Wednesday, April 29, 2009

Target Portfolio and Asset Class Performance: Australian Style

As promised this post looks at the performance of our target portfolio from the perspective of an Australian investor. As I did in a post in December I am representing foreign shares by the MSCI World Index converted into AUD and Australian shares by EWA converted into AUD. The other asset classes are as in the U.S. post but again converted to AUD. However, the managed futures fund and hedge fund index have the exchange rate risk hedged out as is standard for products of this type offered in Australia, but the foreign stocks, bonds, and real estate are not hedged. The target portfolio is modeled as:

EWA: 30%
MSCI: 17%
CREF Bond Fund: 10%
TIAA Real Estate Fund: 10%
Credit Suisse/Tremont Hedge Fund Index (hedged into AUD): 14%
Man AHL Managed Futures (hedged into AUD): 14%
AUD Cash: 5%

Again 20 cents is borrowed (in AUD) for each dollar invested.

The target portfolio performs pretty nicely - it doesn't manage to avoid losses in either bear market but it doesn't suffer a sharp drop in the current bear market, outperforming Australian shares since the market peak. The target portfolio has a mean monthly return of 0.78% and a Sharpe ratio of 0.69 vs. 0.65% and 0.28 for Australian shares. Again, a mix of hedge funds and managed futures would have done even better (ignoring tax implications).

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