The document analyzes risk-adjusted returns across various asset classes over one, three, and five year periods using the Sharpe ratio. For all periods, fixed income assets generally had the highest Sharpe ratios, indicating strong risk-adjusted returns. Over one and three years, emerging market debt and risk parity had the top Sharpe ratios, while over five years UK government bonds and emerging market debt performed best on a risk-adjusted basis. Equities, commodities, and other assets tended to have lower Sharpe ratios, particularly over the five-year period.

1. Economics Nobel Laureate William F. Sharpe developed the Sharpe ratio to measure risk-adjusted
investment return. The Sharpe ratio allows us to evaluate the performance of an asset in terms of
risk as well as excess return generated.
Risk-Adjusted Return: Quarterly Update
R Rf
Rf

2. RISK ADJUSTED RETURNRISK ADJUSTED RETURNRISK ADJUSTED RETURN
ONE YEAR 30/09/2011 - 30/09/2012
Over this 1-year period, 7 of the top 8 best Sharpe ratios have been in fixed income, the exception
being Risk Parity. On an excess return basis, Developed and Emerging Market Equities performed
3rd and 5th best respectively. When measured on a risk-adjusted basis, they drop to 11th and 12th
in our table.
*See appendix for a list of benchmarks & definitions.

3. RISK ADJUSTED RETURNRISK ADJUSTED RETURNRISK ADJUSTED RETURN
THREE YEARS 30/09/2009 - 30/09/2012
Over this 3-year period, 8 of the top 9 best Sharpe ratios have been in fixed income, the exception
being Risk Parity. Commodities, Emerging Market Equities and Developed Market Equities per-
formed comparatively well when measured by excess return, however on a risk-adjusted basis they
fall towards the bottom end of the chart.
*See appendix for a list of benchmarks & definitions.

4. RISK ADJUSTED RETURNRISK ADJUSTED RETURNRISK ADJUSTED RETURN
FIVE YEARS 30/09/2007 - 30/09/2012
Over this 5-year period, only 6 out of the 13 asset classes delivered positive excess returns, 5 of
which were in fixed income and the other was Risk Parity. Equity, Commodities, Investment Grade
Credit, Leveraged Loans and Macro Hedge Funds saw returns below the risk free rate over the
period.
RISK ADJUSTED RETURNRISK ADJUSTED RETURNRISK ADJUSTED RETURN
*See appendix for a list of benchmarks & definitions.

5. Appendix
1 year Monthly Data
Excess Sharpe
Label Asset Class Benchmark Index Return Volatility Ratio
EMD Hard Currency EMD Hard Currency JP Morgan EMBI 20.1% 7.1% 2.85
Risk Parity Risk Parity Salient Risk Parity Index 20.4% 7.3% 2.78
High Yield (US) High Yield US ML US High Yield - excess swap rtn 15.0% 7.7% 1.94
High Yield (Europe) High Yield Europe ML EUR High Yield - excess swap rtn 17.8% 11.9% 1.49
Leveraged Loans (US) Leveraged Loans US S&P US LL index 7.8% 5.4% 1.45
IG Credit (US) IG Credit US ML US Corp Master - excess swap rtn 6.6% 4.9% 1.35
Government Bonds (UK) UK Government Bonds FTSE actuaries uk gilts TR all 7.0% 5.7% 1.23
IG Credit (UK) IG Credit UK ML Sterling Corp&Collateralised Ex Sub - excess swap rtn 5.2% 4.3% 1.20
Developed Market Equities Developed Market Equities MSCI World Developed USD 18.3% 16.5% 1.11
Emerging Market Equities Emerging Market Equities MSCI EM TR Index 16.5% 24.3% 0.68
Index-Linked Government Bonds (UK) UK Government Bonds Index-Linked FTSE actuaries uk index linked gilts TR all 3.3% 8.5% 0.38
Commodities Commodities DJ-UBS Commodity Index 5.4% 16.6% 0.33
Hedge Fund - Macro HF - Macro HFRX Macro Index -3.3% 3.4% -0.98
3 years Monthly Data
Excess Sharpe
Label Asset Class Benchmark Index Return Volatility Ratio
EMD Hard Currency EMD Hard Currency JP Morgan EMBI 11.9% 6.5% 1.83
Risk Parity Risk Parity Salient Risk Parity Index 12.1% 7.2% 1.69
Government Bonds (UK) UK Government Bonds FTSE actuaries uk gilts TR all 6.7% 5.6% 1.20
Index-Linked Government Bonds (UK) UK Government Bonds Index-Linked FTSE actuaries uk index linked gilts TR all 7.5% 7.0% 1.07
High Yield (US) High Yield US ML US High Yield - excess swap rtn 7.1% 8.6% 0.83
High Yield (Europe) High Yield Europe ML EUR High Yield - excess swap rtn 6.4% 11.4% 0.56
IG Credit (US) IG Credit US ML US Corp Master - excess swap rtn 2.4% 4.3% 0.56
Leveraged Loans (US) Leveraged Loans US S&P US LL index 3.4% 6.6% 0.51
IG Credit (UK) IG Credit UK ML Sterling Corp&Collateralised Ex Sub - excess swap rtn 1.6% 3.7% 0.42
Developed Market Equities Developed Market Equities MSCI World Developed USD 4.8% 17.3% 0.28
Commodities Commodities DJ-UBS Commodity Index 4.8% 18.2% 0.26
Emerging Market Equities Emerging Market Equities MSCI EM TR Index 5.3% 21.9% 0.24
Hedge Fund - Macro HF - Macro HFRX Macro Index -3.4% 4.5% -0.75
5 years Monthly Data
Excess Sharpe
Label Asset Class Benchmark Index Return Volatility Ratio
Government Bonds (UK) UK Government Bonds FTSE actuaries uk gilts TR all 5.6% 6.2% 0.91
EMD Hard Currency EMD Hard Currency JP Morgan EMBI 9.0% 11.1% 0.81
Index-Linked Government Bonds (UK) UK Government Bonds Index-Linked FTSE actuaries uk index linked gilts TR all 5.3% 8.7% 0.61
Risk Parity Risk Parity Salient Risk Parity Index 6.8% 11.2% 0.61
High Yield (US) High Yield US ML US High Yield - excess swap rtn 2.0% 15.9% 0.12
High Yield (Europe) High Yield Europe ML EUR High Yield - excess swap rtn 2.1% 18.2% 0.12
IG Credit (US) IG Credit US ML US Corp Master - excess swap rtn -0.3% 8.3% -0.04
IG Credit (UK) IG Credit UK ML Sterling Corp&Collateralised Ex Sub - excess swap rtn -0.6% 5.9% -0.10
Leveraged Loans (US) Leveraged Loans US S&P US LL index -1.6% 12.9% -0.12
Hedge Fund - Macro HF - Macro HFRX Macro Index -2.5% 7.5% -0.33
Emerging Market Equities Emerging Market Equities MSCI EM TR Index -2.6% 30.5% -0.09
Commodities Commodities DJ-UBS Commodity Index -4.9% 22.8% -0.22
Developed Market Equities Developed Market Equities MSCI World Developed USD -5.6% 21.6% -0.26
Freddie Ewer
Analyst | Investment Consulting
freddie.ewer@redington.co.uk
Jonathan Letham
Analyst | ALM & Investment Strategy
jonathan.letham@redington.co.uk
Here we look at the risk-adjusted performance across asset classes for the past one, three and five 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. For
Sterling denominated indices, the UK 6 Month LIBOR total return index is used for the risk free rate and for US Dollar denominated indices, the US 3 Month
LIBOR total return index is used. 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.
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