Dynamic Asset Allocation. Thomas Chevrier, Ph.D. Head of State Street Associates, Asia Pacific State Street Global Markets

Transcription

1 Dynamic Asset Allocation Thomas Chevrier, Ph.D. Head of State Street Associates, Asia Pacific State Street Global Markets

2 Outline Introduction to Dynamic Asset Allocation Why DAA What is DAA Allocation Strategies and Constraints Results Model Performance Betting Returns Methodology Dynamic Equities and Bonds Asset Allocation Dynamic Currency Asset Allocation Quality of Alpha Conclusion Appendix Futures Basket Cost 2

3 Typical Australian Investor Performance Through Time Preserving Portfolio Value Is a Constant Challenge Strategic Asset Allocation (December 2010)* Asset Class Weight 23% 18% Annualized 2 Year Rolling Returns Australian Equities 30% International Equities 15% Emerging Market Equities 5% Property 10% Alternatives 15% Australian Composite Bonds 5% Australian Sovereign Bonds 5% International Bonds 5% Cash 10% Total Weight of Dynamic Assets 80% * Quarter 2010 Rainmaker Roundup Industry Funds 13% 8% 3% -2% -7% Jun-99 May-01 Apr-03 Mar-05 Feb-07 Jan-09 Dec-10 High Turbulence SAA Turbulence is determined using Global Asset Turbulence Index Source: State Street Bank Europe Limited 3

4 Why Dynamic Asset Allocation? Statistics Over Crisis Periods November February 2003 Total Return Standard Deviation Average Monthly Return October February 2009 Total Return Standard Deviation Average Monthly Return SAA -3.50% 5.45% -0.12% SAA -9.78% 6.39% -2.04% DAA 2.79% 4.18% 0.11% DAA -6.13% 4.94% -1.26% 23% Annualized 2 Year Rolling Returns 18% 13% 8% 3% -2% -7% Jun-99 May-01 Apr-03 Mar-05 Feb-07 Jan-09 Dec-10 4 High Turbulence SAA DAA

5 What is Dynamic Asset Allocation? Take advantage of specific market environments Asset Allocation Model Dynamic Asset Allocation Currency Turbulence Index 5 Stock / Bonds Cheap? Strategic Asset Allocation Carry Trade on/off?

6 3 Allocation Strategies Sample Constraints Currencies Equities Individual Bet Size <5% Total Bets in any direction <15% Short Selling Allowed X Short Currencies X Equities Bonds Leverage Long / Short Strategy X X Bonds Currencies 6

7 Results Betting on Equities, Bonds, and Currencies: Out-of-sample information ratio of 0.89 Worst drawdown reduced from over 17% to less than 15% Reduced probability of a loss and Value-at-Risk Takes bets 97% of the months Average monthly turnover of 8% 7

8 July December 2010 Backtest (%) Model Performance SAA DAA Publication Lag Out of Sample In Sample Bets on Equities and Bonds Information Ratio Sharpe Ratio* Return-to-Risk Ratio Largest Drawdown Bets on Currencies Information Ratio Sharpe Ratio* Return-to-Risk Ratio Largest Drawdown Bets on Equities, Bonds, and Currencies Information Ratio Sharpe Ratio* Return-to-Risk Ratio Largest Drawdown * Riskless return = 4.5% 8

9 Betting Returns 2.0% 1.5% 1.0% 0.5% 0.0% -0.5% -1.0% -1.5% -2.0% Jul-97 Jul-99 May-01 May-03 Mar-05 Mar-07 Jan-09 Dec-10 Publication Lag Average Batting average is 61.25% 9

10 Dynamic Equities & Bonds Allocation Model Source: State Street Bank Europe Limited Asset Allocation Model (as of 28 February 2011) Signal Investor Behavior Regime Map Global Sector Risk Appetite Emerging Markets Flows Global Sovereign Bond Flows Global Dividend Yield Correlation Fundamentals Relative Valuation US Earnings Growth Global Yield Curve Turbulence Indices Global Breadth Model Favors Favors Bonds Stocks Stocks Neutral Stocks Stocks Bonds Stocks Stocks Bonds Stocks 10 Monthly publication 5 investor behavior signals 5 fundamental signals Customizable Favors Stocks Favors Bonds

11 Dynamic Equities & Bonds Allocation Model 100% Private Equity 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% International Property Cash Plus 2% Infrastructure International Inflation-Linked Bonds Specialist Credit Australian Property Diversity Cash Australian Sovereign Bonds Australian Composite Bonds Emerging Market Equities International Equities Australian Equities 11

12 Dynamic Currency Allocation Model Currency Turbulence Index and 30-Day Moving Average Turbulence Index Turbulence Index Moving Average Ruble Crisis Dot-com Bubble Burst 9-11 Accounting Scandals Subprime Mortgage Crisis Moving Average 1 0 Jul-97 Nov-98 Mar-00 Jul-01 Nov-02 Mar-04 Jul-05 Nov-06 Apr-08 Aug-09 Dec-10 0 Source: State Street Bank Europe Limited (February 2011). Published Daily Increases exposure to countries with interest rates higher than Australia & vice versa no active adjustment to exposure 12

13 Dynamic Currency Allocation Model 25% 20% 13 Currency Exposure (%) Currencies Exposure as % of Total Portfolio CAD 1.99 CHF 0.68 EUR 3.10 GBP 1.79 JPY 2.50 NOK 0.18 NZD 0.08 SEK 1.84 USD Total % 10% 5% 0% -5% -10% -15% -20% For Australian investors, currencies tend to diversify the portfolio, therefore taking currency bets may lead to greater portfolio risk in addition to generating potential alpha 26.34% is a small exposure which does not allow us to take large active bets NZD NOK CHF SEK CAD GBP JPY EUR USD

14 Quality of Alpha Quality of Alpha Percentage of Months with Bets Mean Return of Bets Batting Average Average Win Average Loss Win/Loss Ratio Information Ratio # years confident Bets on Equities and Bonds Publication Lag 91.88% 0.10% 56.05% 0.45% -0.36% Out of Sample 91.93% 0.18% 60.13% 0.49% -0.29% In Sample 91.98% 0.23% 65.41% 0.49% -0.28% Bets on Currencies Publication Lag 50.63% 0.07% 50.96% 0.25% -0.13% Out of Sample 50.93% 0.07% 53.33% 0.24% -0.12% In Sample 51.23% 0.13% 60.38% 0.25% -0.06% Bets on Equities, Bonds, and Currencies Publication Lag 96.88% 0.14% 61.25% 0.47% -0.38% Out of Sample 96.89% 0.22% 66.46% 0.51% -0.33% In Sample 96.91% 0.31% 71.60% 0.54% -0.28%

15 Conclusion Valuable information in SSGM indicators Can help to Generate significant Information Ratio Reduce risks Even with a constrained, simple, yet realistic DAA model, the out-of-sample gains are impressive 15

16 Legal Disclaimer State Street Global Markets is a registered trademark of State Street Corporation (incorporated in Massachusetts). State Street Associates is a registered trademark of State Street Corporation. Issued by State Street Bank and Trust Company ABN , AFSL (State Street). This presentation is directed and made available only to institutional investors who are classified as wholesale clients under the Corporations Act 2001, and is not meant for the general public. The information contained in this presentation is obtained from a number of sources and its accuracy is not guaranteed by State Street nor is it a forecast of future returns. Past performance is no guarantee of future performance. This presentation contains general information only and is not intended to represent investment or professional advice. It is provided with the understanding that the recipient will be responsible for making their own assessment and evaluation, and should seek the advice of legal, tax and financial advisers before making any investment or trading decisions. State Street and its related companies and their directors and employees disclaim any liability for loss or damage howsoever caused by any recipient relying in any way on the contents of this presentation. Redistribution is prohibited without written consent by State Street. State Street Associates, State Street Bank and Trust Company One Lincoln Street Boston MA

17 Appendix: Considerations for Implementation 17

18 Futures Baskets Futures Baskets (%) Australian Equities International Equities Emerging Market Equities Australian Composite Bonds Australian Sovereign Bonds Equity Futures Australia 100 Canada 3.59 Europe Hong Kong Japan Singapore Switzerland 1.25 UK 8.14 US China 2.08 India Mexico South Africa South Korea 6.50 Taiwan Bond Futures Australia 3 Year Australia 10 Year Out-of-Sample Tracking Error Transaction Costs (bps)

19 Cost For the most active DAA model, the Equities, Bonds, and Currencies model, we observe an average annual cost of 16 bps Cost (%) DAA on Equities and Bonds Average Monthly Turnover Standard Deviation of Turnover Publication Lag Out of Sample In Sample DAA on Currencies Publication Lag Out of Sample In Sample DAA on Equities, Bonds, and Currencies Publication Lag Out of Sample In Sample

20 Futures Transaction Costs Futures Transaction Costs (bps) Country Future Cost Roll Frequency Australia ASX SPI 200 Index Futures 0.54 Quarterly Canada S&P/TSE 60 Index Futures 0.51 Quarterly Europe DJ Eurostoxx 50 Index Futures 0.16 Quarterly Hong Kong Hang Seng Index Futures 0.58 Monthly Japan Topix Index Futures 1.90 Quarterly Singapore STI Index Futures 0.99 Monthly Switzerland SMI Index Futures 0.52 Quarterly UK FTSE 100 Index Futures 0.33 Quarterly US S&P 500 Index E-Mini Futures 0.66 Quarterly China Hang Seng China Entreprises Index Futures 0.56 Quarterly India SGX S&P CNX Nifty Index Futures 3.45 Monthly South Africa FTSE/JSE Top 40 Index Futures 1.41 Quarterly South Korea KOSPI 200 Futures 1.91 Quarterly Taiwan MSCI Taiwan Stock Index Futures 1.53 Monthly Australia 3 year Australian 3 Year Bonds Futures 0.50 Quarterly Australia 10 year Australian 10 Year Bonds Futures 0.50 Quarterly 20