Portfolio review

Model Portfolio review (March 2018): winners and losers in a volatile month

  • MTD portfolio performance: +0.13% (+0.13% since inception)
  • MTD benchmark performance: -0.80% (-0.80% since inception)
  • Net performance: +0.93% (+0.93% since inception)

Theme returns and model allocation

2018-03 theme returns

2018-03 allocation

2018-03 model contributors

Markets recap

It has been quite an edge-of-your-seat type of month for everybody watching financial markets. The volatility spike that happened in early February 2018 has not receded and has made asset prices wildly gyrate throughout the month:

  • The VIX volatility index started the month around 22.5, in between moving in a 14.6-26.0 range and finishing slightly lower at 20.0. That is still a lot higher than the low teens we have been seeing for the last year
  • US 10 year treasury yields started the month at 2.83% but headed lower to 2.74% at month-end. the short-end and ultra long-end of the curve did the same
  • The S&P500 ended the month down -2.5%, meaning that on YTD basis it is now down -0.8%

Looking at the various themes that we track on this website, four clear winners were frontier markets (+2.49%), clean energy (+1.71%), water scarcity (+1.56%) and trade war (+1.32%). Meanwhile, the big losers were mostly technology related as self-driving vehicles (-4.06%), batteries (-3.62%), millennials (-3.62%) and blockchain (-3.39%) sold off. For reference, the broad market ETF (VT) returned -1.29%.

Broad Market (VT)-1.29%+0.42%-0.88%
Hard Brexit-1.79%+2.88%+1.04%
Rising interest rates-0.48%-0.05%-0.53%
The next market crash+0.32%-0.96%-0.64%
Trade wars+1.32%-0.10%+1.22%
Low volatility high yield-0.20%+1.40%+1.20%
Robotics / Automation-2.45%-2.51%-4.90%
Water scarcity+1.56%-0.20%+1.36%
Global tourism-2.41%-1.22%-3.60%
Frontier Markets+2.49%-3.94%-1.55%
Healthcare Innovation+0.48%-1.96%-1.49%
Core Bond+1.02%-1.29%-0.28%
Core Equity-0.19%-1.11%-1.30%
Space Race-2.41%-5.01%-7.30%
Clean Energy+1.71%+3.47%+5.24%
Modern Agriculture-2.23%+0.13%-2.10%
Self-driving vehicles-4.06%+0.91%-3.19%
Emerging Markets-0.21%-2.77%-2.97%
Post Trump Administration+1.05%-0.54%+0.50%
Late Cycle+0.65%+1.09%+1.75%
Dawn of Eurasia-1.21%-2.42%-3.60%

Winning themes: frontier markets and trade war

  • Frontier Markets. It is fascinating to see that a potentially high risk theme like frontier markets did so well this month. Returning +2.49% in a month when broad equity markets sell off quite strongly is impressive. Argentina and Nigeria were slightly down while Vietnam was up nearly 5%. But the real impressive figures came from Egypt which delivered a stunning +14% return.
  • Trade War. In a month of escalating rhetoric between the US, China and the EU on tariffs, it is no surprise (fortunately) that the constructed trade war portfolio performed well. Each component in it rallied: China and US small caps, US Treasury, long JPY and commodities.

Losing themes: Self-driving vehicles and batteries

  • Self-driving Cars. This theme had a bad month and lost -4.06%. Uber had a fatal accident involving an autonomous vehicle, and tech (which forms a big part of the theme through for instance Intel, Google and Baidu) sold off on the back of worries about a data breach at Facebook. The Cars ETF itself returned -4.3%
  • Batteries. The one constituent of this portfolio lost -3.6%, similarly on the worries about the technology industry mentioned above

Portfolio recap

The model portfolio outperformed its benchmark by 93bps, as it returned +0.13% while the benchmark returned -0.80%. In a month where the S&P500 ended down -2.5% that is not a bad result. The low risk (mostly fixed income) portion (25%) underperformed given declining interest rates during the month, while the model is positioned to do better than the benchmark when rates are rising.

The fixed income portion had close to a flat return. The high risk (mostly equity) portion (75%) strongly outperformed, returning +0.17% vs the benchmark return of -1.29%. The main reasons were higher frontier market and emerging market exposure, while themes like clean energy, water and healthcare managed to deliver positive returns even when the market as a whole was down

The model portfolio overall did pretty well and outperformed its benchmark by +0.93%, avoiding allocation to all the four worst performing themes mentioned above.

  • Model portfolio return: +0.13%
  • Benchmark return: -0.80% (75% VT Vanguard Total World Stock and 25% BND Vanguard Total Bond Market)
  • Net outperformance: +0.93%

The lower risk (fixed income) portion of the benchmark (BND) returned +0.69% versus +0.04% in the model. Meanwhile the higher risk (equity) portion returned -1.29% versus +0.17% in the model. The benchmark therefore netted -0.80%, while the model returned +0.13%. On the risky side of the allocation (equity) the portfolio was able to generate strong outperformance, while on the low risk side it slightly underperformed:

  • Lower Risk Portion. The 25% low-risk component of my allocation, which I have structured to go head to head with the BND ETF, returned as follows. Core Bond (+1.02%), rising rates (-0.48%), low vol high yield (-0.2%), next market crash (+0.32%). That makes for a +0.04% total return on this bucket, which therefore underperformed the benchmark component.
  • Higher Risk Portion. The 75% equity component returned some +0.17% vs -1.29% on its benchmark. Notably my Core Equity portfolio did much better (-0.19%) given its frontier and EM market components. But themes like Clean Energy, Water, Healthcare etc. also delivered positive returns

The main reason the low risk bucket underperformed is that my portfolio is structured for rising rates, and in fact interest rates declined by 9bps due to the general risk-off environment. Note though that my Core Bond portfolio did outperform the fixed income benchmark, so the 4 ETFs would still have been better than the single bond ETF portfolio.

What changes am I making to my asset allocation?

  • I am selling 2.5% healthcare (+0.48%) this month, and buying 2.5% trade wars (+1.32%)

Categories: Portfolio review

Leave a Reply