Happy day all the Smart Investors out there! Today I wanted to make a quick note on how the SIA-style portfolios performed in the past. Past performance is of course not a guarrantee for the future, but if the backtesting period is long enough it can constitute a sound basis to expect similar behviour going forward.
I have decided to run the backtesting for the Pension Portfolio (PP) for two main reasons:
(a) PP is the base for Global Leaders Portfolio (GLP) and GLP shall in the long run have higher returns than PP, becuase of the additional Beta given to the portfolio by the stocks picked up according to the SIAScore.
(b) Some of the stocks currently in GLP have not been listed long enough to guarrantee a smooth execution of proper backtesting, whilst in PP the equity part depicted by SPY (S&P500 ETF) is listed since 1993 (yes ETFs are already that old, even though most of us only got to know them in recent years!). EEM (iShares MSCI Emerging Markets ETF is an exchange-traded fund incorporated in the USA and it tracks the performance of the MSCI TR Emerging Markets Index) tracks back to 2003. TLT (iShares 20+ Year Treasury Bond ETF and seeks to track the investment results of an index composed of U.S. Treasury bonds with remaining maturities greater than twenty years), which is our long-term high-grade sovereign debt proxy, has been listed sine 2002. GLD (Gold ETF covered with physical gold bullion) was listed at the end of 2004, but before that it could have been replaced by the performance of XAU (Gold spot price) (for backtesting I am using XAU instead of GLD, but their performance is almost identical, so it does not make a real differene whether you use GLD or XAU – GLD is just the way an investor can get exposure to XAU).
The backtesting
First I would like to start with the following facts:
-> Start of backtesting: September 2005 (when all ETFs necessary to build a PP portfolio are already listed and available).
-> Equity allocation is captured via a 50/50 split between EEM/SPY to provide a balanced exposure to Emerging Markets stocks and US stocks as a proxy for Developed Markets equities.
-> Aggregate allocation in equities is determined by a top-down macro perspective accordingly to the economic cycle phases as per the Enhanced Aggregate Spread (Mr.Model).
-> Equity allocation determines the total allocation in TLT+GLD(XAU)+Cash
Portfolio structure at the rabalancings dates*
*Weights do not add up to 100% – balance between total weight of EEM+SPY+TLT+XAU and 100% = CASH
| 9/1/2005 | ||
| PK | ID | Weight |
| Totals | 95 | |
| EEM US Equity | EEM | 25 |
| SPY US Equity | SPY | 25 |
| TLT US Equity | TLT | 22,5 |
| XAU Curncy | XAU | 22,5 |
| 9/1/2006 | ||
| PK | ID | Weight |
| Totals | 95 | |
| EEM US Equity | EEM | 20 |
| SPY US Equity | SPY | 20 |
| TLT US Equity | TLT | 27,5 |
| XAU Curncy | XAU | 27,5 |
| 10/2/2007 | ||
| PK | ID | Weight |
| Totals | 95 | |
| EEM US Equity | EEM | 5 |
| SPY US Equity | SPY | 5 |
| TLT US Equity | TLT | 45 |
| XAU Curncy | XAU | 40 |
| 11/1/2009 | ||
| PK | ID | Weight |
| Totals | 95 | |
| EEM US Equity | EEM | 20 |
| SPY US Equity | SPY | 20 |
| TLT US Equity | TLT | 30 |
| XAU Curncy | XAU | 25 |
| 1/1/2010 | ||
| PK | ID | Weight |
| Totals | 95 | |
| EEM US Equity | EEM | 27,5 |
| SPY US Equity | SPY | 27,5 |
| TLT US Equity | TLT | 20 |
| XAU Curncy | XAU | 20 |
| 2/1/2010 | ||
| PK | ID | Weight |
| Totals | 95 | |
| EEM US Equity | EEM | 27,5 |
| SPY US Equity | SPY | 27,5 |
| TLT US Equity | TLT | 20 |
| XAU Curncy | XAU | 20 |
| 11/1/2011 | ||
| PK | ID | Weight |
| Totals | 95 | |
| EEM US Equity | EEM | 25 |
| SPY US Equity | SPY | 25 |
| TLT US Equity | TLT | 22,5 |
| XAU Curncy | XAU | 22,5 |
| 1/1/2019 | ||
| PK | ID | Weight |
| Totals | 95 | |
| EEM US Equity | EEM | 20 |
| SPY US Equity | SPY | 20 |
| TLT US Equity | TLT | 27,5 |
| XAU Curncy | XAU | 27,5 |
| 1/28/2020 | ||
| PK | ID | Weight |
| Totals | 97 | |
| EEM US Equity | EEM | 20 |
| SPY US Equity | SPY | 20 |
| TLT US Equity | TLT | 32 |
| XAU Curncy | XAU | 25 |
| 3/31/2020 | ||
| PK | ID | Weight |
| Totals | 75 | |
| EEM US Equity | EEM | 5 |
| SPY US Equity | SPY | 5 |
| TLT US Equity | TLT | 37 |
| XAU Curncy | XAU | 28 |
Conclusions
The backtesting conslusions are pretty straighforward and simple:
-> Since September 2005 PP gave a total return of 298% and an average annualized return of 9.87% (CAGR)
-> PP has outperformed substantialy vs. wide market bear markets and corrections as a result of appropriate adjustment of equity allocations to the economic cycle phase and a balanced structure of the portfolio between risky assets and safe havens and value holders/inflation hedgers with zero or negative correlation (during the backtesting the economy has been through: Recovery->Expansion->Boom->Recession(GFC)->Recovery->Expansion->Boom->Recession (current/Covid-related).
-> PP’s biggest monthly drawdown was -14.75% during the GFC in 2008-9, when SP500 fell 66% peak to through.
-> The portfolio was perfeclty prepared for the Covid-19 recession and only saw a drawdown of -4% (so far) on monthly basis, whilst the wide market fell 35% peak to through.
-> SIA-style PP can be deemed a very good quality portfolio with very high downside protection characteristics in the long run.
More of good stuff coming soon!
Happy investing MSart Investors!
Yours,
PC
Disclaimers: None of the ideas, views and thoughts presented here shall ever be taken as a recommendation to buy or sell stocks,bonds,FX,commodities or any other financial instruments as stated in REGULATION (EU) No 596/2014 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 16 April 2014 on market abuse (market abuse regulation) and repealing Directive 2003/6/EC of the European Parliament and of the Council and Commission Directives 2003/124/EC, 2003/125/EC and 2004/72/EC or the Regulation of the Polish Minister of Finance of 19 October 2005 on information constituting recommendations regarding financial instruments, their issuers or exhibitors (Journal of Laws of 2005, No. 206, item 1715) or the Polish Act of 10 February 2017 amending the act on trading in financial instruments and some other acts. The article is for educational reasons and purely presents private views of the author, thus the author shall not be claimed eligibile for any losses of a third party resulting from trading activities based upon this article. The author uses his best knowledge and data from sources believed to be reliable, but makes no representations as to the accuracy of the data. Full Disclaimers&Liability Limitations page.
