Transcript Global Asset Allocation and Stock Selection Assignment #1

Global Asset Allocation and Stock Selection
Assignment #1
Comparison of Investment Styles along
Tactical Trading Strategies
Gold Asset Management
Artima Suraphongchai
Genzo Kimura
Andrew (Jing) Liu
Joseph Sun
Stefan Prawitz
AGENDA
Methodology Overview
Forecasting Model
Strategy Evaluation
Key Take-Aways
Methodology Overview: 3 Investment Styles
Country-based Investing
US
UK
JP
Sector-based Investing
DE
Financial
Health
Utilities
Material
Mixed Investing
US
Financial
Health
DE
Each Investment Style Evaluated Across
6 Tactical Trading Strategies
Tactical Trading Strategies
Description
Strategy 0:
Buy-and-hold
• Buy & Hold sub-strategies assume equal weights for all 4 asset classes.
Strategy 1A:
Long-or-Cash (No Filter Rule)
• Compares highest forecasted return to the 1-month Eurodollar deposit
return
• If forecasted returns exceed the deposit return, go “Long” in the asset
class with highest forecasted return.
Strategy 1B:
Long-or-Cash (Filter Rule)
• Same as strategy 1A, but highest forecasted return must exceed 1-month
Eurodollar deposit return by at least 0.01% on a monthly basis
• Only then will we go “Long” on the asset class.
Strategy 2A:
2-Long-Positions
(Equal Weights)
• Compares two highest forecasted returns to 1-month Eurodollar deposit
return
• If both forecast returns exceed deposit return, then go “Long”
• If only one asset exceeds deposit return, go only “Long” in one asset and
deposit the rest
• Equal weights for both positions (50%-50%)
Strategy 2B:
2-Long-Positions (Weights 2:1)
• Same as Strategy 2B, but asset with highest forecast twice that of the
second highest forecast
Strategy 3:
Long-and-Short
• Go “Long” in asset with highest positive forecast and “Short” in the
lowest negative return forecast
• Positive forecast must also exceed deposit return. If there are no positive
forecasts, then deposit. If there are no negative forecast, no short position
is taken
Country-based Forecasting Model
Variables
US
Germany
Japan
UK
Oil Price Change
(3)
Spread Change
(4)
Dividend Yield
(5)
Price-Book
Price-Earnings
(1)
Relative Change to Term
Structure
Note:
•
•
•
•
•
•
P/E ratio of US equities
P/E ratio of UK equities
Change in spread of 10-year German Bunds over 10-year US Treasuries
Dividend Yield of Japanese equities
Price-Book Ratio of Japanese equities
UK term structure
(1)
(2)
(6)
Sector-based Forecasting Model
Finance
Oil Price Change
Yield Change in 10Y USTreasuries
US Price-Earnings
Change of Relative US Term
Structure
Health
Utilities
Material
Historical Efficiency Frontier (Strategic View)
Comparison of Efficient Frontiers Historical (Strategic) View
01/1988 - 12/2003
Countries
Sectors
Combined (2 Countries, 2 Sectors)
County Assets
Sector Assets
0.015
Expected Return
0.013
0.011
0.009
0.007
0.005
0.04
0.05
Portfolio Standard Deviation
0.06
0.07
Predicted Efficiency Frontier (Tactical View)
Comparison of Efficient Frontiers Predicted (Tactical) View
01/2004
Countries
Sectors
Combined (2 Countries, 2 Sectors)
County Assets
Sector Assets
0.020
0.018
0.016
Expected Return
0.014
0.012
0.010
0.008
0.006
0.004
0.002
0.03
0.04 Portfolio Standard Deviation 0.05
0.06
0.07
Investment Style Comparison (Return)
Average Monthly Return
0.0200
0.0180
0.0160
Return
0.0140
0.0120
0.0100
0.0080
MSCI World Return
0.0071
Country Only
Sector Only
0.0060
Combined
0.0040
0. Buy-and-Hold with
equal initial weights
1a. Country Long or
Cash (No Filter Rule)
1b. Country Long or
Cash (Filter Rule)
2a. Long Positions
(no filter, equal
weights)
Trading Strategy
2b. Long Positions
(no filter, weights 2:1)
3. Long-and-Short
Investment Style Comparison (Standard Deviation)
Historical Monthly Standard Deviation of Return
0.0550
0.0500
0.0450
MSCI World Std Dev
0.0424
Return
0.0400
0.0350
0.0300
0.0250
Country Only
Sector Only
Combined
0.0200
0.0150
0. Buy-and-Hold with
equal initial weights
1a. Country Long or Cash 1b. Country Long or Cash 2a. Long Positions
(No Filter Rule)
(Filter Rule)
(no filter, equal weights)
Trading Strategy
2b. Long Positions
(no filter, weights 2:1)
3. Long-and-Short
Investment Style Comparison (Sharpe Ratio)
Historical Average Monthly Sharpe ratio
0.50
0.45
0.40
0.35
Return
0.30
0.25
0.20
MSCI World Sharpe Ratio
0.1672
0.15
Country Only
0.10
Sector Only
Combined
0.05
0.00
0. Buy-and-Hold with
equal initial weights
1a. Country Long or Cash 1b. Country Long or Cash
(No Filter Rule)
(Filter Rule)
2a. Long Positions
(no filter, equal weights)
Trading Strategy
2b. Long Positions
(no filter, weights 2:1)
3. Long-and-Short
Two way comparison:
Ranking System for Combination Evaluation (I)
Average monthly return
Country
Sector
Combined
0
0.0072
0.0074
0.0091
1a
0.0177
0.0136
0.0179
1b
0.0162
0.0138
0.0172
2a
0.0159
0.0122
0.0155
2b
0.0165
0.0126
0.0163
3
0.0170
0.0155
0.0184
Standard Deviation
Sharpe Ratio
Rank of Average monthly return
Country
Sector
Combined
0
18
17
16
1a
3
13
2
1b
8
12
4
2a
9
15
10
2b
6
14
7
3
5
11
1
Rank of Standard Deviation
Rank of Sharpe Ratio
% of non-negative
Rank of % of non-negative
Maximum Return
Rank of Maximum Return
Minimum Return
Rank of Minimum Return
Two way comparison :
Ranking System for Combination Evaluation (II)
Rank of Average monthly return
Country
Sector
Combined
0
18
17
16
1a
3
13
2
1b
8
12
4
2a
9
15
10
2b
6
14
7
3
5
11
1
Rank of Sharpe Ratio
Country
Sector
Combined
0
18
17
16
1a
13
15
6
1b
9
10
4
2a
5
12
2
2b
7
14
3
3
1
11
8
Rank of Maximum Return
Country
Sector
0
17
18
1a
4
1
1b
8
1
2a
15
14
2b
12
10
3
11
1
Combined
16
5
5
13
9
5
Rank of Standard Deviation
Country
Sector
Combined
0
16
12
14
1a
18
11
15
1b
13
3
8
2a
7
1
2
2b
9
4
5
3
6
10
17
Rank of Percentage of Non-negative Return
Country
Sector
Combined
0
17
18
16
1a
11
7
9
1b
4
1
2
2a
10
7
3
2b
12
5
5
3
14
13
14
Rank of Minimum Return
Country
Sector
Combined
0
17
16
18
1a
7
13
12
1b
6
13
1
2a
5
8
8
2b
4
10
10
3
3
13
2
Key Take-Aways
Investment Style Comparison
Overall score shows Mixed Strategy is the best
Plot of efficiency frontier favors country-only strategy
Poor sector returns probably due to high inter-correlation
Tactical trading Strategy Comparison
Overall score shows 1b: Long-or-Cash (Filter Rule) is the best
Little difference between 2-Long and Long-Short trading strategies
Buy & Hold strategy has the lowest performance (But still beat MSCI World)
Best combinations is to have Combined asset classes and implement LongCash (with Filter) trading strategy
0
1a
1b
2a
2b
3
Buy & Hold
Long-Cash (No Filter)
Long-Cash (Filter)
2Long (Equal Weight)
2Long (Weights 2:1)
Long-Short
Country
17
9
8
9
8
7
10
Sector
16
10
7
10
10
10
10
Combined
16
8
4
6
7
8
8
17
9
6
8
8
8
Global Asset Allocation and Stock Selection
Assignment #1
Any Questions?
Gold Asset Management
Artima Suraphongchai
Genzo Kimura
Andrew (Jing) Liu
Joseph Sun
Stefan Prawitz
Regression Summary:
Solid Adj-R2 and High Predicting Power
Country-based
Sector-based
Adjusted
R square
Correct
Direction
Count
Total
Observations
Percentage
Buy &
Hold
US
10.28 %
134
192
70%
63%
Germany
5.78 %
126
192
60%
58%
Japan
4.32 %
104
180
58%
46%
UK
5.13 %
118
192
61%
57%
Finance
9.18 %
168
262
64%
66%
Health
7.63 %
175
262
67%
65%
Utility
4.72 %
127
192
66%
60%
Material
16.57 %
77
108
71%
59%
GARCH model (Expected variance)
200
A + B = 0.68 << 1
180
180-200
160
160-180
140-160
140
120-140
100-120
80-100
120
60-80
40-60
100
80
0.8
60
0.6
40
0.4
0
0.1
0.2
0.3
0.2
0.4
0.5
0.6
Fig II. Utility Sector Likelihood Function
0.7
0.8
0.9
Parameter B
0
1
Parameter A
Investment Style Comparison Table
Average Returns
Strategy
Sub-Strategy
%
Rank
Country-Only
0
0.720%
3
1A
1.771%
2
1B
1.623%
2
2A
1.586%
1
2B
1.648%
1
3
1.702%
2
Average Rank
1.8
Sector-Only
0
0.742%
2
1A
1.359%
3
1B
1.377%
3
2A
1.216%
3
2B
1.264%
3
3
1.547%
3
Average Rank
2.8
Mixed
0
0.911%
1
1A
1.792%
1
1B
1.720%
1
2A
1.547%
2
2B
1.629%
2
3
1.839%
1
Average Rank
1.3
Standard Deviation
%
Rank
4.346%
3
5.059%
3
4.232%
3
3.798%
3
4.013%
3
3.753%
1
2.7
4.204%
1
4.186%
1
3.593%
1
3.399%
1
3.625%
1
4.108%
2
1.2
4.310%
2
4.340%
2
3.847%
2
3.427%
2
3.634%
2
4.483%
3
2.2
Sharpe Ratio
%
Rank
16.56%
3
35.02%
2
38.36%
2
41.76%
2
41.07%
2
45.36%
1
2.0
17.64%
2
32.46%
3
38.33%
3
35.77%
3
34.86%
3
37.66%
3
2.8
21.13%
1
41.30%
1
44.71%
1
45.14%
1
44.83%
1
41.04%
2
1.2
Strategy Comparison (Maximum Return)
Historical Maximum Monthly Return
0.3000
0.2500
Return
0.2000
0.1500
0.1000
Country Only
Sector Only
0.0500
Combined
0.0000
0. Buy-and-Hold with
equal initial weights
1a. Country Long or Cash 1b. Country Long or Cash 2a. Long Positions
(No Filter Rule)
(Filter Rule)
(no filter, equal weights)
Trading Strategy
2b. Long Positions
(no filter, weights 2:1)
3. Long-and-Short
Strategy Comparison (Minimum Return)
Historical Minimum Monthly Return
0.0000
-0.0200
0. Buy-and-Hold with
equal initial weights
1a. Country Long or Cash 1b. Country Long or Cash 2a. Long Positions
(No Filter Rule)
(Filter Rule)
(no filter, equal weights)
2b. Long Positions
(no filter, weights 2:1)
3. Long-and-Short
-0.0400
-0.0600
Return
-0.0800
-0.1000
-0.1200
-0.1400
Country Only
-0.1600
Sector Only
Combined
-0.1800
-0.2000
Trading Strategy
Global Industry Classification (GICS)
Sector
Description
Financials Sector
Banking, consumer finance, investment banking and brokerage, asset
management, insurance and investment, and real estate, including REITs.
Health Care Sector
Two main industry groups. The first includes companies who manufacture
health care equipment and supplies or provide health care related services,
including distributors of health care products, providers of basic health-care
services, and owners and operators of health care facilities and
organizations. The second regroups companies primarily involved in the
research, development, production and marketing of pharmaceuticals and
biotechnology products
Utilities Sector
Electric, gas or water utilities, or companies that operate as independent
producers and/or distributors of power. This sector includes both nuclear
and non-nuclear facilities.
Materials Sector
Encompasses a wide range of commodity-related manufacturing industries.
Included in this sector are companies that manufacture chemicals,
construction materials, glass, paper, forest products and related packaging
products, and metals, minerals and mining companies, including producers
of steel.
Note:
• 10 Sectors (Other 6 sectors are Energy, Industrial, Consumer Staples, Consumer Discretionary, IT and Telecom)
• 24 Industry Groups
• 62 Industries
• 132 Sub-industries
Source: MSCI website