Saxo Stronghold USD – Q2 2020 commentary Saxo Stronghold USD – Q2 2020 commentary Saxo Stronghold USD – Q2 2020 commentary

Saxo Stronghold USD – Q2 2020 commentary


Instruments traded
Asset classesGlobal equities, bonds and alternatives
Investment styleQuantitative portfolio management
Quarterly return-0.16% (net of fees)
Annualised volatility (since inception)

Market overview

The two first quarters of 2020 will go down in history in different ways. Q1 saw unprecedented volatility and the world’s biggest and most liquid government bond market, the US Treasury market, stopped functioning orderly, resulting in one the biggest central bank interventions of all time. At the end of Q1 markets had turned around on the back of dramatic lockdowns to suppress the COVID-19 pandemic and historic stimulus from central banks and government. But uncertainty remained elevated and very few in the investment community had foreseen what was about to happen in Q2.

Global equities had its best quarter since 1998 with US technology stocks leading the rally while currency and bond markets stabilised with unusual low volatility levels. The low interest rates globally combined with massive government stimulus bolstered investor confidence in equities as the least bad investment option together with gold as investors are clearly preparing portfolios for future inflation and very low returns in government bonds and credit.

Stronghold looks back in time when estimating the current market volatility and correlations between the different portfolio instruments. The volatile Q1 makes the portfolio cautious about taking on a lot of risk. Thus, the strategy only slightly increased its exposure to equities, despite that it finds opportunities in many of the equity-related ETFs in its investment universe. As of 30 June 2020, the model has only increased the equity exposure to 6.8% and keeps generally a very defensive allocation going into Q3. Relative to standard asset allocation models it means that the portfolio will most likely outperform in negative and volatile environment in Q3 and likely underperform if investors are willing to bid up equities even more. 

The biggest risks to the market are the current resurgence in COVID-19 cases in the US that could impact human behaviour and economic activity during the summer months. The ten largest stocks in the S&P 500 Index have also seen their combined market value rise to 31% of the index which is the biggest equity market concentration ever in history. While things look rather calm on the surface, fragility, and turbulence lurk just beneath and the market could easily suffer a violent setback. The VIX Index remains elevated at 28 which means that the option market is still expecting 50% more volatility than the long-term average.


Portfolio performance

Second Quarter 2020 - total-0.16%
Inception Jan 02 2017

(Performance is net of all fees)

  • The best performing position in the portfolio has been the exposure to US Momentum equities initiated in the middle of April, and over the quarter it has contributed with +0.5%-pts. 

  • The worst performing position in the portfolio has been the exposure to US Core S&P 500 equities, bought in the first part of June and sold in end-June. It has contributed to the portfolio performance with -0.5%-pts. 

Changes to allocations 

The main change in the Stronghold USD portfolio over the quarter has been a slight increase in the equity exposure:

Portfolio weights (%)

Asset classAsset sub-classAs of 06-04-2020As of 02-07-2020
AlternativePhysical gold
 0.0 0.0
CreditUS Corporate IG
US Corporate HY
EM Bonds (USD)
EquityUS Large-cap Equities
US Small-cap Equities
International Equities
EM Equities
US Minimum Volatility
US Momentum
GovernmentUS Govt 1-3Y
US Govt 7-10Y

A new asset was added to the portfolio universe this quarter – Physical Gold. It was included as a diversification play for the portfolio, giving the portfolio a further handle in managing turmoiled markets.


In the last week of June 2020 the New York Fed’s Weekly Economic Index (a real-time US economic tracker) showed that the economy was down 7.4% y/y - a drastic improvement from the bottom in late April where the US economy was estimated down 11.5%. This recovery trajectory is the prevailing narrative in financial markets and the main driver in equities. 

Economists expect the global economy to contract by 3.7% in 2020 and then rebound by 5% in 2021. S&P 500 dividend futures (a financial contract that prices future dividends) are less rosy predicting dividends to decline 7% this year and 9% in 2021 before seeing a slow recovery but still 12% lower in 2025 from current levels. This is a significant divergence from the positive equity market. The dividend futures curve reflects the uncertainty over COVID-19, supply-chain shocks, US-China trade war, elevated debt levels etc. Our only explanation for the current equity valuations and the good Q2 is that investors are willing to accept a lower future return.

In the favorable scenario Stronghold would have participated in the strong equity rally in Q2. However, the increased market volatility forced the strategy to reduce the portfolio risk - due to the nature of the strategy - as the expected risk level in the portfolio exceeded the target level of the strategy. It means the portfolio is well prepared for a potential volatile summer with Q2 earnings that could change the rebound narrative but also the risks from a second wave of COVID-19 in the US and potential supply disruptions as many emerging market countries are massive pressure from the pandemic.


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