ReSolve FLASH REPORT: YUP DIVERSIFICATION STILL WORKS

Transcription

1 ReSolve FLASH REPORT: YUP DIVERSIFICATION STILL WORKS ReSolve Asset Management 1 Adelaide Street East Suite 2100 Toronto, Ontario M5C 2V9 T: TF:

2 YUP DIVERSIFICATION STILL WORKS Did you read our 2015 Annual Letter, entitled "Navigating Active Asset Allocation When Diversification Fails?" If not, you should, click here because some of the things that are happening in the markets right now are eerily in line with the topics addressed therein. To wit, the letter began: In most years...even as a portfolio is struggling it is possible to point to a few investments that performed admirably. This reality reinforces for clients the purpose of diversification; portfolios ought to hold assets with diverse performance profiles to optimize risk-adjusted returns. But sometimes there s a dearth of positive items to highlight, and 2015 was one of those years. Last year, very few investors especially the thoughtful, globally-diversified FAs we often speak with were able to reap the benefits of diversification. Following this relatively somber opening, we began an exploration of the myriad reasons global tactical asset allocators struggled through calendar We won't go into full details here, because you can read the report by clicking here, but we did identify multiple dynamics which normally contribute to the success of diversified strategies, but which all broke down simultaneously in Among them: 1. Average returns from top assets were the lowest in at least two decades. 2. The performance dispersion between asset classes was at historical lows. 3. Asset classes frequently crossed above and below their zero-return boundary. Concluding this discussion we offered up several reasons why - while constantly striving to improve - we remain committed to global diversification. 2 ReSolve Asset Management

3 We wrote: It is natural to wonder whether the environment we experienced in 2015 will continue to confound global strategies like ours in 2016 and beyond. While we can offer no guarantee that the situation will improve, our confidence is bolstered by the knowledge that in markets, it is almost always darkest before the dawn. To be clear, we are agnostic as to which way the markets move, as long as they do so with sufficient magnitude, diversity, and clarity of signal......over the short term, outcomes...are mostly dominated by luck. However, in the long-term investment success is a function of disciplined, diversified exposure to methodologies with solid economic merit, and a long-term track record of persistent returns. No sooner had we published our Annual Letter, addressing head on the adversity of 2015 and the reasons to stay committed to a thoughtful and risk-managed process, than global equity markets started to tumble. However, our long-only diversified global mandates were, perhaps unsurprisingly, able to navigate the market turmoil with aplomb. Figure 1. ReSolve CAD Globally Diversified Mandates vs. Popular Benchmarks: Equity Source: ReSolve Asset Management. Data from CSI. 3 ReSolve Asset Management

4 Figure 2. ReSolve CAD Globally Diversified Mandates vs. Popular Benchmarks: Returns and Maximum Drawdowns Source: ReSolve Asset Management. Data from CSI. For the record, we vehemently eschew any focus on short-term results. In fact, it is mostly impossible to distinguish investment skill from luck even when observing performance over many years. To ReSolve, a thoughtful investment process is a significantly better predictor of long-term success than a model's short-term historical performance. Which is why it's important to understand how this happened. First off, note that we didn t do anything differently in January 2016 than we did in We followed the same process, constantly seeking out diversified global portfolios with persistent positive momentum. But in contrast to most of 2015, the investment environment in January of 2016 presented an abundance of opportunity. First off, global markets offered differentiated assets with persistent momentum and materially positive performance that our process was able to capitalize on. Of course, those assets (government bonds) were not what investors typically - and myopically - focus on (stocks). But that s why we re agnostic about market 4 ReSolve Asset Management

5 direction; because in most environments we can count on the fact that there is a bull market somewhere, even during a bear market in stocks. That said, while our portfolios were universally skewed toward positively trending Treasury bonds in January, our process did not eschew stocks entirely. That s because of our focus on diversification. In fact, Figures 3. and 4. show average holdings on the month for the Adaptive Asset Allocation 8% Target Volatility mandate, and their average risk contributions in the portfolio, respectively. Note that portfolios were heavily skewed toward Treasuries, especially in terms of capital allocation. However, while equities consumed almost 20% of the portfolio s capital, they contributed almost none of the risk. That s because the equity assets had almost zero correlation to the overall portfolio. Figure 3. ReSolve Adaptive Asset Allocation (8% Volatility Target, CAD) Average Portfolio Holdings in January 2016 Source: ReSolve Asset Management. Data from CSI. 5 ReSolve Asset Management

6 Figure 4. ReSolve Adaptive Asset Allocation (8% Volatility Target, CAD) Average Risk Contributions in January 2016 Source: ReSolve Asset Management. Data from CSI. Of course, another distinguishing feature of ReSolve mandates is that they were fully invested at all times during the month. In contrast, many global tactical strategies leaned heavily on concentrated cash positions to weather the market s turbulence. Not only is this type of position evidence that a methodology is vulnerable to extreme bets, it is also a sign of a fragile approach that is particularly exposed to just one or two wrong-way positions. Furthermore, the purpose of investing is to gain exposure to risky assets to earn a long-term risk premium. Large holdings in zero-yielding cash positions undermine this source of long-term returns. 6 ReSolve Asset Management

7 In summary, January offered a rare opportunity to see which investment methods were swimming naked as the proverbial tide went out for global equities. While no investment approach will deliver positive performance all the time, global strategies that actively promote diversification are more reliable than most. To learn more about our spectrum of globally diversified strategies, please visit 7 ReSolve Asset Management

8 General Disclaimer ReSolve Asset Management Inc. ( ReSolve ). is registered as an investment fund manager in Ontario and Newfoundland and Labrador, and as a portfolio manager and exempt market dealer in Ontario, Alberta, British Columbia and Newfoundland and Labrador. In the U.S. ReSolve is registered with the United States Securities and Exchange Commission as a Non-Resident Investment Adviser. General information regarding hypothetical performance and simulated results. Past results are not necessarily indicative of future results. It is expected that the simulated performance will periodically change as a function of both refinements to our simulation methodology and the underlying market data. These results are based on simulated or hypothetical performance results that have certain inherent limitations. Unlike the results in an actual performance record, these results do not represent actual trading. Also, because these trades have not actually been executed, these results may have under- or over-compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated or hypothetical trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account or fund will or is likely to achieve profits or losses similar to those being shown. The results do not include other costs of managing a portfolio (such as custodial fees, legal, auditing, administrative or other professional fees). The information in this presentation has not been reviewed or audited by an independent accountant or other independent testing firm. More detailed information regarding the manner in which the charts were calculated is available on request. Any actual fund or account that ReSolve manages will invest in different economic conditions, during periods with different volatility and in different securities than those incorporated in the hypothetical performance charts shown. There is no representation that any fund or account will perform as the hypothetical or other performance charts indicate. General information regarding the simulation process. The systematic model used historical price data from Exchange Traded Funds ( ETFs ) representing the underlying asset classes in which it trades. Where ETF data was not available in earlier years, direct market data was used to create the trading signals. The hypothetical results shown are based on extensive models and calculations that are available for any potential investor to review before making a decision to invest. 8 ReSolve Asset Management