Are you getting paid for the risk that you are taking? There are a number of statistics that are designed to help an investor make that evaluation for any given strategy. Sharpe ratio, which measures unit of return per unit of standard deviation can be helpful in this regard. In the case of our Systematic RS International portfolio (available as a separately managed account), evaluating the Sharpe ratio, in addition to standard deviation and annualized returns can be helpful. Looking at the statistics below one can see that the Systematic RS International (Net) has outperformed the MSCI EAFE Index by 5.58% annually since its inception date of March 31, 2006. However, one would also note that the standard deviation (volatility) of the Systematic RS International portfolio has been 4.42% higher than the MSCI EAFE. Do those excess returns justify the higher volatility?
Source: Dorsey Wright. Click here for disclosures.
Add to those statistics the fact that the Sharpe ratio for the Systematic RS International portfolio has been nearly double that of the MSCI EAFE since March 31, 2006 and I would suggest that the answer is yes to the question of whether or not an investor is getting adequately compensated for the risk taken in this portfolio.
The statistics above are based on total price returns, inclusive of dividends and transaction costs. Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss.
Performance since inception is shown below:
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Historical Performance Of the Dorsey, Wright Systematic Relative Strength International Strategy The performance represented in this brochure is based on monthly performance of the Systematic Relative Strength International Model. Net performance shown is total return net of management fees for all Dorsey, Wright & Associates managed accounts, managed for each complete quarter for each objective, regardless of levels of fixed income and cash in each account. The advisory fees are described in Part II of the adviser’s Form ADV. The starting values on 3/31/2006 are assigned an arbitrary value of 100 and statement portfolios are revalued on a trade date basis on the last day of each quarter. All returns since inception of actual Accounts are compared against the MSCI EAFE Total Return Index. The MSCI EAFE Total Return Index is a stock market index that is designed to measure the equity market performance of developed markets outside of the United States and Canada and is maintained by MSCI Barra. A list of all holdings over the past 12 months is available upon request. The performance information is based on data supplied by the Manager or from statistical services, reports, or other sources which the Manager believes are reliable. Definition of statistical terms: Performance: Net annualized performance. Volatility: Annualized standard deviation. Standard deviation shows how much variation or dispersion exists from the average value. Beta: A measure of systematic or market-related risk. Alpha: A measure of non-market return associated with the portfolio. See Modern Portfolio Theory for more information. Correlation: Compresses covariance into a range of +/- 1. A negative correlation indicates an inverse relationship whereas a positive correlation is indicative of a direct relationship. Annual turnover: An annualized measure of the percentage of the portfolio that was traded. There are risks inherent in international investments, which may make such investments unsuitable for certain clients. These include, for example, economic, political, currency exchange, rate fluctuations, and limited availability of information on international securities. Past performance does not guarantee future results. In all securities trading, there is a potential for loss as well as profit. It should not be assumed that recommendations made in the future will be profitable or will equal the performance as shown. Investors should have long-term financial objectives when working with Dorsey, Wright & Associates.
