June Allocation

Another month passed with models that try to defend the gain accumulated since beginning year.
Model 3 is giving up something but is still very positive ytd.

Here we go with the June allocations that switch defensive on the first 2 models

MODEL 1 - € Government 1-3 years (Confirmed for the third consecutive month...it doesn't like volatility)

MODEL 2:  € Government 1-3 years (the model left the € HY allocation and go defensive for June. Last time it was defensive was October 2014)

MODEL 3: 50% Treasury 7-10 years - 50% Emerging Bonds $. Model lost money with inflation bonds in May, recovered something with HY. Now it takes  an high $ exposure.

Below you can see the monthly performance calculated using benchmarks

I built the extended version of model 3, now up to 23 assets.
In June I'll make a post on it.
Have a good month.

may allocation follow up

This morning I updated the post I wrote last week end with table and further considerations

May Allocation - preliminary

I am quite busy at the moment.
I couldn't update in the week end because last week moves were "strong" and I needed to download data instead of doing a proxy for last month day like usual.
It was a "decimal game".

I'll write more in the week end. At the moment I just post the new allocation

Model 1: € government 1-3years (defensive)
Model 2: € High Yield
Model 3: € Inflation bonds + € High Yield

The models abandoned the € government 15-30 after the strong fall at the end of April
there were losses, but still in positive YTD.

keep in touch

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Updated on 9 May 

After a very busy week that showed a very strong volatility on Bonds markets, I'm going to update the table with performances.
May didn't start good for monthly allocations because both high yield and inflation bonds suffered from the huge stress in European market.
As I posted on Twitter, because of very high unusual moves and volumes, the probability of a short term bottom is very high.

But trend could be definitively changed this month and investors needs to be on alert on Bonds (especially in Europe) with stop losses in particular on the longer maturities.
By the way, these models don't have an "intra-monthly" stop built in them, but the stop is implicit at the end of the month if the allocation changes.
Let's see the performance in April that basically deleted the very good March's results. All models are in positive but 2 months ago i was happier.

Working progress on model 3.

I expanded the model 3.3 up to 21 assets with results that continue to be solid without optimization. Beginning from Summer, I think that this model will be my new one with real money (now it's the classic model 3 that you can find in this blog).

It's also ready a variant of model 3 that I'll call model 4, with same rules but completely different time frames.
The correlation between the two models is positive and high (70%), but not too much.

I'll post them in May, when I'll have free time. I am also looking for other 1-2 Etfs candidate that are quite liquid (i just need tight bid/ask not volumes), enough track record for the benchmark and low correlation with most assets. I could also try to see how some short equity  Etfs work even if these models are not thought to go short.

Next week I'll post the new May allocation within the week end

MODEL 3.3 (Beta test) 3ETF 18 assets

I'm continuing developing a wider version of model 3.
At the moment asset correlations are increasing between stocks & bonds because of Central Banks liquidity. My target is to build a model with wider ETFs that, hopefully, will be able to resist and limit losses when the next crash will come within 1-2 years. On the other side I don't want to stay aside from markets hoping in better market metrics because often the better gains occur in the last part of the bubble (think about 1999).

This is a beta version and at the moment I'm not investing my money on this, because I always like to see it in real for at least 6 months after developed to see how it works and test if there's some formula bug in the excel file.

Basically it's the same "engine" of model 3, with these differences:
* It invests in 3 ETFs each month instead of 2
* ETF Universe is composed by 18 assets instead of 10.

All of them are listed in Italy but you can find them in other European Exchange such as Frankfurt. Just to clarify a doubt that one reader expressed to me: they are listed in Europe and are not hedged. That means that if I invest in US Equity, my performance is the sum of US Equity in local currency + $ performance vs €.

You can see the ETF universe (all Ishares) in the graph below and see how the model allocated money since 2001.

A problem I have at the moment is that many ETFs are recent and there's not enough track record to test them (or are illiquid).Therefore I find difficult to find other assets to add. For example I'd like to try some smart beta one, but is impossible at the moment.

Here is the performance of the model 3.3 on the hypothesis that I buy the benchmark index at the end of each month. Of course in practice the real performance will differ for slippage costs, bid/ask, capital gain taxes, difference between nav and price, commissions, but this is an interesting starting point in my view.

Allocations in 2015 were:
Jan Govt 15-30 / Treasury 7-10 / UK Gilts
Feb Govt 15-30 / Treasury 7-10 / UK Gilts
Mar S&P500€ / HY $ / Developed Markets Properties
Apr  Govt 15-30 / Gold € / UK Gilts

This is a work in progress because I'm going to add further assets.
The next step is to add many type of Govt (different maturities such as 1-3y, 5-7y, 7-10 and 15-30 and longer if available for euro and US) and corporate bond but I need to prepare the formulas to solve some problems with correlations. It will take time, but hopefully for the Summer I'll have a model that select among 30 assets.I'm also looking for other types of ETF to add other currencies exposure but it's not easy to find something in Italy outside of $, sterling and yen.

I remind that the target of model 3 is to take its risk, also exposing to losses around 7-8% in a month in exchange to obtain interesting risk-adjusted returns over the long term (an alternative to the pure equity investing for my portfolio). Sincerely I don't believe too much in the buy&hold unless you dont' buy in recession times...but it takes good guts!

April Allocation

March...what a great month!! It finished with a very good performance, even if I feared it because invested in overstretched assets. But this is the momentum power and the strength of trend follower methods. They are going to reward until.. the trend doesn't end. But who can say when it will finish?  We could be in a year like 2007 with strong fall coming in equity markets in the next quarters. On the other hand with all liquidity around, we could be in a market like 1998-99, where there were huge gains even if with bubbles all around. Personally I think that there's a bubble in Euro government bond, it's insane to have negative yields.  But I'll continue to surf market (and euro bonds), being conscious that at some point I'll have to take stop losses on the most recent trades.
Let's go and comment with the new allocations.

MODEL 1: it was allocated 100% on the US Equity. It closed with a gain higher than 3% thanks to currency effect. I remind you that all my strategies are elaborated by an European point of view with currency un-hedged. The new allocation for April is Euro Government 1-3years. Basically the model take profits and go conservative. If you can have a positive rate on a sight account this is the month for it. I have Conto Arancio at 1% ad I'll go on it.

MODEL 2: this model invested in US equity as well taking advantage of Dollar strength. The new allocation for April is Euro Government 15-30 years. This model is more volatile than Model 2 and finds extra performance in another stretched market.

MODEL 3: it invests in 2 ETFs each month. In March it was invested in Treasury 7-10 years and euro govies 15-30 that had both good performances in euro. In April the model confirms the euro government 15-30years, but switches from Treasuries to Gold. It's the first time since March 2014 that model invest in Gold and I must admit that it lost money in the previous two gold's allocations.

This is the table with monthly and ytd performance. It will be difficult that the 2015 will continue like in the first quarter.

Summary: all models are going to modify the asset allocation in April. 
Model 1 will invest in Euro-gov 1-3 years; 
Model 2 will invest in Euro-Govies 15-30 years; 
Model 3 will invest in Euro-Govies 15-30years and gold.

Model 1-2-3 - In practice with Markowitz

Since beginning of the year I described 3 models that I'm using at the moment.
Others are W.I.P (work in progress) therefore I don't want to mention them in this post.

Today I want to show how to combine my models to decide the % of portfolio for each one.

I'm going to use Markowitz optimization thanks to an excel written by Ravi Shukla.
http://myweb.whitman.syr.edu/rkshukla/Essentials/

Below I report the expected returns, standard deviation and correlations of 3 models
Constraints: no model can weigh more than 60%

 Then I ran an optimization looking basically for 3 theoretical portfolio:
- Constrained min. standard deviation
- Maximize expected return in a range 5-10%
- Max CAL slope assuming cash rate 0.3%.

You obtain 3 possible portfolios with different weights
For myself I prefer using the first on the left that gives
60% Model 1 - 16% Model 2 and 24% Model 3

I also keep some cash for discretionary strategies because I must optimize the fiscal side. In Italy Etfs are penalized because I can't compensate gains with losses, therefore I need other instruments to recover losses.

Finally someone could also use the portfolio that maximizes CAL (Capital Allocation Line) to move along the black line and rise expected returns or lower standard deviation reaching points not available with the efficient frontier. This is built with a +0.3% cash rate at 1 year.