Saxo Stronghold USD – Q4 2019 commentary

Instruments traded
ETFs
Asset classesGlobal equities and bonds
Investment styleQuantitative portfolio management
Quarterly return+0.5% (net of fees)
Annualised volatility (since inception)5.1%

Market overview

While the third quarter of 2019 offered volatility as the US-China trade tensions escalated, the fourth quarter marked a ceasefire with a Phase-One deal. The trade deal, combined with improving economic activity numbers, lifted equity markets in general. Despite being exposed to equities, the portfolio did not get the full benefit as the exposure was mainly in minimum volatility stocks that declined somewhat as the relative safe-haven in equity markets was no longer needed by investors.

During the fourth quarter, the Stronghold USD model reduced its exposure to minimum volatility stocks to zero percent and generally increased its exposure to equities. As expected, returns across equities improved and volatility declined further. 

The portfolio’s total return in 2019 ended at 9.6% after fees, which was worse than the benchmark that gained 11.2% in 2019. In the first month of 2020, the Stronghold USD portfolio is off to a good start, but with the coronavirus in China worsening every day, the quarter could become quite volatile. The Stronghold model, however, should be able to swiftly react to changing volatility conditions.

 

Portfolio performance

Oct0.0%
Nov+0.1%
Dec+0.4%
1 Year
+9.6%
Inception (01.07.2017)
+17.8%

(Performance is net of all fees)

  • The best performing position in the portfolio has been the exposure to US large cap equities, which contributed more than 1.4%-pts over the quarter.

  • The exposure to 7-10 year government bonds was the largest drag on portfolio performance over the quarter with -0.5%-pts. This exposure, however, ensures that risk in the portfolio is kept at a relatively low level.
     
      

Changes to allocations

The main change in the Stronghold USD portfolio over the quarter was the shift in equity exposure from minimum volatility to large cap equities and a small exposure to emerging market equities and international equities. The shift to ETFs with a higher risk was carried out due to a lower estimated risk in the market, combined with an increased estimate of the reward-risk ratio. The overall allocation change is shown below.

Portfolio weights (%)

Asset class
Asset sub-class
As of 02-10-2019
As of 03-01-2020
CreditUS Corporate IG
US Corporate HY
EM Bonds (USD)
US MBS
17.0
0.0
0.0
15.8
18.0
0.0
0.0
11.1
 EquityUS Large-cap Equities
US Small-cap Equities
International Equities
EM Equities
US Minimum Volatility
US Momentum
US REITs
1.0
0.0
0.0
0.0
29.9
0.0
5.1
 30.3
0.0
5.0
4.8
0.0
0.0
0.0
Government
US Govt 1-3Y
US TIPS
US Govt 7-10Y
0.0
0.0
30.0
 0.0
0.0
30.3
CashCash
1.20.5

The past quarter demonstrates how the quantitative approach to risk management allows the portfolio to benefit from the gains in the equity market, but still keep a part of the allocation in more defensive assets, to be prepared for periods of high volatility. 

Outlook

OECD’s global leading indicators have been revised and now show that the global economy went from contraction to recovery phase in September as monetary and fiscal stimulus arrested the economic slowdown. This has probably avoided a global recession, but the recovery is still fragile and the latest coronavirus outbreak in China poses a critical risk to the global recovery as China is 20% of the global economy and basically the world’s manufacturing facility.

As economic activity has improved, equity markets have delivered positive returns. Volatility has also declined, and as a result, the Stronghold model has increased its equity exposure during the fourth quarter from 36% to 40%. If economic activity continues to expand, the portfolio should experience higher returns amid this increased equity exposure.

The key risk to our outlook is the Chinese coronavirus, which comes with many unknowns and nonlinearities. Higher interest rates will impose losses on the bonds in the portfolio, but the extent of the losses depends on whether rising rates come from inflationary pressure or improving economic activity.

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