Over various time periods from 1 to 10 years, the document analyzes the risk-adjusted performance of various asset classes using metrics like Sharpe Ratio, excess return, and volatility. For the past 1 year, European High Yield had the highest Sharpe Ratio of 6.46, while Macro Hedge Funds were the only asset class to post negative excess returns. Over 10 years, Risk Parity had the highest Sharpe Ratio of 0.98, while both Risk Parity and Emerging Market Equities generated the highest excess return of 9.9% per annum.
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1 YEAR
30/06/2013
30/06/2014
Over the last twelve months, European High Yield continued to be a
top performer, with a Sharpe Ratio of 6.46, and a volatility of 2.1%.
However, low spreads indicate repetition of this performance could
be difficult. US High Yield performed well on a risk-adjusted basis
over the past quarter with a Sharpe ratio rising from 1.48 to 4.01,
this was largely due to a rise in excess return from 7.3% to 11.5%
per annum. Macro Hedge Funds were the only asset class to post
negative excess returns during the 12-month period. Compared to
Q2 2013, volatilities are largely lower and excess returns higher
leading to higher Sharpe Ratios: for example European High Yield,
also the top performer in Q2 2013, had a Sharpe Ratio of 3.38.
Although useful for evaluating performance on a short-term basis,
please note that one year is a short time frame over which to
assess the risk and return characteristics of different asset classes
and strategies.
RISK - ADJUSTED
RETURN (2014 Q2)
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3 YEAR
30/06/2011
30/06/2014
Over a three-year period, Risk Parity has maintained its position
as the best performing asset class on a risk-adjusted basis with a
Sharpe Ratio of 1.56, up from 1.38 last quarter. It also continues to
have the highest excess return of 14.5% per annum. UK Government
Bonds were the only asset class to experience a reduction in risk
adjusted return over the quarter, with Sharpe Ratios for nominal
Gilts falling from 0.84 to 0.77 and index-linked Gilts falling from
0.90 to 0.76. Commodities, Macro Hedge Funds, and Emerging
Market Equities have posted consecutive negative three-year
performances over two quarters.
RISK - ADJUSTED
RETURN (2014 Q2)
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5 YEAR
30/06/2009
30/06/2014
Over a five-year period, US High Yield has remained the top
performing asset class on a risk-adjusted basis with a Sharpe
Ratio of 2.01, down from 2.11 last quarter. European High Yield
continued to produce the highest excess return of 14.8% per
annum. Risk Parity and nominal UK Government Bonds are the only
asset classes to show an improvement in five-year risk adjusted
return over the quarter. Macro Hedge Funds continue to post
negative excess returns, for the eighth consecutive quarter, of
-3.0%, an improvement from -4.2% per annum last quarter.
RISK - ADJUSTED
RETURN (2014 Q2)
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10 YEAR
30/06/2004
30/06/2014
Over a ten-year period, Risk Parity is the top asset class on a
risk-adjusted basis with a Sharpe Ratio of 0.98. Both Risk Parity
and Emerging Market Equities have generated the highest excess
return, over 10 years, at 9.9% per annum. On a risk-adjusted
basis Emerging Market Equities have not performed as well, with
a Sharpe ratio of 0.41 and a volatility of 24.3%, approximately
2.5x higher than Risk Parity. Macro Hedge Funds and Commodities
both continue to post negative excess returns over the 10-year
period (though both doing better than Q1 2014) at -1.5% and -1.2%
per annum respectively. This analysis over the 10-year period
includes the impact of the financial crisis, as a result volatilities
are noticeable larger and excess returns smaller compared to the
5-year analysis.
RISK - ADJUSTED
RETURN (2014 Q2)
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Here we look at the risk-adjusted performance across asset classes for the past one, three, five and
ten years. The calculations that underlie this analysis use monthly data sourced from Bloomberg.
Excess return is taken to be the annualised return of the asset class for the relevant period above
the risk free rate which is calculated using the UK 3 Month LIBOR total return index. Volatility is the
standard deviation of monthly excess returns. For all asset classes apart from Investment Grade Credit
and High Yield Bonds, total return indices are used to calculate the absolute returns. For Investment
Grade and High Yield, interest rate hedging is assumed and the excess return over swaps is used for
the excess return.
APPENDIX
1 year
Asset Class Benchmark Index Excess Return (% p.a) Volatility (% p.a) Sharpe Ratio
High Yield Europe ML EUR High Yield TR 13.3% 2.1% 6.46
High Yield US ML US High Yield TR 11.5% 2.9% 4.01
Leveraged Loans US S&P US LL index TR 5.3% 1.4% 3.88
Risk Parity Salient Risk Parity Index 25.8% 7.1% 3.64
IG Credit UK ML Sterling Corp&Collateralised Ex Sub - excess swap rtn 5.1% 1.5% 3.42
IG Credit US ML US Corp Master - excess swap rtn 4.6% 1.5% 3.18
Developed Market Equities MSCI Daily TR Net World USD 23.8% 9.6% 2.48
EMD Hard Currencies JP Morgan EMBI 10.8% 6.9% 1.56
Emerging Market Equities MSCI EM TR Index 14.1% 12.3% 1.14
Commodities DJ-UBS Commodity Index TR 8.0% 8.8% 0.91
UK Government Bonds Index-Linked FTSE actuaries uk index linked gilts TR all 3.3% 3.9% 0.83
UK Government Bonds FTSE actuaries uk gilts TR all 1.7% 3.3% 0.53
Hedge Fund-Macro HFRX Macro Index -1.6% 1.8% N/A
3 years
Asset Class Benchmark Index Excess Return (% p.a) Volatility (% p.a) Sharpe Ratio
Risk Parity Salient Risk Parity Index 14.5% 9.3% 1.56
High Yield US ML US High Yield TR 8.9% 6.4% 1.40
High Yield Europe ML EUR High Yield TR 10.4% 9.1% 1.14
Leveraged Loans US S&P US LL index TR 5.1% 4.7% 1.09
EMD Hard Currencies JP Morgan EMBI 7.3% 8.1% 0.90
Developed Market Equities MSCI Daily TR Net World USD 11.5% 13.8% 0.83
IG Credit UK ML Sterling Corp&Collateralised Ex Sub - excess swap rtn 3.0% 3.6% 0.83
UK Government Bonds FTSE actuaries uk gilts TR all 4.1% 5.3% 0.77
UK Government Bonds (Index-Linked) FTSE actuaries uk index linked gilts TR all 5.8% 7.6% 0.76
IG Credit US ML US Corp Master - excess swap rtn 2.6% 4.0% 0.64
Emerging Market Equities MSCI EM TR Index -0.7% 19.7% N/A
Hedge Fund-Macro HFRX Macro Index -2.4% 2.8% N/A
Commodities DJ-UBS Commodity Index TR -5.5% 15.2% N/A
5 years
Asset Class Benchmark Index Excess Return (% p.a) Volatility (% p.a) Sharpe Ratio
High Yield US ML US High Yield TR 13.6% 6.8% 2.01
Risk Parity Salient Risk Parity Index 14.7% 7.9% 1.85
High Yield Europe ML EUR High Yield TR 14.8% 9.5% 1.55
Leveraged Loans US S&P US LL index TR 8.1% 5.5% 1.47
EMD Hard Currencies JP Morgan EMBI 10.1% 7.3% 1.38
IG Credit UK ML Sterling Corp&Collateralised Ex Sub - excess swap rtn 3.6% 3.5% 1.03
IG Credit US ML US Corp Master - excess swap rtn 3.8% 3.8% 1.00
Developed Market Equities MSCI Daily TR Net World USD 14.6% 14.7% 1.00
UK Government Bonds (Index-Linked) FTSE actuaries uk index linked gilts TR all 6.7% 6.9% 0.96
UK Government Bonds FTSE actuaries uk gilts TR all 4.0% 5.3% 0.75
Emerging Market Equities MSCI EM TR Index 8.9% 19.1% 0.46
Commodities DJ-UBS Commodity Index TR 1.6% 15.2% 0.11
Hedge Fund Macro HFRX Macro Index -3.0% 3.7% N/A
10 years
Asset Class Benchmark Index Excess Return (% p.a) Volatility(% p.a) Sharpe Ratio
Risk Parity Salient Risk Parity Index 9.9% 10.1% 0.98
EMD Hard Currencies JP Morgan EMBI 7.4% 9.1% 0.82
High Yield US ML US High Yield TR 6.8% 10.6% 0.64
UK Government Bonds (Index-Linked) FTSE actuaries uk index linked gilts TR all 3.9% 7.2% 0.54
High Yield Europe ML EUR High Yield TR 6.8% 12.6% 0.54
UK Government Bonds FTSE actuaries uk gilts TR all 2.4% 5.2% 0.47
Emerging Market Equities MSCI EM TR Index 9.9% 24.3% 0.41
Leveraged Loans US S&P US LL index TR 3.2% 8.9% 0.36
Developed Market Equities MSCI Daily TR Net World USD 5.2% 16.5% 0.31
IG Credit UK ML Sterling Corp&Collateralised Ex Sub - excess swap rtn 0.5% 4.4% 0.12
IG Credit US ML US Corp Master - excess swap rtn 0.4% 6.0% 0.06
Commodities DJ-UBS Commodity Index TR -1.2% 18.4% N/A
Hedge Fund-Macro HFRX Macro Index -1.5% 7.2% N/A
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