Tuesday, April 28, 2009

Asset Class Performance Through the GFC

This post follows up with the performance in the last 4 month of the asset classes I discussed in the context of endowment style portfolios in December. The chart shows a bunch of funds and indices and a simulation of my current "target portfolio" - the thick brown line - through the end of March. That's not the portfolio I have, which is heavier in stocks and lighter on managed futures but the one I am aspiring to in the next few years. The simulation uses:

47% MSCI World
14% Credit Suisse/Tremont Hedge Fund Index
14% Man AHL Managed Futures
10% TIAA Real Estate
10% TIAA Bond Market
5% AUD Cash

Then a 50% hedge into the Australian Dollar is applied and the portfolio is invested in with 120% of equity (i.e. borrowing an extra 20 cents for each dollar). Returns are in USD terms. The portfolio certainly does not escape the financial crisis and by following the path of the AUD you can see that the hedge into Australian Dollars exacerbates the bad performance.

The portfolio did well in the previous bear market but except for a portfolio constructed of bonds and managed futures this bear market has been too sharp for anything to do well.

The target portfolio has a beta of 0.86 and an annual alpha of 5.66% relative to the MSCI World Index. Not considering tax consequences, you could have constructed a smoother and better performing portfolio from managed futures, hedge funds, and real estate. Or really just managed futures and hedge funds...

Next up, I'll look at the problem from the Australian investor's viewpoint (i.e. in AUD)

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