Stronghold EUR: delivers strong return in August

The Stronghold EUR portfolio has currently 43.6% exposure in equities, 1.7% in listed private equity, 13.7% in credit, 40.4% in government bonds and 0.6% in cash. The model has slightly reduced its exposure to equities during August. With cross asset class correlations rising in 2019 it is our expectation that the next risk-off event could be a difficult event to navigate as equities will most likely take a substantial hit without much gains from bonds to offset the risk.

Our next live equity presentation will be on the 19^th of September at 13:30 CET. In this presentation we will dedicate half of the time for presenting the Stronghold portfolio. It will be possible to ask live questions about our view on equities but also the Stronghold model in general.

Tactical asset allocation will be very important the next 10 years

If you look at the expected returns over the next 5-10 years published by the big investment banks and asset managers, they are all very depressing. Expected bond returns are either flat or negative, equity returns are also subdued except for emerging markets. In any case, investors building defensive strategic asset allocations will run into the problem that the portfolio will most likely not deliver returns above inflation and nominal returns could be in some cases be negative – unless of course bonds continue further into negative territory providing further capital gains to bondholders.

Return expectations and the outlook for a massive reconfiguration of the global supply chain due to the US-China trade war will likely mean that active investing could begin to shine against passive investing. Within asset allocation strategies we believe the next 10 years will favour tactical asset allocation strategies.

We track the Stronghold EUR portfolio against five BlackRock volatility targeted portfolios (see chart). As the Stronghold model takes higher order effects into account it should in theory be better at navigating changing volatility whereas volatility targeted portfolios are lagging in that regard. Since Stronghold EUR’s inception on July 1, 2017 the portfolio has trailed the BlackRock portfolios but during 2019 the Stronghold portfolio has slowly gained relatively to lower risk portfolios and as of August 2019 the Stronghold EUR portfolio is now ahead of the balanced portfolio. Overall, the risk-adjusted returns have also been better measured on the Sharpe ratio.

The Stronghold EUR model has an ESMA rating 4 risk profile meaning that expected annual volatility is between 5-10% which means that the Stronghold EUR portfolio is on average a balanced portfolio with medium risk profile. However, due to the nature of Stronghold being tactical it can fluctuate between being very defensive to very aggressive depending on the market structure.

What is the Stronghold model?

The Stronghold model is tactical asset allocation strategy that was developed in late 2016. The model aims to control the drawdowns in the portfolio and within this risk framework maximize the portfolio return. It comes in two versions: USD and EUR - but only one of them will be available, depending on geographical region. The Stronghold USD portfolio trades only US-listed ETFs and although does have some global exposure it is a bit US-centric. The Stronghold EUR portfolio trades only European listed ETFs and has in general a global exposure profile across most asset classes except high yield bonds.

Stronghold takes trading costs into account in its decision-making and thus only rebalances if it is required to keep its risk profile within its constraints or it can achieve a higher return after rebalancing costs. In more volatile periods the model will rebalance more frequently and thus trading costs will go up but the Stronghold comes with an all-in fee structure so no client will suddenly experience rising costs.

The two Stronghold portfolios are available on Saxo Bank’s trading platforms and an all-in cost of 0.75% per year for new clients. There is no lock-up period, so a client can leave the strategy within the same day if the market is open where the ETFs are listed. The minimum funding required is USD 30,000 or EUR 30,000.