2015-2016 Asset Allocation Competition: Results

Sixty-two investors entered last year’s Asset Allocation Competition that challenged competitors to assess risk and return in various sectors. Join Ben Trollip as he reveals the results of the competition and speaks to our winners. 

In April 2015, the Wealth Management Sub-Committee launched its Asset Allocation Competition. This contest allowed entrants to manage a hypothetical superannuation fund allocating across asset classes ranging from Australian shares and bonds to global infrastructure, hedge funds and commodities. Prizes were to be determined based on the results for the year to 31 March 2016 and awarded to:

1)         The highest total return.

2)         The best risk-adjusted return (excess return over cash divided by volatility).

3)         The closest return to CPI + 5%.

As we know, the twelve months to March were a challenging time for investors. The table below shows the results from the various sectors available to competitors:

Aus Equity Large Cap

-10.4%

 

Infrastructure

2.8%

Aus Equity Small Cap

3.7%

 

Global Prop

4.6%

Global Equity (unhdgd)

-3.9%

 

Hedge Funds

-7.4%

Global Equity (hdgd)

-3.1%

 

Commodities

-28.7%

EM Equity

-7.7%

 

 

 

   

 

 

 

Aus Bond Composite

2.0%

 

Global Bond Corp

2.9%

Aus Bond Govt

1.9%

 

Global Bond Sov

5.0%

Aus ILBs

-1.0%

 

US Bond High Yield

-2.2%

Aus Cash

2.2%

 

Emerging market debt

4.4%

 

With the sea of red in the results ledger, only one of the 62 competitors managed to outperform cash, one matched cash (by investing 100% in said asset class throughout) and one marginally underperformed cash to take home the third prize.

The top return overall went to Jack Ding. Jack achieved this by investing in a combination of infrastructure and global property; having a rocky ride before rallying strongly in the last few months of the period. His comments on his strategy were:

“From the beginning of the competition I had ruled out shares and bonds from being good investment choices at the time. As at March 2015, interest rates [were] already at historical lows so bonds returns would be very limited, while price earnings ratios of both Australian and US stock market [were] above historical averages so the shares looked expensive to me.

The reason I have chosen infrastructure and property was that I believed these asset classes should benefit from the low interest rates and cheap financing.

Last year was quite a year of turbulence for the stock market, and both assets I had invested are listed assets, in the short term they do have very high correlation with shares.

So the portfolio actually did not perform well and the cumulative return was negative for most of the year.  This is the main reason that I had not rebalanced, as the portfolio was not performing until both asset classes rebounded strongly in March 2016.  This was very lucky for me as it was the last month of the competition.”

Jack also had some informed comments on the nature of this competition:

“This competition has an investment horizon of one year which is kind of short to evaluate long term strategies which are most relevant for superannuation funds.

My belief is that long term investing is all about: 1. Looking for assets that are relatively underpriced. 2. Ignore short term fluctuations and hold while it is still underpriced. 3. Leave the rest to luck.”

These are very fair comments. The contest was chosen to simulate the job of a CIO at a superannuation fund – a steward for investors whose time horizons in many cases span decades. Thus the measurement period of just 12 months, was exceedingly short and represented a mismatch of time horizons. With that said, this is a conflict (albeit an extreme example) that is often faced in our industry, where the agents in charge of investors’ savings often have significantly different motivations.

Returning to the torrid time in investment markets, the second prize went to Chao Gan, who invested 100% in cash throughout the contest, and shared the following comments:

“To be honest, I didn’t expect to win at all. At the start when I saw the three objectives, I knew the only one that I had any real chance of winning was the “best risk adjusted return”, so it was clear that would be my objective. I put all in cash because in theory that would generate the minimum volatility and hence the best risk adjusted performance. In hindsight, maybe I should’ve put 1% in another asset class just to differentiate from anyone else also using this strategy.

I recall that a few days later, an email was sent to clarify that the return was measured in excess of cash return, so I wasn’t sure if my strategy would still be valid. None the less […] I decided to stick with the strategy as an experiment and see how it would play out.”

Chao’s strategy indeed generated a low volatility but in rising markets may have lagged sufficiently so as not to take home the best risk adjusted return. Nevertheless, with all others (except Jack) underperforming this year, a risk-adjusted return of zero was good enough!

Finally, the third prize went to the “least worst loss” which was obtained by Helen Lu. Helen split her portfolio between high yield bonds, emerging market debt and global property. Unfortunately she was unavailable to provide comment.

Overall, this contest provided an interesting lens of investor behaviour. The average starting allocation was approximately 57% to equities, 19% to bonds and 24% to the remainder (property, infrastructure, commodities and hedge funds) – not too far out of line with industry practice. And of particular interest was that most contestants took a “set and forget” approach with only around 30% choosing to actively manage the portfolio by rebalancing their portfolio at one of the quarterly opportunities.

Watch this space for future new and (hopefully) exciting investment competitions run by the Wealth Management Sub-Committee.

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