The Financial Crisis and its
Consequences on Asset
Allocation
Institutional Investment Conference
Tel Aviv, March 12, 2012
- Confidential copy, not to be distributed -
Evolution of asset allocation
Past
Present
Model
Classic
Yale
Asset Classes
• Equity
• Bonds
•
•
•
•
•
Geography
• Home bias
• Global
Liquidity
• High
• Partly low
Allocation
• Static
• Static
Weighting
• Capital
• Capital
Future?
Equity
Bonds
Commodities
Hedge Funds
Private Equity
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Yale Endowment: Reduced drawdowns due to
uncorrelated asset classes
Asset Allocation
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100%
80%
Trend 1980-2007
• AuM: USD 22.5 Bn
60%
• Positive returns
(Ø 17.8% p.a. ’97-’07)
40%
Money Market
Real Estate
Private Equity
Fixed Income
20%
• Large part invested
in absolute return
strategies
Non-US equity
US Equity
Absolute Return
1980
1990
2000
2007
3
Yale Model successful up to financial crisis
Rebased, in EUR
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225
200
Yale Model
175
-38%
150
-18%
125
Classic Balanced
100
-28%
-26%
75
99
00
01
02
03
04
05
06
07
08
09
10
„Yale model“: 25% equities (MSCI World NTR, NDDUWI Index), 25% commodities (GSCI Total Return EUR hedged, GSCI Index),
25% government bonds (JP Morgan Global Gov. Bonds Index hedged EUR, JPMGGLBL Index),25% Hedge Fonds EUR hedged
(HFRXGLE Index).
Classic portfolio: 50% Equity (MSCI World, NDDLEMU Index), 50% Euro government bonds (Citigroup Europe WGBI, SBEUEU Index)
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Evolution of asset allocation
Past
Present
Future?
Model
Classic
Yale
Risk Weighted
Asset Classes
• Equity
• Bonds
•
•
•
•
•
•
•
•
•
Geography
• Home bias
• Global
• Global
Liquidity
• High
• Partly low
• High
Allocation
• Static
• Static
• Dynamic
Weighting
• Capital
• Capital
• Risk
Equity
Bonds
Commodities
Hedge Funds
Private Equity
Equity
Bonds
Commodities
Alpha-Strategies
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Risk concentration in typical “balanced” portfolios
Capital weighting
Contribution to risk
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10%
60%
40%
90%
Bonds
50% Aktien
Stocks
50% Obligationen
Stocks
Bonds
Drawdown
0%
Risk weighting
-10%
-20%
Capital weighting
-30%
-40%
99
00
01
02
03
04
05
06
07
08
09
10
Typical balanced portfolio: 60% bonds: World Government Bond Index (SBWGL), 40% stocks: MSCI World Index (NDDLWI)
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The concept behind risk parity
Equal allocation to
asset classes based on
risk
17%
Volatility target
(e.g. 7%)
Volatility*
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25%
3%
With four asset classes
each asset class
contributes 25% to the
total risk of the
portfolio
1%
Short term
Government
interest rates
bonds
Stocks
Commodities
Ensuring a risk
balanced portfolio
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* Wegelin & Co. analysis: annual volatility based on daily data from 1999–2009
Risk parity more robust
Indexed, in EUR
350
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Risk parity
300
250
Yale model
200
150
Typical balanced
100
50
99
00
01
02
03
04
05
06
07
08
09
10
11
12
Period: 1.1.2000 – 31.01.2012. Typical balanced corresponds to a capital allocation of 60% bonds (Citigroup WGBI All Maturities
Local, SBWGL), 40% equities (MSCI World NTR, NDDLWI); “Yale model” corresponds to a capital allocation of 25% equities (MSCI
World NTR), 25% commodities (GSCI TR Index hedged EUR), 25% bonds (Citigroup WGBI All Maturities Local, SBWGL), 25% hedge
funds (HFRX GL hedged EUR); Risk parity corresponds to the Wegelin Global Diversification Strategy net of fees in EUR. Strategy
launched November 2009. Source: Bloomberg, 1741 Asset Management analysis
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Practical implementation: ATP
Bjarne Graven Larsen
CIO of the largest Danish
Pension Fund ATP
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Global asset class exposure through futures
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Universe
Equities
Risk parity
Tail risk
Government
Short term
bonds
interest rates
• FTSE 100
• 2 Year US
• S&P 500
• 5 Year US
• Nasdaq
• 10 Year US
• CAC 40
• 5 Year DE
• SMI
• 10 Year DE
• DAX
• 10 Year JP
• Topix
• 3 Year AU
• Hang Seng
• 10 Year AU
• ASX
• 10 Year CA
• 3 months
Eurodollar
• 30 Day
Fed Funds
Commodities
• GSCI
21 highly liquid
exchange traded
futures are used to
gain exposure to the
asset classes
The futures provide
the required liquidity
to dynamically
rebalance the strategy
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Improving on the risk parity concept
Universe
Risk parity
Tail risk
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Risk parity: the portfolio view point
• Considering various measures of risk, including symmetric,
asymmetric and path-dependent risk indicators
• No return forecasts or tactical asset allocation considerations
Risk parity
(risk weighted investing)
Equity
Bond
STIR
Commodity
Risk weights
Evaluated signal:
• Symmetric risk
measures
• Asymmetric risk
measure
• Path-dependent risk
measure
Capital weights
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Multi-dimensional tail risk management
Universe
Risk parity
Tail risk
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Tail risk: the instrument view point
• Numerous risk signals collectively analysed
• Tail risk signals aggregated per instrument and used to scale the original
exposure, further reducing the risk of fat tails and severe draw downs
Tail risk management
Evaluated signal:
• Volatility
• Value at Risk
• Skewness
• Correlation
• Kurtosis
• 3 proprietary measures
Volatility
-3
-2,4 -1,8
-1,2 -0,6
-0
0,6
1,2
1,8
2,4
3
Correlation
-3
-2,4 -1,8
-1,2
-0,6
-0
0,6
1,2
1,8
2,4
3
-3
-2,4 -1,8
-1,2
-0,6
-0
0,6
1,2
1,8
2,4
3
Final instrument
allocation
Value at Risk
Tail risk factor
Skewness
-3
-2,4 -1,8
-1,2
-0,6
-0
0,6
1,2
1,8
2,4
3
-3
-2,4 -1,8
-1,2
-0,6
-0
0,6
1,2
1,8
2,4
3
-3
-2,4 -1,8
-1,2
-0,6
-0
0,6
1,2
1,8
2,4
3
0-100%
Kurtosis
Further measures
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Risk parity - Annual Returns*
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As of February 29, 2012
Return
Volatility
2007
+7.8%
7.6%
2008
+6.2%
7.8%
2009
+11.5%
7.0%
2010
+11.1%
6.6%
2011
+11.3%
6.4%
+2.7%
5.6%
2012 (ytd)
The performance of
the risk parity
model is robust
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*
Since November 2009 net performance of Wegelin Global Diversification® Base Share Class in EUR.
Stable performance thanks to active and
continuous risk management
Net daily return from November 30, 2009 to December 30, 2011
18%
Risk Parity
16%
Classic Portfolio*
14%
12%
10%
8%
6%
4%
2%
3,8%
3,4%
3,0%
2,6%
2,2%
1,8%
1,4%
1,0%
0,6%
0,2%
0%
-0,2%
-0,6%
-1,0%
-1,4%
-1,8%
-2,2%
-2,6%
-3,0%
-3,4%
0%
-3,8%
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20%
* Classic portfolio: 60% bonds (World Gov Bonds (SBWGL) in local currency) / 40% equity (MSCI World (NDDLWI) in local currency)
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Risk weighted portfolio more robust
2000 – 2011 performance contribution of each asset class in a risk-weighted portfolio
25%
20%
11%
9%
10%
12%
11%
2010
10%
2009
15%
9%
6%
8%
6%
5%
1%
0%
0%
-5%
STIR
Bonds
Equity
Commodities
2011
2008
2007
2006
2005
2004
2003
2002
-15%
2001
-10%
2000
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16%
Total
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Note: Performance in EUR of Wegelin Global Diversification ® incl . back-testing 2000 – Nov 2009
Improvement through add-on of Risk Parity
Creating a new balanced portfolio
Typical balanced*
Balanced with Risk Parity**
20%
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RP
60%
40%
Bonds
Equities
50%
BD
30%
EQ
Typical balanced*
Improvement
Annualised return
3.7%
4.7%
+27%
Annualised volatility
7.7%
6.4%
-17%
Sharpe ratio
0.09
0.26
+198%
Sortino ratio
0.13
0.47
+249%
-5.1%
-3.9%
-24%
-17.0%
-32%
Max monthly drawdown
Max drawdown
*
Balanced with RP**
-25.1%
Typical balanced portfolio: 60% bonds (World Gov Bonds EUR (SBWGU)) 40% equities (MSCI World Net EUR (NDDUWI). 06/1998
– 06/2010.
** Balanced with Risk Parity (RP) same instruments as above, 20% risk parity (Wegelin Global Diversification EUR, strategy live since
Nov 2009. Figures before Nov 2009 back tested). 06/1998 – 06/2010
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THANK YOU!
Thank you!
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Disclaimer
This document was compiled for professional investors and is not intended for public distribution. It
constitutes neither a recommendation nor an offer to conclude any legal transaction. Past performance is not
indicative of future returns. Investors are recommended to consult their investment advisor prior to reaching
any investment decisions. The information contained in this document can be changed any time and without
prior notice. 1741 Asset Management Ltd., Wegelin Asset Management Funds SICAV and Wegelin Specialised
Investment Funds SICAV accept no liability for any damages whatsoever arising from action taken on the
basis of this information.
Contact details:
Wegelin Asset Management Funds SICAV
31, Z.A Bourmicht 8070 Bertrange
Luxembourg
Phone: +352 26 30 22 54
info@wegelinfunds.com
www.wegelinfunds.com
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