Interview with Henry Cobbe, Head of Research, at the TrackInsight ETF Investor Summit Watch the video
UK Equity Income Indices Investors have a choice of UK Equity Income index strategies, each with different risk-return characteristics, weightings methodologies and factor tilts. These difference influence the performance of each index strategy (all figures below are on a total return basis for GBP investors). Best performing for 2017 The best performing strategies for UK Equity Income in 2017 were:
This compares to +12.3% for FTSE 100 (best tracked by HSBC FTSE 100 UCITS ETF (LON:HUKX)). Best performing over last 3 years The best performing strategies for UK Equity Income over the last 3 years were:
This compares to +31.5% cumulative return for FTSE 100 (best tracked by HSBC FTSE 100 UCITS ETF (LON:HUKX)). Fig. 1: Total Returns (Cumulative) by strategy/index (cumulative, GBP terms) Best risk-adjusted returns The best risk-adjusted returns in 2017 of available UK Equity Income indices was achieved by:
To look at consistency of risk-adjusted returns, we have plotted 1Y Sharpe ratios vs 3Y Sharpe ratios for each UK Equity Income index strategy in Fig.2 below. Fig.2. 1Y & 3Y Sharpe Ratios, selected UK Equity Income index strategies (GBP terms) Conclusion Different index construction methodologies has a material impact on performance outcomes – both in absolute terms and on a risk-adjusted basis. A naïve interpretation is to consider performance in isolation, however our view is that index selection is more nuanced than that: it should relate to the objectives and constraints of individual client portfolios and the desired exposure - on asset-basis, risk-basis and factor-basis and the interaction between the selected strategy and the rest of a client portfolio. Note: Scope of our comparison For these reports, we have analysed the indices and ETFs detailed in Fig.3. Fig. 3: UK Equity Income Indices & ETFs vs HSBC FTSE 100 UCITS ETF (LON:HUKX) [ENDS]
NOTICES: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. This article has been written for a US and UK audience. Tickers are shown for corresponding and/or similar ETFs prefixed by the relevant exchange code, e.g. “NYSEARCA:” (NYSE Arca Exchange) for US readers; “LON:” (London Stock Exchange) for UK readers. For research purposes/market commentary only, does not constitute an investment recommendation or advice, and should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product. This blog reflects the views of the author and does not necessarily reflect the views of Elston Consulting, its clients or affiliates. For information and disclaimers, please see www.elstonconsulting.co.uk Photo credit: N/A; Chart credit: Elston Consulting; Table credit: Elston Consulting All product names, logos, and brands are property of their respective owners. All company, product and service names used in this website are for identification purposes only. Use of these names, logos, and brands does not imply endorsement. Chart data is as at 30-Dec-17
Focus on market cap indices is a choice, not an obligation A market cap weighted approach has well known drawbacks: it biases larger companies, regardless of efficiency and is "procyclical" - buying larger amounts of more expensively valued companies. This is a critique of "passive investing". We don't believe there's such a thing as passive investing. There is index investing and non-index investing. There is subjective investing and systematic investing. Choice of index, choice of methodology, choice of asset allocation are all active decisions. Index investing simply delivers the desired investment approach in a way that is efficient, transparent and cheap. Factor-based indices The arrival of factor-based indices, means that for a required World Equity exposure, we can select which factors we want exposure to: for example, Size, Momentum, Quality, Value or Minimum Volatility. The different factors can be summarised as follows:
How have these different factors fared? Ranking the 1Y performance of these factors in 2017: Momentum factor delivered the highest total return at +20.6%, followed by Size factor at +13.1%, followed by Quality factor at +12.5%, followed by Value factor at +11.5%, and finally Min Volatility at +7.1%. This compares to +13.2% for the traditional cap-weighted approach. Fig 1. Equity Factor 1Y Realised Risk-Return On a 3Y basis, the annualised returns of Momentum come in at +18.2%, followed by Size at +15.7%, followed by Quality at +15.2%. This compares to +14.6% for the traditional cap-weighted approach. Fig 2. Equity Factor 3Y Realised Risk-Return Risk-Adjusted Returns Ranking the 1Y risk adjusted performance by Sharpe Ratio: Momentum leads at 1.94, followed by Size at 1.44, followed by Quality at 1.30. This compares to 1.37 for the traditional cap-weighted approach. On a 3Y basis, Size leads at 1.33, followed by Momentum at 1.30, followed by Quality at 1.19. This compares to 1.15 for the traditional cap-weighted approach. In Fig 3. we plot the 1Y and 3Y Sharpe ratio for each World Equity factor relative to traditional cap-weighted Global and EM Equity indices, to compare the risk-adjusted returns of different factor exposures over different time frames. Fig 3. Equity Factor Sharpe Ratios Conclusion: a differentiated approach
We are not suggesting that one factor approach is inherently superior to another. But with a broader array of factor exposures readily accessible to decision-makers to match with their portfolio requirements, there's no longer need to complain about the limitations of cap-weighted indices. NOTICES: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. This article has been written for a US and UK audience. Tickers are shown for corresponding and/or similar ETFs prefixed by the relevant exchange code, e.g. “NYSEARCA:” (NYSE Arca Exchange) for US readers; “LON:” (London Stock Exchange) for UK readers. For research purposes/market commentary only, does not constitute an investment recommendation or advice, and should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product. This blog reflects the views of the author and does not necessarily reflect the views of Elston Consulting, its clients or affiliates. For information and disclaimers, please see www.elstonconsulting.co.uk Photo credit: N/A; Chart credit: Elston Consulting; Table credit: Elston Consulting All product names, logos, and brands are property of their respective owners. All company, product and service names used in this website are for identification purposes only. Use of these names, logos, and brands does not imply endorsement. Chart data is as at 30-Dec-17
For historic and expected asset class risk-return perspectives, see below. Fig. 1: 1-year historic asset class risk-return for GBP investors Fig. 2: 3-year historic asset class risk-return for GBP investors Fig. 3: 5-year expected asset class risk-return for GBP investors Source: Blackrock Investment Institute, total returns basis (arithmetic) for GBP investors
NOTICES: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. This article has been written for a US and UK audience. Tickers are shown for corresponding and/or similar ETFs prefixed by the relevant exchange code, e.g. “NYSEARCA:” (NYSE Arca Exchange) for US readers; “LON:” (London Stock Exchange) for UK readers. For research purposes/market commentary only, does not constitute an investment recommendation or advice, and should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product. This blog reflects the views of the author and does not necessarily reflect the views of Elston Consulting, its clients or affiliates. For information and disclaimers, please see www.elstonconsulting.co.uk Photo credit: N/A; Chart credit: Elston Consulting (Fig 1&2), BlackRock (Fig 3); Table credit: N/A All product names, logos, and brands are property of their respective owners. All company, product and service names used in this website are for identification purposes only. Use of these names, logos, and brands does not imply endorsement. Chart data is as at 30-Dec-17
UK Equity Income ETF Choices Investors have a choice of UK Equity Income index strategies, each with different risk-return characteristics, weightings methodologies and factor tilts. Portfolio managers and advisers considering a UK Equity Income ETF should understand the differences of each to inform their selection process. In the first of a series of studies of this key sector, we have done a sector analysis of London-listed UK Equity Income ETFs, to understand their inherent characteristics relative to the UK main equity index, the FTSE 100. For these studies, we have analysed the indices and ETFs detailed in Fig.1. Fig. 1: UK Equity Income Indices & ETFs vs HSBC FTSE 100 UCITS ETF (LON:HUKX) Methodology impact on sector allocation The result of the application of various index methodologies to the UK equities opportunity set materially impacts the sector exposures of available Equity Income ETFs. In some cases, sector caps form part of the index rules. In other cases they do not. For example, the FTSE100’s bias to Energy and Financials is well documented. For some Equity Income strategies, such biases are mitigated or even eliminated. Selecting the right Equity Income ETF for the business cycle For investors that focus on the business cycle, we have analysed the available UK Equity Income ETFs by GICS sectors, and classified those GICS sectors into two broad groups – Cyclicals and Defensives. This enables us to rank UK Equity Income ETFs by their exposure to the business cycle. On this basis, investors wanting access to UK Equity Income with a Cyclical bias (coloured red in Fig.2. below), should consider (in order) LON:WUKD, LON:IUKD, and LON:HUKX. Conversely, investors wanting access to UK Equity Income with a Defensive bias (coloured grey in Fig.2. below), should consider (in order) LON:DOSH, LON:UKDV and LON:ZILK. Fig. 2: UK Equity Income ETFs by Sector Allocation vs HSBC FTSE 100 UCITS ETF (LON:HUKX) Conclusion
There is more to UK Equity Income than yield alone, by understanding the look-through sector exposures of the available UK Equity Income ETFs, investors can make more informed decisions as regards ETF selection that is consistent with their preferences, and client needs. NOTICES I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. This article has been written for a US and UK audience. Tickers are shown for corresponding and/or similar ETFs prefixed by the relevant exchange code, e.g. “NYSEARCA:” (NYSE Arca Exchange) for US readers; “LON:” (London Stock Exchange) for UK readers. For research purposes/market commentary only, does not constitute an investment recommendation or advice, and should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product. This blog reflects the views of the author and does not necessarily reflect the views of Elston Consulting, its clients or affiliates. For information and disclaimers, please see www.elstonconsulting.co.uk Photo credit: N/A; Chart credit: Elston Consulting; Table credit: Elston Consulting All product names, logos, and brands are property of their respective owners. All company, product and service names used in this website are for identification purposes only. Use of these names, logos, and brands does not imply endorsement. Chart data is as at 30-Nov-17 Confidence that UK equities having "made up lost ground" post-Brexit is misplaced. The largest UK companies that make up the bulk of the FTSE 100 and the MSCI UK Index have high exposure to global earnings. Apparent "strength" in the largest UK equities is just a translation effect of that revenue exposure. So the apparent uptick in UK equities offers no real comfort for global USD-based investors. For GBP-denominated ETFs tracking MSCI UK Equity (e.g. LSE:CSUK) performance is +3.7% since the EU Referendum Day 23rd June 2016 before votes were counted. Over the same period, the USD version of the same ETF (e.g. NYSEARCA:EWU) performance is -9.3% while sterling has weakened -12.4% (FXB). Fig.1 Performance of MSCI UK (LSE:CSUK) in GBP since EU Referendum Fig.2 Performance of MSCI UK (EWU) in USD since EU Referendum Chart Source: Google Finance
After equal measures of anticipation and fear, Vanguard has finally unveiled its D2C offer for the UK retail market. Advisers should celebrate. Sounds contradictory? Not at all.
What’s being offered Firstly, a quick look at what is being offered. Vanguard is offering direct access to its funds through with the option of holding them through an ISA or JISA, with a SIPP to follow. Of most of interest (or rather for most ease), from a consumer perspective, will be the “do it for me” type of asset allocation funds that provide an entire portfolio management solution within a single fund. Specifically, the target risk funds, known as the Vanguard LifeStrategy funds, (with a fixed allocation to equity, e.g. 60% equity), and the target date funds, known as the Vanguard Target Retirement Funds (with a target date to match expected retirement date). For these portfolio management funds, the OCF is, for example, 0.22% (the Vanguard LifeStrategy 60% Equity Fund). Adding on some 0.15% administration fee for holdings below £250,000 and the all-in cost (“Total Cost of Ownership”) of 0.37% is highly compelling, when compared to existing DIY alternatives. The right thing for the right segment Vanguard going D2C poses no threat to advisers. Here’s why:
So who should be worried? Whilst having a multi-billion manager park its tanks on a well-mown English lawn definitely deserves a shiver of fear, that fear should not belong to advisers. In my view, those that should be worried are: 1) Fund providers that can offer asset-class fund “components” but do not offer investment strategies delivered as funds. The principle target of the FCA market study are the “closet indexers”, providing exposure to a particular market, but with questionable value for money. Asset managers need to decide if they build components, run strategies or do both. The most successful managers will do both, but to charge for the strategy, the components need to be low cost. Roll on ETFs. 2) DIY platform providers that can compete on value, but cannot differentiate themselves on service, brand or quality. To a certain extent, platforms solve a problem – how can I access all the funds on the market, see all my holdings in one place, with ubiquitous online access? But it’s yesterday’s problem. If the focus is on delivering managed asset allocation solutions, the DIY investor is struggling with how best to combine the thousands of funds on offer. With asset allocation funds (target risk, or target date), the fund is the platform, and the fund has all the holdings in one place. 3) Roboadvisers that can offer a compelling interface, but offer generic investment strategies. Both robo and Vanguard are offering ready made portfolios of ETFs. The cost of delivering robo investment solutions via individual accounts will necessarily always exceed the cost of delivering investment solutions via a collectivised fund. Besides, Vanguard has more firepower to spend on brand without need for impatient private equity backing. Conclusion Vanguard’s long-awaited UK launch is good for existing and first-time UK investors. Its deflationary pressure is healthy for an industry that needs to think hard about what it offers. Whilst some may be concerned, this is good news for advisers, and great news for the investors they can’t serve. Commerzbank launches a certificate that tracks Elston’s multi-asset Minimum Volatility Index to provide a “Liquid Alternative” investment strategy
The index was launched in December 2014 and has a two year track record The strategy has delivered on its target of providing diversified, differentiated returns with minimised portfolio volatility MEDIA RELEASE 3rd March 2017 ETF specialist Elston Consulting announces today that is has successfully licensed its Elston Strategic Beta Global Minimum Volatility index (ticker ESBGMV) to Commerzbank for the creation of an investable certificate that tracks this innovative index. The certificate is issued with an initial notional of £10m. Whereas most Min Volatility indices relate to a single asset class such as Global Equities, Elston’s approach was to launch an index that targeted the minimum volatility portfolio created from a globally diversified range of asset classes represented by low cost iShares® exchange traded funds (ETFs). The objective of providing diversified, differentiated returns with downside risk mitigation makes this strategy similar in portfolio function to a hedge fund. Constructing this alternative strategy using a dynamically rebalanced mix of ETFs brings the benefit of transparency, liquidity and lower cost. This is why strategies of this nature are sometimes referred to as “Liquid Alternatives”. Transparency comes from the rules-based approach of the index. Liquidity comes from the nature of the underlying securities, and lower cost comes from the use of ETFs as the building blocks of the strategy. Whereas all Elston’s ETF Portfolio strategies are available for licensing to asset managers and financial advisers, the launch of a certificate by Commerzbank makes it convenient for those wishing to access this dynamic strategy with a single holding. The certificate is available to private banks and discretionary investment managers seeking a lower cost more transparent and liquid alternative to hedge funds. Ranye Lu, Quant & Index Strategist, Elston Consulting said: “This index has been tested through some volatile times in the last two years, and we are satisfied that it has delivered in line with its design brief. It is always important that the strategies we develop are readily investable, so we are delighted that Commerzbank is licensing the index to launch these certificates.” Christopher Hughes, Head of Structured Solutions, Commerzbank said: “We have been in discussions with Elston since this index launched, and are delighted to see it reach its two year anniversary. Our certificate is issued under our popular German programme and the security gives investors a convenient way to access a dynamic multi-asset strategy through a single holding. Additionally we have scope to hedge returns of the index into major currencies.” Joe Parkin, Head of iShares Wealth & Retail UK Sales at BlackRock said: “We aim to offer a broad range of ETFs with different characteristics as building blocks for smarter investment strategies. We welcome innovation of this kind that makes alternative investment strategies more broadly and cost-efficiently available.” About Elston Consulting · Elston Consulting is a research and development boutique incorporated in 2010. · Elston researches and develops portfolios and strategies on a proprietary or white-label basis for asset managers and financial advisers. · Multi-asset strategies developed for the UK market, include ETF Portfolios, Target Date Funds, Target Date Indices, and the Elston Strategic Beta® Indices · As an ETF specialist, Elston has been a member of BlackRock’s iShares Connectprogramme since April 2014. The programme aims to connect ETF specialists with financial advisers looking to construct robust ETF Model Portfolios (EMPs). · Elston has worked with index providers such as FTSE and Solactive to create innovative investable indices using proprietary models underpinned by academic research. www.elstonconsulting.co.uk Information about the certificate Information about the certificate is available at COSP867<Go> Notes about the strategy · The Elston Strategic Beta Global Minimum Volatilty Index (ticker: ESBGMV) aims to provide a globally diversified multi-asset long-term growth strategy with minimised portfolio risk (volatility). · The portfolio construction process uses Elston’s proprietary quantitative models for the screening, selection and optimisation of ETFs within the index. · Looking at performance of the index in backtest since 2004 and since launch in December 2014, the realised volatility is in line with objectives (see Rolling 12M Volatility chart), whilst the level and distribution of returns is higher and narrower relative to the major asset classes from which the strategy is constructed (see Kernel Density chart). About BlackRock BlackRock is a global leader in investment management, risk management and advisory services for institutional and retail clients. At December 31, 2016, BlackRock’s AUM was $5.1 trillion. BlackRock helps clients around the world meet their goals and overcome challenges with a range of products that include separate accounts, mutual funds, iShares® (exchange-traded funds), and other pooled investment vehicles. BlackRock also offers risk management, advisory and enterprise investment system services to a broad base of institutional investors through BlackRock Solutions®. As of December 31, 2016, the firm had approximately 13,000 employees in more than 30 countries and a major presence in global markets, including North and South America, Europe, Asia, Australia and the Middle East and Africa. For additional information, please visit the Company’s website at www.blackrock.com| Twitter: @blackrock_news | Blog: www.blackrockblog.com| LinkedIn: www.linkedin.com/company/blackrock About iShares iShares® is a global leader in exchange-traded funds (ETFs), with more than a decade of expertise and commitment to individual and institutional investors of all sizes. With over 700 funds globally across multiple asset classes and strategies and more than $1 trillion in assets under management as of December 31, 2016, iShares helps clients around the world build the core of their portfolios, meet specific investment goals and implement market views. iShares funds are powered by the expert portfolio and risk management of BlackRock, trusted to manage more money than any other investment firm1. 1 Based on $5.147 trillion in AUM as of 12/31/16 iShares® and BlackRock® are registered trademarks of BlackRock, Inc. and its affiliates (“BlackRock”). BlackRock makes no representations or warranties regarding the advisability of investing in any product or service offered by Elston Consulting or Commerzbank or any of their affiliates. BlackRock has no obligation or liability in connection with the operation, marketing, trading or sale of any product or service offered by Elston Consulting or Commerzbank or any of their affiliates. Whilst advisers and investments are comfortable and familiar with the simple term “funds” (has anyone heard of an “CIS (Collective Investment Scheme) Conference” or being an “AUT (Authorised Unit Trust) investor”? There is much less familiarity with the once-institutional and now pervasive ETFs (Exchange Trade Funds). That lack of familiarity means that for some reason that particular TLA has stuck.
Claer Barrett in FT Weekend’s FT Money section tries to demystify the jargon – but ends up makes thing sound more complicated than they need to be. Advisers wanting to check or brush up on the difference between an ETP, ETF, ETN and ETC could do well to invest 2 hours of their time to earn accredited CPD (Continuous Professional Development) from the roadshow being run by Copia Capital Management to get a solid understanding of this increasingly popular and pervasive investment vehicle. As for civilians – customers and investors – it's actually quite simple. It’s about money. Client money. And how it gets put to work. So forget the TLAs and the alphabet soup of ET-this and ET-that. The key question to ask managers is “What are you doing for your fee, and how do I get to keep the most of my available return?” The investment management industry is waking up to the fact that its customers deserve more English-language dialogue, and fewer abbreviations. QED. NOTICES: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. This article has been written for a US and UK audience. Tickers are shown for corresponding and/or similar ETFs prefixed by the relevant exchange code, e.g. “NYSEARCA:” (NYSE Arca Exchange) for US readers; “LON:” (London Stock Exchange) for UK readers. For research purposes/market commentary only, does not constitute an investment recommendation or advice, and should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product. This blog reflects the views of the author and does not necessarily reflect the views of Elston Consulting, its clients or affiliates. For information and disclaimers, please see www.elstonconsulting.co.uk Photo credit: squarespace,com; Chart credit: N/A; Table credit: N/A John Authers’ Long View article in the FT this weekend addresses market timing. While he claims that just passive investors are such bad timers, we would go further: most are.
Attempts to time the market (choosing the right moment to buy or sell into risk assets) are a mug’s game. Great for brokerages that delight in investors’ fees levied to senselessly overtrade. Bad for investor’s portfolio outcomes. Despite the annual survey by Dalbar that investors’ attempts to time the market is really bad for their portfolio, people – including some portfolio managers – still try and have a go. The problem is that in timing the market, we become slaves to our behavioural biases around entry points, and the noise around market sentiment. An investor fearing Brexit might have – out of emotion – sold everything to cash stocked up on gold sovereigns and run for the hills whilst tracing Irish ancestry. The smart thing was to acknowledge sterling weakness and increase their allocation to FTSE100 exposure where companies have predominantly foreign earnings. So what do you do if you don’t want to time? The answer’s simple: have a rule. If you’re moving from holding one portfolio of risk assets to another (e.g. switching managers). There’s no point trying to time – switching on a relevant valuation point (e.g. month or quarter end) keeps you “in the game” and allows you to reset the performance measurement clock. If you’re moving from 100% cash to a 100% non-cash portfolio of equities and bonds, it’s slightly different: your entry point has a huge impact on long-term value of your portfolio. In this instance, I would want to “average in”, either by allocating 1/12th of the capital each month into the proposed portfolio, or a quarter of the capital each quarter. By using "pound cost averaging” - your entry point is exactly that: an average. But that’s better than flipping a coin on the vicissitudes of Mr. Market. NOTICES: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. This article has been written for a US and UK audience. Tickers are shown for corresponding and/or similar ETFs prefixed by the relevant exchange code, e.g. “NYSEARCA:” (NYSE Arca Exchange) for US readers; “LON:” (London Stock Exchange) for UK readers. For research purposes/market commentary only, does not constitute an investment recommendation or advice, and should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product. This blog reflects the views of the author and does not necessarily reflect the views of Elston Consulting, its clients or affiliates. For information and disclaimers, please see www.elstonconsulting.co.uk Photo credit: Google Images; Chart credit: N/A; Table credit: N/A
Smart beta strategies are “smart” because they take a scientific, quantitative and objective approach to investing by combining a range of index-tracking ETFs with different market risk or “beta” exposures. In contrast to the opacity of hedge funds, dynamic allocation “smart beta” investment strategies should do what they say on the tin. Elston runs a number of diversified multi-asset investment strategies, two of which have been offered as indices for asset owners and investment managers to benchmark against or track. Chart 1: Risk and Return 2016 Source: Elston, Bloomberg, all in GBP Looking at outcomes Our multi-asset Global Max Sharpe index (Bloomberg: ESBGMS) did what it said on the tin delivering a Sharpe ratio (our primary measure of success for this strategy) of 2.06 for 2016, compared to 1.94 for Equities, 1.90 for Bonds and 1.45 for Commodities. On a returns basis (our secondary measure of success) the strategy returned 23.58% for the year, compared to 28.35% for equities, but with volatility of 10.35% compared to 15.45% for equities. Put differently, the strategy captured 83% of equity returns with just 67% of equity risk. Chart 2: Elston Multi-Asset Max Sharpe (ESBGMS) 2016 Outcome Source: Elston, Bloomberg, all in GBP Our multi-asset Global Min Volatility index (Bloomberg: ESBGMV) also did what it said on the tin whilst maintaining exposure to a broad set of return-seeking asset classes. The realised volatility (our primary measure of success for this strategy) for 2016 was 7.08%, compared to 15.45% for equities, 13.64% for bonds and 25.28% for commodities. Our dynamic asset allocation approach minimised portfolio variance whilst harvesting returns. On a returns basis (our secondary measure of success), the strategy returned 18.62% for the year, compared to 28.35% for equities, but with volatility of 7.08% compared to 15.45% for equities. Put differently, the strategy captured 66% of equity returns with just 46% of equity risk. Chart 3: Elston Multi-Asset Min Volatility (ESBGMV) 2016 Outcome Source: Elston, Bloomberg, all in GBP Theory and practice Our strategies constituent parts are ETFs representing a broad range of asset classes and geographies. The Sharpe of our Global Max Sharpe strategy’s whole is greater than the sum of its constituent parts. The Volatility of our Global Min Volatility strategy’s whole is less than the sum of its constituent parts. And that’s the intention. A low cost more consistent alternative to hedge funds? Hedge funds were popular because they provided differentiated returns and mitigated risk. In 2016, Hedge Funds returned 1.35% with volatility of 3.56%. Put differently, on average they captured just 5% equity returns, despite taking on 23% of equity risk. We plot out equity return capture (return relative to global equity return) and risk outlay (volatility relative to global equity volatility) for the main asset classes, our strategies and HFRX (all in GBP) in the summary matrix below. Chart 4: 2016 Return Capture vs Risk Outlay Source: Elston, Bloomberg
The problem with many hedge funds is that they are not doing what they say on the tin. They aim to provide diversified differentiated returns – but their process, statistically, amounts to trial and error, fraught with subjective bias. We seek to achieve similar outcomes, but using a clinically quantitative approach. To paraphrase a famous composer: “At the end of the day, it’s just maths.” What next? The Elston Strategic Beta multi-asset indexes were launched in December 2014. They are priced daily with index values available for free, factsheets are published daily. Our research strategies and indices are available for licensing.
Growth estimates cut UK GDP’s growth rate has been downgraded relative to pre-referendum expectations, with a cut from 2.2% to 1.4% for 2017E and from 2.1% to 1.7% for 2018E. Inflation estimates raised Following post-referendum sterling weakness, estimates for UK inflation were increased from 1.6% to 2.3% for 2017E and from 2.0% to 2.5% for 2018E. This compares to 2.4% and 2.8% for 2017E and 2018E respectively for UK swap breakeven rates. Rising interest rate environment With higher inflation expectations there is upward pressure on Bank Rates after a protracted “lower for longer” regime. Spending focus: infrastructure and innovation
The government spending plans shows clearly defined cous – with budget to increase infrastructure spending from 0.8% of GDP today to 1.0-1.2% from 2020. This supply side stimulus that focuses on productivity gains is welcome if fiscally manageable. NOTICES: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. This article has been written for a US and UK audience. Tickers are shown for corresponding and/or similar ETFs prefixed by the relevant exchange code, e.g. “NYSEARCA:” (NYSE Arca Exchange) for US readers; “LON:” (London Stock Exchange) for UK readers. For research purposes/market commentary only, does not constitute an investment recommendation or advice, and should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product. This blog reflects the views of the author and does not necessarily reflect the views of Elston Consulting, its clients or affiliates. For information and disclaimers, please see www.elstonconsulting.co.uk Photo credit: www.gov.uk; Chart credit: OBR; Table credit: OBR Data, Bloomberg
Voting results Trump swept to victory with 42 of 50 states declared, Trump leads Clinton 244 electoral votes to 215, with 26 to win, collecting 48.2% of the vote vs Clinton 47.1% (as at 0630 GMT today). The result with 46 of 50 states declared gives a Trump win of 278 electoral votes to 218, with 48.0% of the Vote vs Clinton 47.3% (as at Trump acceptance speech). Impact EQUITIES: expect US equities (NYSEARCA:SPX; LON:CSPX) and global equities (NYSEARCA:ACWI; LON:SSAC) to be volatile, with emerging markets (NYSEARCA:EEM; LON:IEEM) to be negatively impacted, particularly Mexico (NYSEARCA:EWW; LON:CMXC). From a sector perspective expect a positive reaction for financials (NYSEARCA:XLF; LON:SXLF), healthcare (NYSEARCA:XLV; LON:SXLV) and US infrastructure/utilities (NYSEARCA:XLU; LON:SXLU). BONDS: expect near-term flight to safety driving government bond (NYSEARCA:TLT; LON:IGLO) yields down and prices up. ALTERNATIVES: Expect flight to safety to drive relative outperformance in gold (NYSEARCA:SGOL; LON:GBS) and precious metals (NYSEARCA:GLTR; LON:AIGP), oil (NYSEARCA:IEO; LON:SPOG) as well as copper (NYSEARCA:JJC; LON:COPA). CURRENCY: expect USD short-term weakness vs GBP, CHF and JPY. Why pollsters got it wrong? The result compares to pre-election polls of Clinton 46.8%, Trump 43.6%. Pollsters got it wrong for two reasons 1) voter turnout amongst disaffected voters was higher so mix of voters in sample size is no longer indicative, and 2) “secret Trumpers” – voters who may not admit to voting for Trump in polls, but did. Source: RealClearPolitics Why Bookies got it wrong? By analysing political spread-betting odds, it is possible to derive an implied probability figure for the respective candidates. On the night before election, these gave Clinton an implied 84% probability of success and Trump 16%. As results started coming in, the implied probability for Trump spiked to close at 97% before betting closed. The probabilities were so wrong because a market-derived estimate is only as good as the aggregate views of the market participants betting against each other. And given spread-betting is more a past-time for affluent city types, rather than Trump’s core supporters, it is, like Brexit, liable to the same “groupthink” effect which makes it impossible for them to fathom that anyone would vote for Trump, because they over-estimate the size and influence of their “group”. Source: betdata
What next? The risks to a Trump victory were asymmetrical on the downside to a Clinton victory on the upside – and markets will react accordingly. The next few weeks will set the tone of the new President’s administration. It will soon become clear whether or not the toxicity of this campaign will subside in favour of pragmatic policy focus, now that the election is over. Personalities aside, with the new administration, markets need to assess is the outlook for 1) Growth and earnings; 2) inflation and interest rates; and 3) employment and trade. So once the dust settles, and the ticker tape is swept up, the focus will shift policy in Trump’s first 100 days and, more imminently, the Fed’s rate decision in December. NOTICES: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. This article has been written for a US and UK audience. Tickers are shown for corresponding and/or similar ETFs prefixed by the relevant exchange code, e.g. “NYSEARCA:” (NYSE Arca Exchange) for US readers; “LON:” (London Stock Exchange) for UK readers. For research purposes/market commentary only, does not constitute an investment recommendation or advice, and should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product. This blog reflects the views of the author and does not necessarily reflect the views of Elston Consulting, its clients or affiliates. For information and disclaimers, please see www.elstonconsulting.co.uk Photo credit: Google; Chart credit: RealClearPolitics, betdata; Table credit: N/A
Who’s right? Given Referendums are only advisory in nature, and sovereignty rests with Parliament alone, the case had merit. And yesterday’s ruling in the High Court, the three ruling Judges agreed. The challengers maintain they are not contesting the referendum results, they just want legal process to be upheld. Others suspect the campaign is partisan, but even if so, the case still deserves to be heard. Parliamentary approval was required on the way in to Europe. It should be required on the way out. Rather than backing the down, the Government is taking the ruling to the Supreme Court in an attempt to get its way. By digging in deeper they are potentially compounding the error of not calling an election the moment that May was anointed Prime Minister. The fine line While in the summer the new Cabinet felt it was riding high on the momentum of populist support, there is a fine line between democracy and demagoguery. Had the Brexiteers had a clear plan for what happens next, there would not be a feeling of rushing headfirst into the unknown. As winter approaches, the need for a cool tempered defence of the sovereignty of Parliament is hard for even the most committed Brexiteers to deny: particularly as sovereignty was at the heart of the Leave campaign. Where’s the mandate? The Conservative government had the referendum in their electoral mandate. But not the mandate to act on its results. Nor did the country vote for May to be Prime Minister May. She should tread carefully. Borrowed time This leaves Prime Minister May with two unpalatable choices: Either to call a snap election (she should have done this when she won the leadership contest) to confirm her mandate as leader and the mandate to trigger Article 50 Or to try to brush the inconvenient constitutional truth of Parliamentary approval by taking it to the Supreme Court. Who’s afraid of an election? The new Cabinet is scared of an election. It could sweep them out of power and could push back further the decisive moment at which Article 50 is triggered as a new government reviews the position. The toxicity in Westminster between Conservative factions means that the political body count of MPs with reputations smashed or jobs lost will continue to grow. That is making the cabinet increasingly desperate. And desperate politicians make bad choices. Bottom line Chances are this Cabinet will fall apart before Article 50 gets triggered, either through extended legal wrangling in the Supreme Court (not a pretty site) or in an attempt to win a mandate by calling an election. With their parliamentary majority so slim, and the dramatis personae so different there is no guarantee they would win. [ENDS] NOTICES: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. This article has been written for a UK audience. For research purposes/market commentary only, does not constitute an investment recommendation or advice, and should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product. This blog reflects the views of the author and does not necessarily reflect the views of Elston Consulting, its clients or affiliates. For information and disclaimers, please see www.elstonconsulting.co.uk Image credit: clipart.co; Chart credit: N/A; Table credit: N/A October saw a sharp one month loss for global sovereigns owing to inflation fears, raised interest rate expectations and declining Central Bank appetite for QE.
In the US, prospects of a December Fed Rate hike saw 10 year yields clime 30bp on month and 76bp from summer lows to 1.26%, whilst stronger growth numbers raised inflation expectations and positive performance for TIPS. The USD performance for inflation-linked treasuries was -0.33% (LSE:ITPS), compared to for -1.32% (LON:IBTM) for conventional treasuries. In the EU, fears over the ECB’s commitment to QE contributed to the sell off. The EUR performance for inflation-linked Euro government bonds (LSE:IBCI) was -1.78%, compared to for -2.14% for conventional Euro government bonds (LSE:IEGA). In the UK, the inflationary potential from Brexit, and vanishing expectations of any further BoE rate cuts on stronger economic growth led to a gilts sell off. The GBP performance for inflation-linked gilts (LSE:INXG) was -0.65%, compared to -3.92% for (LSE:IGLT) for conventional gilts. |
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