Equity Strategist Minimum Volatility Equity Solutions – Euro Stoxx 50 Index October 2012
Q M S Advisors .
This material does not constitute investment advice and should not be viewed as a current or past recommendation or a solicitation of an offer to buy or sell any securities or to adopt any investment strategy.
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tel: 078 922 08 77 e-mail: info@qmsadv.com website: www.qmsadv.com
Minimum Volatility Strategy Risk Efficiency in Passive Investing GOAL
Enhancing Long-Term Portfolio Performance while Diminishing Equity Risks
Ø Delivering the best risk/return trade-of: Ø Since the 1960s, the capital asset pricing model (CAPM) brought an elegant solution to the optimization problem, arguing that the most efficient portfolio is necessarily a broad market portfolio weighted by market capitalization of stocks. Ø This corresponds to performing mean-variance optimization with market implied forecasts of risk and returns.
Ø Market-capitalization weighted portfolio Ø The only portfolio that is truly "passive" in its objective on the mean-variance frontier is the Minimum Variance Portfolio (MVP). Ø MVP is an optimal portfolio that is constructed by minimizing portfolio variance. The minimum variance construction does not use stocks' expected returns as inputs, and relies only on the covariance matrix.
Ø Risk-efficient passive equity allocation: Ø There is a growing body of evidence of outsized ex-post risk-adjusted performance of minimum variance portfolios. Q.M.S Advisors
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Minimum Volatility Strategy Risk Efficiency in Passive Investing Based on Historical Weekly Data from December 29th 2006 to the October 12th 2012 Historical Returns Historical Volatility Historical Returns/Risk Ratio Maximum Drawdown Historical Skewness Historical Kurtosis Jarque-Bera Jarque-Bera: Chi-Test
Eurostoxx 50 Low Volatility TR (*) Strategy (*) -8.792% 27.08% -0.3247 -62.75% -1.16 3.79 248 0.99
2.550% 20.39% 0.1250 -46.73% -1.50 6.67 674 0.00
Attractive historical statistical features Ă˜
The low volatility strategy offers attractive statistical features whether considered on a standalone or total portfolio basis, and this despite the extreme market environment considered in our analysis.
Source: Bloomberg, QMS Advisors
Q.M.S Advisors
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Minimum Volatility Strategy Performance Based on Historical Data from Dec 29th 2006 to Oct 12st 2012 140
Historical Performance - Base 100 on December 26th 2006
120
115.75
100
80
60
58.60
40
20
0 29.12.06
29.06.07
29.12.07
29.06.08
29.12.08
29.06.09
29.12.09
29.06.10
29.12.10
29.06.11
29.12.11
29.06.12
-20 Performance Differential: Low Volatility Strategy (*)
Performance: Eurostoxx 50 TR (*)
Performance: Low Volatility Strategy (*)
Q.M.S Advisors
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Minimum Volatility Strategy Significantly Reduced Volatility Based on Historical Data from Dec 29th 2006 to Oct 12st 2012 50%
-35%
40% -25% 35% -20%
30%
25%
-15%
20% -10% 15%
Volatility Differential (in %, inverted scale)
-30%
-5% 10%
Volatility Differential: Low Volatility Strategy (*)
04.09.2012
04.07.2012
04.05.2012
04.03.2012
04.01.2012
04.11.2011
04.09.2011
04.07.2011
04.05.2011
04.03.2011
04.01.2011
04.11.2010
04.09.2010
04.07.2010
04.05.2010
04.03.2010
04.01.2010
04.11.2009
04.09.2009
04.07.2009
04.05.2009
04.03.2009
04.01.2009
04.11.2008
04.09.2008
04.07.2008
04.05.2008
0% 04.03.2008
5% 04.01.2008
Volatility (52 Weeks Rolling in % p.a.)
45%
Volatility (Rolling 52 Weeks) Eurostoxx 50 TR (*)
Volatility (Rolling 52 Weeks) Low Volatility Strategy (*)
Q.M.S Advisors
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Minimum Volatility Strategy
-2
28.08.2012
28.06.2012
28.04.2012
28.02.2012
28.12.2011
28.10.2011
28.08.2011
28.06.2011
28.04.2011
28.02.2011
28.12.2010
28.10.2010
28.08.2010
28.06.2010
28.04.2010
28.02.2010
28.12.2009
28.10.2009
-1
28.08.2009
0.4
28.06.2009
0
28.04.2009
0.6
28.02.2009
1
28.12.2008
0.8
28.10.2008
2
28.08.2008
1
28.06.2008
3
28.04.2008
1.2
28.02.2008
4
28.12.2007
Information Ratio (52 Weeks Rolling)
Based on Historical Data from Dec 29th 2006 to Oct 12st 2012
Information Ratio Differential (52 Weeks Rolling)
Consistently Higher Information Ratios
0.2
0
Information Ratio Differential: Low Volatility Strategy (*)
Q.M.S Advisors
Information Ratio: Eurostoxx 50 TR (*)
Information Ratio: Low Volatility Strategy (*)
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Q.M.S Advisors Max. Drawdown Differential: Low Volatility Strategy (*)
| tel: +41 (0)78 922 08 77 | e-mail: info@qmsadv.com | website: www.qmsadv.com 29.08.2012
29.06.2012
29.04.2012
29.02.2012
29.12.2011
29.10.2011
29.08.2011
29.06.2011
29.04.2011
28.02.2011
29.12.2010
29.10.2010
29.08.2010
29.06.2010
29.04.2010
28.02.2010
29.12.2009
29.10.2009
29.08.2009
29.06.2009
29.04.2009
28.02.2009
29.12.2008
29.10.2008
29.08.2008
29.06.2008
29.04.2008
29.02.2008
29.12.2007
29.10.2007
29.08.2007
29.06.2007
29.04.2007
28.02.2007
29.12.2006
Maximum Drawdown from December 29th 2006 (in %)
Based on Historical Data from Dec 29th 2006 to Oct 12st 2012 0%
-10%
-20% 38%
-30% 28%
-40%
-50% 18%
-60%
-70% M. Drawdown Differential (in %)
Minimum Volatility Strategy
Reduced Drawdown Risks 58%
48%
8%
-2%
Maximum Drawdown: Eurostoxx 50 TR (*)
Maximum Drawdown: Low Volatility Strategy (*)
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Minimum Volatility Strategy Comparative Distribution of Weekly Returns Based on Historical Data from Dec 29th 2006 to Oct 12st 2012 25%
100%
90%
FrĂŠquence (nombre d'observations)
20%
80%
70%
15%
60%
50%
10%
40%
30%
5%
20%
10%
0%
0% -20% -18% -16% -14% -12% -10% -8% Low Volatility Strategy (*)
Q.M.S Advisors
-6%
-4%
-2%
0%
Eurostoxx 50 TR (*)
2%
4%
6%
8%
10% 12% 14% 16% 18% 20% 22%
Eurostoxx 50 TR (*)
Low Volatility Strategy (*)
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Minimum Volatility Strategy Relative Weekly Distribution of Returns Based on Historical Data from Dec 29th 2006 to Oct 12st 2012
15%
y = 0.725x + 0.002 R2 = 0.928
10%
Low Volatility Strategy (*)
5%
0% -30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
-5%
-10%
-15%
-20%
-25%
-30%
Q.M.S Advisors
Eurostoxx 50 TR (*) | tel: +41 (0)78 922 08 77 | e-mail: info@qmsadv.com | website: www.qmsadv.com
Page 8
Minimum Volatility Strategy A Simple Approach to Higher Portfolio Efficiency Ø
Low Volatility Strategies offer a simple, transparent and highly customizable way to tap one of the most recognized and documented source of alpha: Ø
This passive strategy utilizes a systematic approach that does not rely on forecasts of stock returns and uses as input only the covariance matrix.
Ø The portfolio resulting from minimum variance optimization has the smallest ex-ante volatility, and exhibits a significant reduction in ex-post risk as well, with respect to the selected benchmark Ø Historically the strategy has produced significantly higher returns with lower realized volatility when compared to its benchmark; resulting in attractive Sharpe ratios. Ø Empirical evidence shows that the design of the optimization problem plays a much greater role when assuming homogeneous return estimates. This in turn results in allocations that maintain their promise: exhibiting lower risk in the future while giving full exposure to the equity market Q.M.S Advisors
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