Stronghold portfolio cuts equity exposure to zero amid market turbulence

Equities 6 minutes to read

Peter Garnry

Head of Equity Strategy

Summary:  In just two weeks our tactical asset allocation strategy Stronghold EUR has cut its equity exposure from 34% to 0% to protect the portfolio from further tail-risk shocks. The exposure has mostly been shifted to investment grade credit bonds and mortgage bonds. February was the worst month since inception in July 2017 but March has so far shown a 1.2% rebound taking year-to-date loss to only 1.1% compared to -2.5% for the benchmark. So far Stronghold has done its done of de-risking aggressively and it has excess risk budget to utilise should central banks and governments succeeding in stabilising markets.


Our tactical asset allocation strategy Stronghold has reacted to the last couple of weeks’ turbulence by cutting its equity risk to zero for the first time since inception in July 2017. Stronghold EUR was down 2.8% in February, its worst month since inception, as the portfolio had 34% exposure to equities around mid-February. However, as market volatility increased and equities declined the Stronghold model drastically reduced risk shifting exposure into government bonds and credit. Note how the risk allocation has mostly been into credit (in this case investment grade corporate bonds) as the model can get a better risk-reward profile for now instead of going all-in on government bonds.

Source: Saxo Group

Quick response to risk-off dynamics

Stronghold EUR has rebounded in March by 1.2% taking the total return year-to-date to minus 1.1% beating the benchmark index down 2.5% year-to-date. We are satisfied with the model’s ability to react to changing risk conditions and the Stronghold EUR portfolio is well-positioned for further volatility and declines in equity markets. The model’s ability to manage its tail-risk is the reason why risk-adjusted returns remain very good compared to other tactical asset allocation models.

Source: Saxo Group

But even better, the portfolio is not utilizing its risk budget so in the event central banks and governments are able to stabilize markets the model can quickly add equity exposure. Given the model uses dynamic lookback windows in assessing return expectations the model should be able to quickly react to a bounce back scenario if its occurs.

The table below shows the current exposures across the various asset classes.

Source: Saxo Group

Gold makes a difference

One of the major changes we did to our model in February was to add physical gold. In our initial research we could not get gold to work. However, after more work and the right constraints in the portfolio optimization it was clear that physical gold was a real diversifier and so it was added in February. As of today the portfolio has a 5.3% exposure to physical gold which is a large active bet relative to a market weighted global asset allocation portfolio. In current market regime gold has proved to make a difference for risk-adjusted returns and it creates an extra cash-like risk layer for the Stronghold model before going heavily into synthetic cash (1-3Y government bonds).

Why Stronghold should be a core component in a portfolio

When we talk to clients we argue that Stronghold should be a core component to stabilize portfolio returns as its dynamic framework automatically reduces risk when needed and increases it intelligently when the cross-volatility structure allows it. With interest rates going even further towards zero (the G7 10Y yield-to-worst yield is now at 0.35%) the upside from bonds will be limited going forward. For risk parity it means more leverage if a 10% volatility target is the goal and standard portfolios it means worse portfolios in terms of risk-adjusted returns. A tactical asset allocation framework will dominate the next 10 years as the passive/strategic asset allocation ride ends with ZIRP and policy volatility like we haven’t seen in more than a decade.

Disclaimer

The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.

Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.