Return-seeking Alternative Risk Premia
Previously, we’ve discussed Defensive ARP (Alternative Risk Premia), particularly as a bond alternative with yields close to their effective lower bounds. We round out that analysis by introducing our Core and Growth ARP portfolios. We also include a new section in this publication below, reviewing the performance of our ARP portfolios and highlighting any interesting observations on the broader Quantitative Investment Strategy (QIS) complex.
CIPAM Core & Growth
Our Core and Growth portfolios target a higher return profile and are constructed to offer an additional return-seeking option in the broader asset allocation process. Drawing on our large pool of available indices, the strategies are designed to contain a number of characteristics that increase their effectiveness over the medium- and long-term:
- Each portfolio contains uncorrelated neutral ARP factors that work to reduce volatility at the portfolio level
- Each portfolio also contains dedicated return-seeking factors that contribute performance to the portfolio
- Each of these return-seeking factors target different risk premia and as such are sources of uncorrelated alpha within the portfolio
Figure 1 compares the performance of these two ARP portfolios to MSCI World. We see that since 2017, the ARP portfolios generate consistent returns at much lower volatility. While MSCI World is capable of sharp rallies, it is also susceptible to acute drawdowns. This is even more evident when we look at specific 6-month periods over that time (Figure 2).
Given that both returns and volatility move around, it is important to compare risk-adjusted returns through time. The below table shows the returns, volatility and their ratio for 6-month windows starting in 2017.
The higher Sharpe ratios delivered by the two ARP portfolios make for a smoother ride through different market environments. This is in part due to the neutral factors dampening the volatility of the portfolio. This does not come at an outsized cost to returns, as the Core and Growth portfolios return 11.2% and 12.2% per annum respectively, compared to MSCI World at 14.2%.
CIPAM Core & CIPAM Growth offer a de-correlated, return-generating alternative to traditional equity and alternatives allocations. They can be used to replace beta or as an additional diversified source of returns.
Next month we’ll continue to look at alternative ways to introduce return-seeking portfolio blocks, with a focus on credit.
The Solutions Team
The Solutions team provides derivative overlay and risk management fiduciary services to Asset Owners and Managers in Australia. Our goal is to provide asset owners and managers with an experienced overlay advisory and execution service to improve portfolio outcomes and cost efficiency.
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