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Week 49 Investment Performance & Risk Analytics

Investors have more than just a Fed Rate Hike and disappointing ECB announcements  -- this past week the market experienced some fairly dramatic shifts in it's underlying dynamics.


Broad Asset Classes
 

Volatilities increased across the board for broad asset classes, with only Foreign Emerging Equity experiencing a decline in volatility.

                                      RETURN                 vs.                   RISK               vs.           SHARPE RATIO

Tail risk, or risk of extreme events increased from a variety of directions.  Tail risk, independent of other asset classes, increased for every asset class with the exception of Foreign Emerging Equity.  Most noticeably, US REITs now has the highest risk of extreme loss of the major asset classes (see "Isolated Tail Risk" in the below chart).

When incorporating co-movement (asset correlations) using the Contribution to Extreme Loss, risk declined in Commodities, Foreign Emerging Equity, and Foreign Developed Equity.  However, it's again important to note that US REITs, with their increased correlation to US Fixed Income, is now the greatest source of tail risk when combined with these other asset classes.

             

      RISK OF EXTREME LOSS    vs.   CONTRIBUTION TO EXTREME LOSS

Because higher rates reduce the value of fixed coupon payments, REITs and US Fixed Income have seen an increase in correlation over the past week as a likely Fed hike draws near.    An increase from near-zero correlations to over 25%, means that US REITs is now officially the riskiest asset class in the portfolio, exhibiting not only the greatest Risk of Extreme Loss, but all the greatest Contribution to Extreme Loss (that incorporates correlation).  US REITs have been highlighted below, to show the progress in correlations to other major asset classes over the past 3 weeks.

 WEEK 47 CORRELATIONS    vs.   WEEK 48 CORRELATIONS    vs.   WEEK 49 CORRELATIONS

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November Investment Performance & Risk Analytics

Asset classes across the spectrum were either flat or negative for the month of November.  US Fixed Income posted both the least negative return at -0.2% and the lowest monthly volatility (annualized) at 2.1%.  Whereas, Emerging Market Equities exhibited the most volatile price path, exhibiting nearly a 20% annualized volatility during the month. Commodities had the most negative return for the month, losing investors nearly slightly more than 6%.

Of note is that even as asset prices were flat or declined, risk of extreme loss (e.g. tail risk), declined nearly across the board for the 3rd month in a row.  Tail risk in US Equities and Foreign Developed Equities dropped below Commodities, US REITs, & Foreign REITs, making them the least risky asset classes behind US Equities.


Broad Asset Classes

 

                                    RETURN                                  RISK                           SHARPE RATIO   

   BROAD ASSET CLASS RISK & RETURN FOR NOVEMBER

BROAD ASSET CLASS RISK OF EXTREME LOSS (CVAR) FOR SEPTEMBER, OCTOBER, & NOVEMBER

Fixed Income

 

Broad Fixed Income subclasses were mostly flat in November, with US Investment Grade Corporates squeaking out 30 bps of return for investors.  However, the biggest change in the market was the continued decline in risk of extreme loss (e.g. tail risk) in US Long Term Treasuries for the second month in a row.  For the first time this quarter, US Long Term Treasuries are exhibiting a similar risk of extreme risk to other risky fixed income subclasses such as Local Currency Denominated Foreign Fixed Income and US High Yield Corporates.  

 

                                     RETURN                                    RISK                             SHARPE RATIO

FIXED INCOME RISK OF EXTREME LOSS (CVAR) FOR SEPTEMBER, OCTOBER, & NOVEMBER

Equities
 

US Small Cap Equities led the month with  a little over a 1% rate of return, with Small Cap Growth barely beating out its value counterpart. Foreign Emerging Equity lost it's October steam and led the declining subclasses with a 4.4% loss for the month. For the 3rd straight month equity markets both domestic and foreign experienced a decreased risk of extreme loss (e.g. tail risk).  The least risky subclass for the first time this quarter is Foreign Developed Equity, whereas the most risky equity investments remain Foreign Emerging Equities.

 

 

                                     RETURN                                    RISK                            SHARPE RATIO

EQUITIES RISK OF EXTREME LOSS (CVAR) FOR SEPTEMBER, OCTOBER, & NOVEMBER

Alternatives

 

                             RETURN                                      RISK                                 SHARPE RATIO

ALTERNATIVES SUBCLASS RISK & RETURN FOR NOVEMBER

ALTERNATIVES RISK OF EXTREME LOSS (CVAR) FOR SEPTEMBER, OCTOBER, & NOVEMBER

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