Global Asset Allocation and Stock Selection

Assignment #1

Comparison of Investment Styles along Tactical Trading Strategies

Gold Asset Management

Artima SuraphongchaiGenzo Kimura

Andrew (Jing) LiuJoseph Sun

Stefan Prawitz

AGENDA

Strategy Evaluation

Key Take-Aways

Methodology Overview

Forecasting Model

Country-based Investing

US UK JP DE

Sector-based Investing

Financial

Health

Utilities

Material

Mixed Investing

US DE

Financial

Health

Methodology Overview: 3 Investment Styles

Each Investment Style Evaluated Across 6 Tactical Trading Strategies

Tactical Trading Strategies Description

Strategy 0: Buy-and-hold

• Buy & Hold sub-strategies assume equal weights for all 4 asset classes.

Strategy 1A: Long-or-Cash (No Filter Rule)

• Compares highest forecasted return to the 1-month Eurodollar deposit return

• If forecasted returns exceed the deposit return, go “Long” in the asset class with highest forecasted return.

Strategy 1B: Long-or-Cash (Filter Rule)

• Same as strategy 1A, but highest forecasted return must exceed 1-month Eurodollar deposit return by at least 0.01% on a monthly basis

• Only then will we go “Long” on the asset class.

Strategy 2A: 2-Long-Positions (Equal Weights)

• Compares two highest forecasted returns to 1-month Eurodollar deposit return

• If both forecast returns exceed deposit return, then go “Long” • If only one asset exceeds deposit return, go only “Long” in one asset and

deposit the rest• Equal weights for both positions (50%-50%)

Strategy 2B: 2-Long-Positions (Weights 2:1)

• Same as Strategy 2B, but asset with highest forecast twice that of the second highest forecast

Strategy 3: Long-and-Short

• Go “Long” in asset with highest positive forecast and “Short” in the lowest negative return forecast

• Positive forecast must also exceed deposit return. If there are no positive forecasts, then deposit. If there are no negative forecast, no short position is taken

Country-based Forecasting Model

Variables US Germany Japan UK

Oil Price Change

Spread Change

Dividend Yield

Price-Book

Price-Earnings

Relative Change to Term Structure

Note:• P/E ratio of US equities• P/E ratio of UK equities• Change in spread of 10-year German Bunds over 10-year US Treasuries• Dividend Yield of Japanese equities• Price-Book Ratio of Japanese equities• UK term structure

(3)

(1)(1)

(4)

(5)

(6)

(2)

Sector-based Forecasting Model

Finance Health Utilities Material

Oil Price Change

Yield Change in 10Y US-Treasuries

US Price-Earnings

Change of Relative US Term Structure

Historical Efficiency Frontier (Strategic View)

Comparison of Efficient Frontiers Historical (Strategic) View01/1988 - 12/2003

0.005

0.007

0.009

0.011

0.013

0.015

0.04 0.05 0.06 0.07Portfolio Standard Deviation

Ex

pe

cte

d R

etu

rn

Countries Sectors Combined (2 Countries, 2 Sectors) County Assets Sector Assets

Predicted Efficiency Frontier (Tactical View)

Comparison of Efficient Frontiers Predicted (Tactical) View01/2004

0.002

0.004

0.006

0.008

0.010

0.012

0.014

0.016

0.018

0.020

0.03 0.04 0.05 0.06 0.07Portfolio Standard Deviation

Ex

pe

cte

d R

etu

rn

Countries Sectors Combined (2 Countries, 2 Sectors) County Assets Sector Assets

Investment Style Comparison (Return)

Average Monthly Return

0.0040

0.0060

0.0080

0.0100

0.0120

0.0140

0.0160

0.0180

0.0200

0. Buy-and-Hold withequal initial weights

1a. Country Long orCash (No Filter Rule)

1b. Country Long orCash (Filter Rule)

2a. Long Positions (no filter, equal

weights)

2b. Long Positions (no filter, weights 2:1)

3. Long-and-Short

Trading Strategy

Re

turn

Country Only

Sector Only

Combined

0.0071MSCI World Return

Investment Style Comparison (Standard Deviation)

MSCI World Std Dev

Historical Monthly Standard Deviation of Return

0.0150

0.0200

0.0250

0.0300

0.0350

0.0400

0.0450

0.0500

0.0550

0. Buy-and-Hold withequal initial weights

1a. Country Long or Cash(No Filter Rule)

1b. Country Long or Cash(Filter Rule)

2a. Long Positions (no filter, equal weights)

2b. Long Positions (no filter, weights 2:1)

3. Long-and-Short

Trading Strategy

Ret

urn

Country Only

Sector Only

Combined

0.0424

Investment Style Comparison (Sharpe Ratio)

Historical Average Monthly Sharpe ratio

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

0.45

0.50

0. Buy-and-Hold withequal initial weights

1a. Country Long or Cash(No Filter Rule)

1b. Country Long or Cash(Filter Rule)

2a. Long Positions (no filter, equal weights)

2b. Long Positions (no filter, weights 2:1)

3. Long-and-Short

Trading Strategy

Ret

urn

Country Only

Sector Only

Combined

MSCI World Sharpe Ratio0.1672

Two way comparison:Ranking System for Combination Evaluation (I)

Average monthly returnCountry Sector Combined

0 0.0072 0.0074 0.00911a 0.0177 0.0136 0.01791b 0.0162 0.0138 0.01722a 0.0159 0.0122 0.01552b 0.0165 0.0126 0.01633 0.0170 0.0155 0.0184

Standard Deviation

Rank of Standard Deviation

Sharpe Ratio Rank of Sharpe Ratio

% of non-negative

Rank of % of non-negative

Maximum Return

Rank of Maximum Return

Minimum Return

Rank of Minimum Return

Rank of Average monthly returnCountry Sector Combined

0 18 17 161a 3 13 21b 8 12 42a 9 15 102b 6 14 73 5 11 1

Two way comparison :Ranking System for Combination Evaluation (II)

Rank of Average monthly returnCountry Sector Combined

0 18 17 161a 3 13 21b 8 12 42a 9 15 102b 6 14 73 5 11 1

Rank of Standard DeviationCountry Sector Combined

0 16 12 141a 18 11 151b 13 3 82a 7 1 22b 9 4 53 6 10 17

Rank of Sharpe RatioCountry Sector Combined

0 18 17 161a 13 15 61b 9 10 42a 5 12 22b 7 14 33 1 11 8

Rank of Percentage of Non-negative ReturnCountry Sector Combined

0 17 18 161a 11 7 91b 4 1 22a 10 7 32b 12 5 53 14 13 14

Rank of Maximum ReturnCountry Sector Combined

0 17 18 161a 4 1 51b 8 1 52a 15 14 132b 12 10 93 11 1 5

Rank of Minimum ReturnCountry Sector Combined

0 17 16 181a 7 13 121b 6 13 12a 5 8 82b 4 10 103 3 13 2

Investment Style ComparisonOverall score shows Mixed Strategy is the bestPlot of efficiency frontier favors country-only strategy Poor sector returns probably due to high inter-correlation

Tactical trading Strategy ComparisonOverall score shows 1b: Long-or-Cash (Filter Rule) is the best Little difference between 2-Long and Long-Short trading strategiesBuy & Hold strategy has the lowest performance (But still beat MSCI World)

Best combinations is to have Combined asset classes and implement Long-Cash (with Filter) trading strategy

Key Take-Aways

Country Sector Combined0 Buy & Hold 17 16 16 171a Long-Cash (No Filter) 9 10 8 91b Long-Cash (Filter) 8 7 4 62a 2Long (Equal Weight) 9 10 6 82b 2Long (Weights 2:1) 8 10 7 83 Long-Short 7 10 8 8

10 10 8

Global Asset Allocation and Stock Selection

Assignment #1

Any Questions?

Gold Asset Management

Artima SuraphongchaiGenzo Kimura

Andrew (Jing) LiuJoseph Sun

Stefan Prawitz

Regression Summary:Solid Adj-R2 and High Predicting Power

Adjusted R square

Correct Direction

Count

Total Observations

PercentageBuy & Hold

Country-based US 10.28 % 134 192 70% 63%

Germany 5.78 % 126 192 60% 58%

Japan 4.32 % 104 180 58% 46%

UK 5.13 % 118 192 61% 57%

Sector-based Finance 9.18 % 168 262 64% 66%

Health 7.63 % 175 262 67% 65%

Utility 4.72 % 127 192 66% 60%

Material 16.57 % 77 108 71% 59%

GARCH model (Expected variance)

0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 10

0.2

0.4

0.6

0.8

40

60

80

100

120

140

160

180

200

Parameter B

Parameter A

Fig II. Utility Sector Likelihood Function

180-200

160-180

140-160

120-140

100-120

80-100

60-80

40-60

A + B = 0.68 << 1

Strategy Sub-Strategy % Rank % Rank % RankCountry-Only 0 0.720% 3 4.346% 3 16.56% 3

1A 1.771% 2 5.059% 3 35.02% 21B 1.623% 2 4.232% 3 38.36% 22A 1.586% 1 3.798% 3 41.76% 22B 1.648% 1 4.013% 3 41.07% 23 1.702% 2 3.753% 1 45.36% 1

Average Rank 1.8 2.7 2.0Sector-Only 0 0.742% 2 4.204% 1 17.64% 2

1A 1.359% 3 4.186% 1 32.46% 31B 1.377% 3 3.593% 1 38.33% 32A 1.216% 3 3.399% 1 35.77% 32B 1.264% 3 3.625% 1 34.86% 33 1.547% 3 4.108% 2 37.66% 3

Average Rank 2.8 1.2 2.8

Mixed 0 0.911% 1 4.310% 2 21.13% 11A 1.792% 1 4.340% 2 41.30% 11B 1.720% 1 3.847% 2 44.71% 12A 1.547% 2 3.427% 2 45.14% 12B 1.629% 2 3.634% 2 44.83% 13 1.839% 1 4.483% 3 41.04% 2

Average Rank 1.3 2.2 1.2

Average Returns Standard Deviation Sharpe Ratio

Investment Style Comparison Table

Strategy Comparison (Maximum Return)

Historical Maximum Monthly Return

0.0000

0.0500

0.1000

0.1500

0.2000

0.2500

0.3000

0. Buy-and-Hold withequal initial weights

1a. Country Long or Cash(No Filter Rule)

1b. Country Long or Cash(Filter Rule)

2a. Long Positions (no filter, equal weights)

2b. Long Positions (no filter, weights 2:1)

3. Long-and-Short

Trading Strategy

Ret

urn

Country Only

Sector Only

Combined

Strategy Comparison (Minimum Return)

Historical Minimum Monthly Return

-0.2000

-0.1800

-0.1600

-0.1400

-0.1200

-0.1000

-0.0800

-0.0600

-0.0400

-0.0200

0.0000

0. Buy-and-Hold withequal initial weights

1a. Country Long or Cash(No Filter Rule)

1b. Country Long or Cash(Filter Rule)

2a. Long Positions (no filter, equal weights)

2b. Long Positions (no filter, weights 2:1)

3. Long-and-Short

Trading Strategy

Ret

urn

Country Only

Sector Only

Combined

Global Industry Classification (GICS)

Sector Description

Financials Sector Banking, consumer finance, investment banking and brokerage, asset management, insurance and investment, and real estate, including REITs.

Health Care Sector Two main industry groups. The first includes companies who manufacture health care equipment and supplies or provide health care related services, including distributors of health care products, providers of basic health-care services, and owners and operators of health care facilities and organizations. The second regroups companies primarily involved in the research, development, production and marketing of pharmaceuticals and biotechnology products

Utilities Sector Electric, gas or water utilities, or companies that operate as independent producers and/or distributors of power. This sector includes both nuclear and non-nuclear facilities.

Materials Sector Encompasses a wide range of commodity-related manufacturing industries. Included in this sector are companies that manufacture chemicals, construction materials, glass, paper, forest products and related packaging products, and metals, minerals and mining companies, including producers of steel.

Source: MSCI website

Note: • 10 Sectors (Other 6 sectors are Energy, Industrial, Consumer Staples, Consumer Discretionary, IT and Telecom)• 24 Industry Groups• 62 Industries• 132 Sub-industries