Portfolio Risk Measurement

chiang_mai

masonic said:

chiang_mai said:

masonic said:

I'd be interested to understand more about equity funds that fall into the cautious risk group. If you look at measures like maximum drawdown or volatility, it's hard to identify any equity funds that are significantly more cautious than average in my experience. I'd be keen to consider such a fund for inclusion in a lower risk portfolio, but have resigned myself to them being a myth, with mixed-asset or fixed interest being the only reliable option for diluting risk.

You are correct of course, the lowest risk equities fund that I hold is Orbis Global Cautious, which has an MS rating of 44 or Moderate. My second bullet point above should not have included the word Cautious since all my equities funds are rated Moderate or above. My apologies for my error. 

Thanks, I took a look at that fund and it seems to be mixed asset with about 30% in equities.

The other option is Royal London Cautious Managed which has an MS rating of 22, which is right on the line between Cautious and Moderate. 

masonic

chiang_mai said:

masonic said:

chiang_mai said:

masonic said:

I'd be interested to understand more about equity funds that fall into the cautious risk group. If you look at measures like maximum drawdown or volatility, it's hard to identify any equity funds that are significantly more cautious than average in my experience. I'd be keen to consider such a fund for inclusion in a lower risk portfolio, but have resigned myself to them being a myth, with mixed-asset or fixed interest being the only reliable option for diluting risk.

You are correct of course, the lowest risk equities fund that I hold is Orbis Global Cautious, which has an MS rating of 44 or Moderate. My second bullet point above should not have included the word Cautious since all my equities funds are rated Moderate or above. My apologies for my error. 

Thanks, I took a look at that fund and it seems to be mixed asset with about 30% in equities.

The other option is Royal London Cautious Managed which has an MS rating of 22, which is right on the line between Cautious and Moderate. 

There are quite a number of these mixed asset funds with a very low percentage in equities. I would not consider any of them "equity funds". Of those funds that invest substantially or wholly in equities, there are "minimum volatility" options, but nothing I've found that actually moves the needle vs a vanilla global fund.

chiang_mai

masonic said:

chiang_mai said:

The other option is Royal London Cautious Managed which has an MS rating of 22, which is right on the line between Cautious and Moderate. 

There are quite a number of these mixed asset funds with a very low percentage in equities. I would not consider any of them "equity funds". Of those funds that invest substantially or wholly in equities, there are "minimum volatility" options, but nothing I've found that actually moves the needle vs a vanilla global fund.

I don't think there is anything out there that is 100% global equities, and MS rated Cautious, the very nature of equities seem to make that impossible. Investors can be be forgiven for thinking otherwise, since the liberal use of the word Cautious appears in the title of many many funds. Even well performing equities funds in the Moderate camp are not always easy to find. I've concluded that the mission now is to avoid the top end of the scale, rather than trying to find funds that will fit in the lower end, which makes MA funds, that much more appealing.

masonic

chiang_mai said:

masonic said:

chiang_mai said:

The other option is Royal London Cautious Managed which has an MS rating of 22, which is right on the line between Cautious and Moderate. 

There are quite a number of these mixed asset funds with a very low percentage in equities. I would not consider any of them "equity funds". Of those funds that invest substantially or wholly in equities, there are "minimum volatility" options, but nothing I've found that actually moves the needle vs a vanilla global fund.

I don't think there is anything out there that is 100% global equities, and MS rated Cautious, the very nature of equities seem to make that impossible. Investors can be be forgiven for thinking otherwise, since the liberal use of the word Cautious appears in the title of many many funds. Even well performing equities funds in the Moderate camp are not always easy to find. I've concluded that the mission now is to avoid the top end of the scale, rather than trying to find funds that will fit in the lower end, which makes MA funds, that much more appealing.

My preference is to hold the defensive assets separately, either direct holdings (e.g. individual gilts) or dedicated bond funds, although something down at ~20% equities is sufficiently bond-like to be considered a bond fund. I don't pay much attention to broad ratings, but if there were an equity fund that tended only to fall 10% to the market's 20%, that would be an attractive proposition. What I've found though is that diversification is the volatility reducer, so then a balanced global equities portfolio for the equities bucket is tough to better. For all the talk of managers who can skilfully limit drawdowns in a bear market, I've not seen evidence this can be done reliably without substituting in other asset classes. Therefore, aside from perhaps a tilt away from growth stocks when they are dominant in the market, there isn't much to be done on the equities side.

Linton

masonic said:

chiang_mai said:

masonic said:

chiang_mai said:

The other option is Royal London Cautious Managed which has an MS rating of 22, which is right on the line between Cautious and Moderate. 

There are quite a number of these mixed asset funds with a very low percentage in equities. I would not consider any of them "equity funds". Of those funds that invest substantially or wholly in equities, there are "minimum volatility" options, but nothing I've found that actually moves the needle vs a vanilla global fund.

I don't think there is anything out there that is 100% global equities, and MS rated Cautious, the very nature of equities seem to make that impossible. Investors can be be forgiven for thinking otherwise, since the liberal use of the word Cautious appears in the title of many many funds. Even well performing equities funds in the Moderate camp are not always easy to find. I've concluded that the mission now is to avoid the top end of the scale, rather than trying to find funds that will fit in the lower end, which makes MA funds, that much more appealing.

My preference is to hold the defensive assets separately, either direct holdings (e.g. individual gilts) or dedicated bond funds, although something down at ~20% equities is sufficiently bond-like to be considered a bond fund. I don't pay much attention to broad ratings, but if there were an equity fund that tended only to fall 10% to the market's 20%, that would be an attractive proposition. What I've found though is that diversification is the volatility reducer, so then a balanced global equities portfolio for the equities bucket is tough to better. For all the talk of managers who can skilfully limit drawdowns in a bear market, I've not seen evidence this can be done reliably without substituting other asset classes.

Value weighted and income equity funds seem to  reduce volatility (as measured by Standard Deviation) to some extent. Whether this is the same as reducing “risk” may be arguable. ISTM  that “risk” needs to be defined more precisely to be a useful concept.

masonic

Linton said:

masonic said:

chiang_mai said:

masonic said:

chiang_mai said:

The other option is Royal London Cautious Managed which has an MS rating of 22, which is right on the line between Cautious and Moderate. 

There are quite a number of these mixed asset funds with a very low percentage in equities. I would not consider any of them "equity funds". Of those funds that invest substantially or wholly in equities, there are "minimum volatility" options, but nothing I've found that actually moves the needle vs a vanilla global fund.

I don't think there is anything out there that is 100% global equities, and MS rated Cautious, the very nature of equities seem to make that impossible. Investors can be be forgiven for thinking otherwise, since the liberal use of the word Cautious appears in the title of many many funds. Even well performing equities funds in the Moderate camp are not always easy to find. I've concluded that the mission now is to avoid the top end of the scale, rather than trying to find funds that will fit in the lower end, which makes MA funds, that much more appealing.

My preference is to hold the defensive assets separately, either direct holdings (e.g. individual gilts) or dedicated bond funds, although something down at ~20% equities is sufficiently bond-like to be considered a bond fund. I don't pay much attention to broad ratings, but if there were an equity fund that tended only to fall 10% to the market's 20%, that would be an attractive proposition. What I've found though is that diversification is the volatility reducer, so then a balanced global equities portfolio for the equities bucket is tough to better. For all the talk of managers who can skilfully limit drawdowns in a bear market, I've not seen evidence this can be done reliably without substituting other asset classes.

Value weighted and income equity funds seem to  reduce volatility (as measured by Standard Deviation) to some extent. Whether this is the same as reducing “risk” may be arguable. ISTM  that “risk” needs to be defined more precisely to be a useful concept.

I've been framing this as the relative drawdown in a market crash, which is what many really care about (daily ups and downs are not usually a problem per se, and few complain about rapid growth). Holding value / EI and growth in combination can be helpful, as these tend to be affected to different extents in different circumstances. A balanced global portfolio should probably seek not to be too concentrated in any of these, but whether there are ready made equity funds that could consistently limit loss potential to a meaningful extent vs say a global index is I suppose what I am driving at.

LHW99

masonic said:

I'd be interested to understand more about equity funds that fall into the cautious risk group. If you look at measures like maximum drawdown or volatility, it's hard to identify any equity funds that are significantly more cautious than average in my experience. I'd be keen to consider such a fund for inclusion in a lower risk portfolio, but have resigned myself to them being a myth, with mixed-asset or fixed interest being the only reliable option for diluting risk.

Presumably any 100% equity fund would be higher "risk". We use the Invesco Monthly Income Plus as a bit of ballast, as it is ~50% equity and Morningstar "Low" risk

https://global.morningstar.com/en-gb/investments/funds/0P0000XBQK/quote

Little capital growth, but regular income.

aroominyork

chiang_mai said:

MaxiRobriguez said:

chiang_mai said:

If anyone has any other interesting ways to quantify a portfolio for risk, I’ll be pleased to learn of it. 

You can look under the hood at the holdings and how certain triggers can impact the wider portfolio. 

For example, your US fund will be dominated by the magnificent 7 tech stocks. If media narrative is right and there's a big sell off coming in that space that will bleed into other markets: Your Asia Developed #1 underlying holding is likely TSCM which will get whacked in the same proportion as the tech sell off. The UK fund will suffer given the impact on global banking... etc. That's following some fairly basic logic, without considering the "when America sneezes the rest of the world catches a cold" type response where everything sells off just because the US markets are. 

Despite that, your portfolio probably is cautious based on the equity proportion only being 47%. You just need to work out what the impact on the other 53% of your portfolio would be in certain equity trigger events. Obviously cash and cash-like investments wouldn't change much but if you have exposure to long duration bonds or gold you need to consider what they're doing for you in your portfolio. 

My bonds are all short duration, this part is very clean.

Short duration bonds are of course less volatile than intermediates through less interest rate sensitivity, but in normal market conditions you have less of the inverse correlation which can reduce overall portfolio risk during an equity crash. Do you only hold govt bonds or also corporates?

I am tilted towards short duration, mostly for high yields (which tend to be short) and for gilts I might want to cash in if there is a prolonged equity crash. (I also hold a short duration strategic bond fund, just because I think it is well managed.) I still have a chunk of intermediate gilt/global aggregate index funds.

ColdIron

LHW99 said:

masonic said:

I'd be interested to understand more about equity funds that fall into the cautious risk group. If you look at measures like maximum drawdown or volatility, it's hard to identify any equity funds that are significantly more cautious than average in my experience. I'd be keen to consider such a fund for inclusion in a lower risk portfolio, but have resigned myself to them being a myth, with mixed-asset or fixed interest being the only reliable option for diluting risk.

Presumably any 100% equity fund would be higher "risk". We use the Invesco Monthly Income Plus as a bit of ballast, as it is ~50% equity and Morningstar "Low" risk

https://global.morningstar.com/en-gb/investments/funds/0P0000XBQK/quote

Little capital growth, but regular income.

I've had Invesco Monthly Income Plus in my SIPP for many years. It's a GBP Strategic Bond that must hold at least 80% in Corporate and government debt securities. If you look at their current factsheet it's 8.9% equities

aroominyork

ColdIron said:

LHW99 said:

masonic said:

I'd be interested to understand more about equity funds that fall into the cautious risk group. If you look at measures like maximum drawdown or volatility, it's hard to identify any equity funds that are significantly more cautious than average in my experience. I'd be keen to consider such a fund for inclusion in a lower risk portfolio, but have resigned myself to them being a myth, with mixed-asset or fixed interest being the only reliable option for diluting risk.

Presumably any 100% equity fund would be higher "risk". We use the Invesco Monthly Income Plus as a bit of ballast, as it is ~50% equity and Morningstar "Low" risk

https://global.morningstar.com/en-gb/investments/funds/0P0000XBQK/quote

Little capital growth, but regular income.

I've had Invesco Monthly Income Plus in my SIPP for many years. It's a GBP Strategic Bond that must hold at least 80% in Corporate and government debt securities. If you look at their current factsheet it's 8.9% equities

I understand the purpose of a strategic bond fund that has flexibility across the fixed interest "universe", but less so one that owns a bit of equity. The cynic might think it's to justify a 0.67% fee, which I think a bit high for its level of return. I hold Artemis Short-Duration Strategic Bond which performs similarly for 0.39%.