Risk Management Is Having A Good Year
Risk management is having a good run in 2020, at least by the standards of two proprietary strategies featured in The ETF Portfolio Strategist (ETF-PS). But rear-view mirrors don’t always reflect the future. That leads to the question: Are the upbeat results likely to continue for the rest of the year?
For some insight, let’s start with an update of the numbers through today’s close (Aug. 11). The strongest performer for the proprietary strategies is Global Managed Risk I (G.B15.MR.I), which is up a sizzling 27.5% so far in 2020. Impressive, but keep in mind that a key driver of these returns is the use of a relatively high-risk “safe” asset: iShares 20+ Year Treasury Bond ETF (TLT). Although using TLT as a risk-off haven has delivered potent results when risk-off signals were triggered earlier this year, it may be tempting fate to assume hat more of the same is on tap given the unusually low level of interest rates. TLT’s safe-haven status, in other words, could fade in a heartbeat if rates rise.
The sister strategy – Global Managed Risk II (G.B15.MR.II) – sidesteps this risk by staying short via iShares Short Treasury Bond ETF (SHV), which is a safer safe haven asset. The two strategies are identical other than the choice of a “safe” asset. Granted, using a cash proxy for risk-off trades has come at a price in terms of lesser returns, but prudence suggests favoring this variation going forward.
Note that G.B15.MR.II’s returns this year, while lower than its counterpart strategy, still rank as strong vs. the usual suspects, including our standard set of benchmarks:
Note, too, that G.B15.MR.II’s 12.4% total return in 2020 through today’s close is competitive with the most aggressive of BlackRock’s quartet of asset allocation funds (AOA in the table below). But unlike AOA’s capacity for downside risk, G.B15.MR.II’s maximum drawdown over the past five years has been relatively mild: -15% vs. AOA’s -28%.
Even better, G.B15.MR.II’s risk management hasn’t hurt longer-term performance. The strategy’s 7.6% annualized total return is in line with AOA’s 7.3%.
What’s the catch? For starters, G.B15.MR.II’s turnover is likely to be substantially higher vs. AOA’s – not an attractive feature for taxable accounts.
Then again, risk management rarely comes cheap, although in the current environment the capacity for tactical adjustment arguably has higher-than-usual appeal, at least in theory.
In the next update, we’ll look at how G.B15.MR.II’s signals have evolved in recent history. Meantime, risk-on remains the current profile for all the fund holdings in G.B15.MR.II.
For definitions of the benchmarks and the proprietary strategies, see this post.