What Really Impacts Investor Returns? Historical experience suggests that stock or fund selection is not the most important factor in reaching investment goals, rather asset allocation is the key.

Indeed, the importance of asset allocation is well established within the investment community and has been proven, time and again. Markowitz’s Modern Portfolio Theory predicts that excess return is the reward for taking on risk. The theory can be criticized in many ways, but the link between risk and return is probably the only points where all academics and professional can agree.

So the idea has been simply to avoid to be invested in some markets when the risk becomes too high.

But How can we measure the risk? And in the meantime, how can we have a universal measure, be able to be used on any liquid asset?

The Risk approach

Fundamental micro-economic data like the EPS consensus was our first thoughts. Indeed, changes across all sectors or the number or downgrades and upgrades should give an idea about some positive or negative changes in the market. Unfortunately, the consensus moves slowly and clearly does not anticipate big movements.

Some macroeconomic indicator as for instance the relation between consumer confidence and industrial production can be useful but such indicators are not applicable to all markets. So, we decided to explore the risk under quantitative and mathematical tools.

The mathematical definition of risk for the financial market is basically the standard deviation called volatility. The notion of volatility can be measured in different ways or on a different period. It is not a leading indicator but it gives quick and good information about the risk of one particular market.

The Model Trend Protection (MTP) is analysing through the volatility the market risk. The indicator is grounded on two different levels:

1. The market is completely out its normal standard deviation measuring across different exponential moving average on long term basis. The risk of correction or the risk to see the end of the current movement becomes statistically high. In such case, The Model Trend Protection (MTP) will alert us.

2. If the volatility is the key, we, therefore, needed a measure of expected market trend. An increase of volatility associated with a strong movement up or down is usually the synonym of a new trend. We developed an indicator taking into consideration the market trend. The objective was not to anticipate a trend but to recognise when statistically we have a strong chance (over 55%) to be in a down market. This indicator would identify when risk is rising, and in such case, we will not invest in such market.

Proven results

For the last fourteen years, in all important bear equity market, our Model Trend Protection allowed us not to be fully investing in markets with high quantitative profile risk.

For instance, in 2008 our average exposure on Equity markets was 8.79%. In 2013, our Model Trend Protection allowed us to avoid the biggest downtrend market on Gold. In 2015, we avoided the turbulences due to the Chinese Market’selloff.

The Model Trend Protection (MTP) is a proprietary forward-looking indicator that continuously monitors market conditions so that asset allocation can be tailored to avoid major downtrend movements seeking to minimise downside risks.

It based on forward-looking market information and composed of factors that reflect the multi-asset and global nature of the capital markets. It is a statistical tool which avoids us to be invested in the market with a high-risk profile.

 

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