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Risk-Adjusted Return: Q2 2014

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Risk-Adjusted Return figures for a variety of different asset classes over 1-, 3-, 5- and 10-years.

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Risk-Adjusted Return: Q2 2014

  1. 1. R Rf Rf RISK-ADJUSTED RETURN: QUARTERLY UPDATE (2014 - Q2)
  2. 2. www.redington.co.uk T. 020 7250 3331 R 1 YEAR 30/06/2013 30/06/2014 Over the last twelve months, European High Yield continued to be a top performer, with a Sharpe Ratio of 6.46, and a volatility of 2.1%. However, low spreads indicate repetition of this performance could be difficult. US High Yield performed well on a risk-adjusted basis over the past quarter with a Sharpe ratio rising from 1.48 to 4.01, this was largely due to a rise in excess return from 7.3% to 11.5% per annum. Macro Hedge Funds were the only asset class to post negative excess returns during the 12-month period. Compared to Q2 2013, volatilities are largely lower and excess returns higher leading to higher Sharpe Ratios: for example European High Yield, also the top performer in Q2 2013, had a Sharpe Ratio of 3.38. Although useful for evaluating performance on a short-term basis, please note that one year is a short time frame over which to assess the risk and return characteristics of different asset classes and strategies. RISK - ADJUSTED RETURN (2014 Q2)
  3. 3. www.redington.co.uk T. 020 7250 3331 R 3 YEAR 30/06/2011 30/06/2014 Over a three-year period, Risk Parity has maintained its position as the best performing asset class on a risk-adjusted basis with a Sharpe Ratio of 1.56, up from 1.38 last quarter. It also continues to have the highest excess return of 14.5% per annum. UK Government Bonds were the only asset class to experience a reduction in risk adjusted return over the quarter, with Sharpe Ratios for nominal Gilts falling from 0.84 to 0.77 and index-linked Gilts falling from 0.90 to 0.76. Commodities, Macro Hedge Funds, and Emerging Market Equities have posted consecutive negative three-year performances over two quarters. RISK - ADJUSTED RETURN (2014 Q2)
  4. 4. www.redington.co.uk T. 020 7250 3331 R 5 YEAR 30/06/2009 30/06/2014 Over a five-year period, US High Yield has remained the top performing asset class on a risk-adjusted basis with a Sharpe Ratio of 2.01, down from 2.11 last quarter. European High Yield continued to produce the highest excess return of 14.8% per annum. Risk Parity and nominal UK Government Bonds are the only asset classes to show an improvement in five-year risk adjusted return over the quarter. Macro Hedge Funds continue to post negative excess returns, for the eighth consecutive quarter, of -3.0%, an improvement from -4.2% per annum last quarter. RISK - ADJUSTED RETURN (2014 Q2)
  5. 5. www.redington.co.uk T. 020 7250 3331 R 10 YEAR 30/06/2004 30/06/2014 Over a ten-year period, Risk Parity is the top asset class on a risk-adjusted basis with a Sharpe Ratio of 0.98. Both Risk Parity and Emerging Market Equities have generated the highest excess return, over 10 years, at 9.9% per annum. On a risk-adjusted basis Emerging Market Equities have not performed as well, with a Sharpe ratio of 0.41 and a volatility of 24.3%, approximately 2.5x higher than Risk Parity. Macro Hedge Funds and Commodities both continue to post negative excess returns over the 10-year period (though both doing better than Q1 2014) at -1.5% and -1.2% per annum respectively. This analysis over the 10-year period includes the impact of the financial crisis, as a result volatilities are noticeable larger and excess returns smaller compared to the 5-year analysis. RISK - ADJUSTED RETURN (2014 Q2)
  6. 6. www.redington.co.uk T. 020 7250 3331 R Here we look at the risk-adjusted performance across asset classes for the past one, three, five and ten years. The calculations that underlie this analysis use monthly data sourced from Bloomberg. Excess return is taken to be the annualised return of the asset class for the relevant period above the risk free rate which is calculated using the UK 3 Month LIBOR total return index. Volatility is the standard deviation of monthly excess returns. For all asset classes apart from Investment Grade Credit and High Yield Bonds, total return indices are used to calculate the absolute returns. For Investment Grade and High Yield, interest rate hedging is assumed and the excess return over swaps is used for the excess return. APPENDIX 1 year Asset Class Benchmark Index Excess Return (% p.a) Volatility (% p.a) Sharpe Ratio High Yield Europe ML EUR High Yield TR 13.3% 2.1% 6.46 High Yield US ML US High Yield TR 11.5% 2.9% 4.01 Leveraged Loans US S&P US LL index TR 5.3% 1.4% 3.88 Risk Parity Salient Risk Parity Index 25.8% 7.1% 3.64 IG Credit UK ML Sterling Corp&Collateralised Ex Sub - excess swap rtn 5.1% 1.5% 3.42 IG Credit US ML US Corp Master - excess swap rtn 4.6% 1.5% 3.18 Developed Market Equities MSCI Daily TR Net World USD 23.8% 9.6% 2.48 EMD Hard Currencies JP Morgan EMBI 10.8% 6.9% 1.56 Emerging Market Equities MSCI EM TR Index 14.1% 12.3% 1.14 Commodities DJ-UBS Commodity Index TR 8.0% 8.8% 0.91 UK Government Bonds Index-Linked FTSE actuaries uk index linked gilts TR all 3.3% 3.9% 0.83 UK Government Bonds FTSE actuaries uk gilts TR all 1.7% 3.3% 0.53 Hedge Fund-Macro HFRX Macro Index -1.6% 1.8% N/A 3 years Asset Class Benchmark Index Excess Return (% p.a) Volatility (% p.a) Sharpe Ratio Risk Parity Salient Risk Parity Index 14.5% 9.3% 1.56 High Yield US ML US High Yield TR 8.9% 6.4% 1.40 High Yield Europe ML EUR High Yield TR 10.4% 9.1% 1.14 Leveraged Loans US S&P US LL index TR 5.1% 4.7% 1.09 EMD Hard Currencies JP Morgan EMBI 7.3% 8.1% 0.90 Developed Market Equities MSCI Daily TR Net World USD 11.5% 13.8% 0.83 IG Credit UK ML Sterling Corp&Collateralised Ex Sub - excess swap rtn 3.0% 3.6% 0.83 UK Government Bonds FTSE actuaries uk gilts TR all 4.1% 5.3% 0.77 UK Government Bonds (Index-Linked) FTSE actuaries uk index linked gilts TR all 5.8% 7.6% 0.76 IG Credit US ML US Corp Master - excess swap rtn 2.6% 4.0% 0.64 Emerging Market Equities MSCI EM TR Index -0.7% 19.7% N/A Hedge Fund-Macro HFRX Macro Index -2.4% 2.8% N/A Commodities DJ-UBS Commodity Index TR -5.5% 15.2% N/A 5 years Asset Class Benchmark Index Excess Return (% p.a) Volatility (% p.a) Sharpe Ratio High Yield US ML US High Yield TR 13.6% 6.8% 2.01 Risk Parity Salient Risk Parity Index 14.7% 7.9% 1.85 High Yield Europe ML EUR High Yield TR 14.8% 9.5% 1.55 Leveraged Loans US S&P US LL index TR 8.1% 5.5% 1.47 EMD Hard Currencies JP Morgan EMBI 10.1% 7.3% 1.38 IG Credit UK ML Sterling Corp&Collateralised Ex Sub - excess swap rtn 3.6% 3.5% 1.03 IG Credit US ML US Corp Master - excess swap rtn 3.8% 3.8% 1.00 Developed Market Equities MSCI Daily TR Net World USD 14.6% 14.7% 1.00 UK Government Bonds (Index-Linked) FTSE actuaries uk index linked gilts TR all 6.7% 6.9% 0.96 UK Government Bonds FTSE actuaries uk gilts TR all 4.0% 5.3% 0.75 Emerging Market Equities MSCI EM TR Index 8.9% 19.1% 0.46 Commodities DJ-UBS Commodity Index TR 1.6% 15.2% 0.11 Hedge Fund Macro HFRX Macro Index -3.0% 3.7% N/A 10 years Asset Class Benchmark Index Excess Return (% p.a) Volatility(% p.a) Sharpe Ratio Risk Parity Salient Risk Parity Index 9.9% 10.1% 0.98 EMD Hard Currencies JP Morgan EMBI 7.4% 9.1% 0.82 High Yield US ML US High Yield TR 6.8% 10.6% 0.64 UK Government Bonds (Index-Linked) FTSE actuaries uk index linked gilts TR all 3.9% 7.2% 0.54 High Yield Europe ML EUR High Yield TR 6.8% 12.6% 0.54 UK Government Bonds FTSE actuaries uk gilts TR all 2.4% 5.2% 0.47 Emerging Market Equities MSCI EM TR Index 9.9% 24.3% 0.41 Leveraged Loans US S&P US LL index TR 3.2% 8.9% 0.36 Developed Market Equities MSCI Daily TR Net World USD 5.2% 16.5% 0.31 IG Credit UK ML Sterling Corp&Collateralised Ex Sub - excess swap rtn 0.5% 4.4% 0.12 IG Credit US ML US Corp Master - excess swap rtn 0.4% 6.0% 0.06 Commodities DJ-UBS Commodity Index TR -1.2% 18.4% N/A Hedge Fund-Macro HFRX Macro Index -1.5% 7.2% N/A
  7. 7. www.redington.co.uk T. 020 7250 3331 R 4 Members Investment Consulting 7 5 7 Manager Research ALM & Investment Strategy Technology Operations Education & Communication 54 AMAZING EMPLOYEES W E W E R E T H E F I RST C O N S ULTA N C Y TO B R I N G R I S K M A NAG E M E N T Named after the visionary actuary Frank Redington, the developer of Immunisation Theory, Redington was founded in May 2006 by Dawid Konotey-Ahulu and Robert Gardner. OCT 2006 DEC 2006 DEC 2007 JULY 2008 JUN 2008 SEPT 2008 OCT 2009 JAN 2010 SEPT 2011 OCT 2011 NOV 2011 SEPT 2009 Authorisation granted Gets its client Redington staff: 5 E u r o p e a n P e n s i o n s A w a r d s: Winner of European Breakthrough Firm of the Year Financial News Awards: Specialist Investment Consultancy of the Year Global Life & Pension Awards: #1 In ALM/LDI #2 in Manager Selection #3 in Strategic Advice #3 Overall Consultant Assets under consulting of £150,000,000,000 Financial News Awards European Pensions Awards Best Consulting Firm of the Year JUL 2011 Launched Assets under consulting Redington staff: 21 Assets under consulting: £30,000,000,000 Redington moves to Mallow Street offices Redington staff: 36 Assets under consulting: £80,000,000,000 Redington expands team to 45 Best Consulting Firm (non-asset allocation issues) Risk Management Firm of the Year Life & Pensions Risk Awards (£200,000,000,000) 16 11 JUN 2012 European Pensions Awards Risk Management Firm of the Year 2012 Pension Consultancy of the Year 2012 MAY 2012 RedBlog was listed as one of the Guardian’s 2012 must-read finance resources. NOV 2012Redington implements seven step framework N In 2012 we also launched RedSTART, a financial literacy programme tackling young people’s failure to save. Our consultants provide free educational training days to students at local schools to help them prepare for September 2012 Redingtons Co-CEO Robert Gardner abseils down the tallest building in Europe, “The Shard” to raise 25k in support of Commando Spirit Sean (Age-13) - Lister Community School 69 years experience as actuaries 257 years capital markets experience OUR STAFF HAVE A WEALTH OF COMBINED EXPERIENCE INCLUDING MAY 2013 JUN 2013 JUL 2013 Assets under consulting in excess of (£270,000,000,000) PENSION WEEK’S PENSION AND INVESTMENT PROVIDER AWARDS (PIPA) Best Investment Consultant 2013 Global Investor / ISF 1st A L M Development European Pensions European Consultancy of the Year European Risk Management Firm of the Year Global Investor/ISF Awards Pension Consultancy of the year 2013 TECHNIQUES FROM INVESTMENT BANKING INTO THE WORLD OF PENSIONS.
  8. 8. www.redington.co.uk T. 020 7250 3331 R Stay up to date with our latest thinking www.redington.co.uk Previous Editions More Redington Publications Disclaimer The information herein was obtained from various sources. We do not guarantee every aspect of its accuracy. The information is for your private information and is for discussion purposes only. A variety of market factors and assumptions may affect this analysis, and this analysis does not reflect all possible loss scenarios. There is no certainty that the parameters and assumptions used in this analysis can be duplicated with actual trades. Any historical exchange rates, interest rates or other reference rates or prices which appear above are not necessarily indicative of future exchange rates, interest rates, or other reference rates or prices. Neither the information, recommendations or opinions expressed herein constitutes an offer to buy or sell any securities, futures, options, or investment products on your behalf. Unless otherwise stated, any pricing information in this message is indicative only, is subject to change and is not an offer to transact. Where relevant, the price quoted is exclusive of tax and delivery costs. Any reference to the terms of executed transactions should be treated as preliminary and subject to further due diligence. Redington Limited is an investment consultant company regulated by the Financial Conduct Authority. The company does not advise on all implications of the transactions described herein. This information is for discussion purposes and prior to undertaking any trade, you should also discuss with your professional, tax, accounting and / or other relevant advisers how such particular trade(s) affect you. All analysis (whether in respect of tax, accounting, law or of any other nature), should be treated as illustrative only and not relied upon as accurate ©Redington Limited 2014. All rights reserved. Issue 1 Issue 2 Issue 3 Issue 4 If you would like more details on the topics discussed, please contact your Redington representative or email enquiries@redington.co.uk

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