Podcast 13 Under-appreciated Risks
Harold Parker, John Lewis, Andy Hyer
Podcast 13 Under-appreciated Risks
March 30, 2011
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Posted by Andy Hyer
The Changing Size of World Stock Markets
March 30, 2011The following figures from the Credit Suisse Global Investment Returns Yearbook 2011 will be nice additions to your “Yes, the markets really are fluid” file. Empires, countries, asset classes, and companies are always in a state of flux. The enduring principle that money always goes where it is treated best means that investors must remain nimble.
What will this chart look like in 10, 20, or 50 years? We don’t know, but we think relative strength is ideally suited to provide the framework to effectively adapt to the inevitable changes.
(Click to Enlarge)
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Posted by Andy Hyer
Drawdowns: Equities vs. Bonds
March 30, 2011It is no wonder that bond investors have felt pretty good about the last three decades. From the start of 1980 to the end of 2010, the annualized real (inflation adjusted) return on government bonds was 6.0% in the USA, broadly matching the 6.3% long-term performance of equities (Credit Suisse Global Investment Returns Yearbook 2011.) Bond investors have almost forgotten that over the preceding 80 years, US government bonds had provided an annualized real return of only 0.2%. ”Well, at least bonds don’t have equity-like drawdowns” some investors might say. They would be correct — they’re worse!
From Credit Suisse:
A crucial question is how deep portfolio drawdowns can be, and how long it takes to recover from them. To answer this question, we compute the cumulative percentage decline in real value from an index high to successive subsequent dates. This indicates just how bad an investor’s experience might have been if the investor had the misfortune to buy at the top of a bull market. As we shall see, although equities have provided a higher return than bonds, they can experience deeper drawdowns — yet there have also been long intervals of deep bond drawdowns. All returns include reinvested dividends and, unless stated to the contrary, are in real (inflation adjusted) terms.
(Click to Enlarge)
How well do bonds protect an investor’s wealth? Figure 2, shown above, plots the corresponding drawdowns for government bonds (red) and equities (blue). Historically, bond market drawdowns have been larger and/or longer than for equities!
In the US bond market, there were two major bear periods. Following a peak in August 1915, there was an initially slow, and then accelerating, decline in real bond values until June 1920 by which date the real bond value had declined by 51%; bonds remained underwater in real terms until August 1927. That episode was dwarfed by the next bear market, which started from a peak on December 1940, followed by a decline in real value of 67%; the recovery took from September 1981 to September 1991. The US bond market’s drawdown, in real terms, lasted for over 50 years.
Given the massive flows into fixed income and out of equities over the last couple of years, this information is completely off investor’s radars.
HT: World Beta
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Posted by Andy Hyer
Momentum and Value Chronicles
March 30, 2011Cliff Asness of AQR Capital has a new white paper out, Momentum in Japan: The Exception that Proves the Rule, that is well worth the read. He convincingly makes the case “that because value and momentum strategies are strongly negatively correlated, they need to be studied as a system.” See the table below for value and momentum correlations around the world over the past 30 years.
As is detailed in the paper, both value and momentum strategies have been able to generate excess return all over the world. Even in Japan, where the returns to momentum strategies have not been nearly as large as they have been in the rest of the world, the benefits of combining value and momentum remain robust.
Those advisors who are seeking to construct asset allocations that are likely to provide excellent risk-adjusted returns over time should be all over this concept of mixing value and momentum.
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Posted by Andy Hyer
Top ADR Performers Over Trailing 12 Months
March 30, 2011Although U.S. investors often focus on U.S.-based companies because of greater familiarity, I suspect that many would be interested in learning more about international companies that trade on U.S. exchanges in the form of American Depository Receipts (ADRs). The top ten performing ADRs over the past 12 months, out of our universe, are shown in the table below. As of 3/29/11.
To learn more about Dorsey Wright’s Systematic Relative Strength International portfolio, click here.
Dorsey Wright’s ADR universe is a sub-set of the entire universe of ADRs. Dorsey Wright currently owns AMRN, GENT, and SPRD. A list of all holdings for this portfolio over the past 12 months is available upon request.
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Posted by Andy Hyer
High RS Diffusion Index
March 30, 2011The chart below measures the percentage of high relative strength stocks that are trading above their 50-day moving average (universe of mid and large cap stocks.) As of 3/29/11.
The 10-day moving average of this indicator is 73% and the one-day reading is 87%. This index briefly dropped to a recent one-day low of 46% on March 16, but has since shot higher. The vast majority of high relative strength stocks continue to trend higher.
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Posted by Andy Hyer
