investors than volatility.
It is still about 70- 80 degrees in LA, but I thought I would share this gorgeous photo from my buddy Brad Hays who lives in Garmisch Germany…