It's April, which means the birds are singing, the trees are leafing, and I'm doing my annual review of my investing and trading performance.
The format will be familiar from previous years, but I'm going to be using the fact I've upgraded my live trading system to include a lot more detail about my futures trading performance.
Overview of my world
My investments fall into the following categories:
- In my investment accounts:
- 1 UK stocks
- 2 Various ETFs, covering stocks, bonds, gold and property
- 3 Usually some uninvested cash
- In my trading account:
- 4 Various ETFs, covering stocks and bonds
- 5 A futures contract hedge against those long only ETFs in 2.1, so that the net Beta is around zero
- 6 Futures contracts traded by my fully automated trading system
- 7 Cash needed for futures margin, and to cover potential trading losses (there is also some cash in my investment accounts, but it's pretty much a rounding error)
Excluded from this analysis is:
- Net property equity - my house
- My 'cash float', roughly 6 months of household expenditure that is kept separately from my investment and trading accounts.
For the purposes of benchmarking it makes most sense to lump my investments in the following way:
- A: UK single stocks
- Benchmarked against ISF, a cheap FTSE 100 ETF (FTSE 350 is probably a better benchmark but these ETFs tend to be more expensive).
- B: Long only investments: All ETFs (in both investment and trading accounts) and UK stocks
- Benchmarked against a cheap 60:40 fund. This is the type of top down asset allocation portfolio I deal with in my second book.
- C: Equity neutral: The ETFs in my trading account, plus the equity hedge.
- Benchmark is zero.
- D: Futures trading: Return from the futures contracts traded by my fully automated system. This is the type of portfolio I deal with in my first book, and in my third book. The denominator of performance here is the notional capital at risk in my account (usually close to, but not exactly the same as the account value).
- Benchmarks are a similar fund run by my ex employers AHL, and the SG CTA index, adjusted for volatility.
- E: Trading account value: This is essentially everything in my trading account, and consists of equity neutral + futures trading.
- No relevant benchmark.
- F: Everything: Long only investments, plus futures hedge, plus futures trading. I include the value of any cash included in my trading or investment accounts, since if I wasn't trading I could invest this.
- For the benchmark here again I use a cheap 60:40 fund.
If you prefer maths, then the relationship to the first set of categories is:
A = 1
B = 1 + 2 + 4
C = 4 + 5
D = 6 + 7
E = 4 + 5 + 6 + 7 = C + D
F = 1 + 2 + 3 + 4 + 5 + 6 + 7 = B + 3 + 5 + D
(Things will be simpler next year. See the end of the post)
Performance contribution
The figures shown are the contribution of each category to my total investment performance:
A, or 1) UK equities +10.4%
2) ETFs +17.5%
B) Long only investments +27.9%
C) Equity hedge -0.9%
D) Systematic futures trading +0.3%
E) Trading account: -0.8%
F) Total +27.4%
Here are the same figures as 'internal rates of return' - the Excel function XIRR (so you can't add these up, but they are comparable and account for flows between categories):
A) UK equities +64.3% Benchmark +24.6%
B) Long only investments +34.8% Benchmark +21.5%
D) Systematic futures trading +0.4% Benchmarks +0.7% +10.9%
F) Total +27.4% Benchmark+21.5%
Clearly it's been an outstanding year on the 'long only' side, both in absolute terms and relative to the benchmark I use (Vanguard 60:40), with a particularly good year in UK stocks. Futures have been less impressive, but overall this is a substantial improvement on last years carnage.
UK Equities
At the start of the year this subportfolio looked like this:
Now a large number of stocks are passing my filter, but I am wary of going 'all in' and trying to bottom fish whilst risk levels are still elevated and trends are showing a mixed picture (decidedly up in the short term, still down in the long term).
My rule about sector diversification is more important than ever here; a huge number of housebuilders look great value, but they are probably more exposed than average to the bear case and so you would not want to exclusively own this sector.I decided to invest a proportion of my target portfolio every week in the stock that shows the best value, initially limiting myself to one stock per sector, with an eye to eventually holding about 20 - 25 stocks. I will miss out on some bargains by averaging in like this, but will hopefully pick up a some stocks that are currently overvalued, and will obviously benefit if the current rally turns out to be a false dawn.
At the moment I am using cash for this, but at some point I will sell the 'placeholder' IUKD ETFs and also do a modest reallocation from bonds. It will take about 6 months to fully re-invest this sub-portfolio."
(The buying was funded partly from selling the stopgap IUKD, partly from selling bond ETFs as part of my risk exposure optimisation, and also with a big chunk of cash).
Apart from INVESCO, which I bought a double helping of, all of these had the same initial investment so the order above also reflects their relative performance. In fact only Hammerson, Babock and UK Wind are currently showing losses. In contrast the total return of Royal Mail is a stellar 177% (since July; so even more on an annualised basis), presumably due to all the rubbish that we are all ordering from the internet; and MCRO and ITV are both up more than 100%.
(Strictly speaking, Hammerson hit it's stop loss and then some right at the start of the year but I didn't get round to selling it. It's value is now so low it is not worth selling; so I'm keeping it as an out of the money call option on UK commercial propery)
The IRR of 64.3% compares extremely well with the benchmark, the ISF FTSE 100 fund, which returned 'just' 24.6%. It isn't timing; my average weighted purchases happened when the index had already rallied 10% from the start of the year. So it's all down to stock selection. My idea of buying the cheapest stock in a sector I did not yet own was perfectly suited to a year in which sector and factor rotation was churning like crazy; even if I missed out on the first leg up of the market rally.
Still the UK market has done very poorly compared to most; global equities are up over 50%, mainly due to US equities being up over 60%. In this compahy my 64.3% would be good, but not brilliant.
Dividends only added about 1% to the performance above; partly due to COVID as firms weren't paying, and partly because I only owned these stocks for 7 months or so on average. In fact I received dividends in only 10 of the stocks above, with only a couple (IMB and AV.) giving me a yield on the purchase price above 5%.
2016 - 2017 XIRR 29.2%, benchmark 22.7%
2017 - 2018 XIRR 18.3%, benchmark 2.2%
2018 - 2019 XIRR -2.3%, benchmark 7.6%
2019 - 2020 XIRR -23.1%, benchmark -24.3%
2020 - 2021 XIRR +64.3% benchmark +24.6%
UK stock picking has been, with one blip, the best part of my portfolio and this year is no exception. On average I'm over 8% up a year: the geometric means are 13.5% and 4.9% respectively; the Sharpe Ratios are 0.52 and 0.33.
ETFs and funds
All my non UK and non equity exposure is in ETFs, with a smattering of investment trusts. As usual trading was done for tax optimisation, to generate funds for SIPP and ISA Investment, and to get the right risk exposure (discussed later). As the markets continued to be volatile I did a lot more of trading than usual (though not as much as in the crazy days of March last year). This has slowed down in the last few months of the year as my exposure targets stopped moving so much.
I don't look at the performance or risk of my ETF portfolio seperately, only in conjuction with UK shares.
It's worth noting that I took the opportunity to realise tax losses and clean out a lot of ETFs from my trading account. This will make the performance of that cleaner, since I also closed the equity hedge out. All that is in that account now is cash and a cash like ETF (XSTR).
Overall then I've gone from about 42 ETF names to 'just' 18. This is sufficiently few that I can actually print the entire list:
Equity EM Dividend SEDY
Equity Europe Dividend EUDV
Equity Europe Dividend IDVY
Equity US Dividend HDLG
Equity Asia Normal PAXG
Bond UK High yield ISXF
Equity Global Dividend VHYL
Equity Asia Dividend IAPD
Bond Europe High yield SHYG
Bond EM Government SEMB
Equity Europe Dividend EQDS
Bond UK Cash like XSTR
Bond EM Corporate EMCP
Equity Asia Dividend PADV
Equity US Dividend USDV
Equity EM Normal HMEF
Equity Global Infrastructure PGIT
Bond Global High yield VSL
Long only
2016 - 2017 XIRR 22.3%, benchmark 17.7%
2017 - 2018 XIRR 1.3%, benchmark 1.3%
2018 - 2019 XIRR 4.0%, benchmark 7.2%
2019 - 2020 XIRR -17.5%, benchmark -10.5%
Systematic futures trading and equity hedge
The systematic futures trading system I run is effectively what you can in find in "Systematic Trading", and which I've blogged about at length.
However things are still a little more complicated for 2021-21, and for my trading account as a whole the breakdown looks like this (all numbers are as a % of the notional maximum capital at risk):
Hedging futures: -4.5%
Hedged stocks, total return: +0.1%
Net equity neutral: -4.3%
Futures trading:
MTM: 4.1%
Interest: -0.09%
Fees: -0.09%
Commissions: -0.47%
FX gain/loss: -3.1%
Net futures trading: +0.39%
Grand total: -4.0%
So I actually made a bit of money trading futures, but lost it on the equity 'neutral' component, and on FX: the value of the cash I hold in non GBP currency went down (GBPUSD rallied from about 1.23 to 1.37 during the year, though fortunately it was flat against euros).
The absolute size of this currency gain/loss is not out of in line with earlier years. I could probably be a bit more pro-active in terms of managing my FX exposure to sweep as much as possible back into GBP on a regular basis, but at the end of the day I will always have to hold quite a bit of foreign currency in my account for margin to avoid paying borrowing charges, and I'm not bothered enough about it that I'm going to hedge it out (though perhaps I should be).
'Bench1' is an GBP denominated AHL fund, using monthly returns from April to March in each year, and a new benchmark 'Bench2' is the SG CTA index, with matching daily returns. Both have returns scaled up to match my volatility: multipling by 1.45 and 1.8 respectively. As I redo this calculation every year the benchmark numbers don't always match previous years.
Remember the benchmark should only be compared against futures trading, not the equity neutral component of the portfolio.
Year: 14/15 15/16 16/17 17/18 18/19 19/20 20/21
Total: 57.2% 39.6% 0.3% 0.4% 6.1% 35.7% -4.0%
Hedge: -1.1% 16.3% 14.4% 4.1% 1.0% -4.0% -4.3%
Futures: 58.2% 23.2% -14.0% -3.7% 5.2% 39.7% +0.4%
Bench1: 66.9% -8.3% -5.8% 7.1% 7.7% 21.6% +0.7%
Bench2: -6.7%* -21.9% -3.8% 0.7% 8.0% 10.9%
* From 13th April 2015
Let's do some python
from sysproduction.data.capital import dataCapitald = dataCapital()pandl = d.get_series_of_accumulated_capital()pandl_returns = pandl.diff()pandl_capital = d.get_series_of_maximum_capital()profits = pandl_returns / pandl_capital
profits.cumsum().plot()
====================================
P&L by instrument for all strategies
====================================
codes pandl
1 EUROSTX -4.31 (used as a hedge only)
2 EDOLLAR -2.86
3 JPY -1.51
4 US10 -1.48
5 KR10 -1.08
6 LEANHOG -0.99
7 CRUDE_W -0.72
8 GAS_US -0.66
9 CORN -0.52... various small numbers removed
17 BOBL 0.52
18 OAT 0.56
19 VIX 1.01
20 SOYBEAN 1.10
21 CAC 1.32
22 MXP 1.81
23 SMI 2.24
24 AUD 2.47
25 PLAT 2.81
26 BTP 3.59
27 WHEAT 4.53
==================
P&L by asset class
==================
codes pandl
0 STIR -2.86
1 OilGas -1.39
2 Equity -0.76
3 Ags +0.02
4 Vol 1.12 5 Bond 1.44 6 FX 2.59 7 Metals 2.81
Total investment return
My total return on all my investments, including cash held for futures margin, came in at an XIRR of +27.9% (the simple return which we've already seen above was slightly lower: +27.4%). This is lower than the 34.8% for long only for a couple of reasons; firstly I did lose money trading futures (a loss in my equity hedge, partly offset with a gain in my actual trading). Secondly, and more importantly, the denominator is larger as it includes the cash I use for futures margin. Once again Vanguard 60:40 seems an appropriate benchmark (since if I wasn't trading futures I could throw all my cash into that fund), at +21.5%.
Let's look at some history
2016 - 2017 XIRR 18.2%, benchmark 19.3%
2017 - 2018 XIRR 0.6%, benchmark 1.3%
2018 - 2019 XIRR 4.4%, benchmark 7.2%
2019 - 2020 XIRR -6.6%, benchmark -10.5
2020 - 2021 XIRR +27.9% benchmark +21.%
I noted last year that I was in a dead heat with the benchmark in the geometric mean race; obviously this year puts me into a lead with a geometric mean of 9.3% versus 7.1% (My Sharpe Ratio is also a little higher; 0.64 to 0.58 using a zero risk free interest rate). To put it another way, futures have added about 1.8% annually to my performance, though quite unevenly:
2016 - 2017 Total XIRR 18.2%,22.3% without futures
2017 - 2018 Total XIRR 0.6%, 1.3% without futures
2018 - 2019 Total XIRR 4.4%, 4% without futures
2019 - 2020 Total XIRR -6.6%, -17.5% without futures
2020 - 2021 Total XIRR +27.9%, 34.8% without futures
Risk
This year I started using the model portfolio (outlined here) as a basis for my risk allocation. So the figures here should look pretty similar to those (with the addition of cash and futures exposure). During the year I sold down my cash, and also shifted from bonds to equities in line with the 12 month momentum signals I use for this allocation.
Cash allocation
|Asset |Start of year|Current|
--------------------------------
|Bonds | 28.9% | 12.7% |
|Equity | 45.8% | 73.4% |
|Other | 0.2% | 0.0% |
|Cash | 25.2% | 13.9% |
"Cash" excludes money held in bank accounts which will cover ~6 months of living expenses that I do not deem part of my investment portfolio. Note: I've included the 'cash like' ETF XSTR that sits in my trading account in the Bond ETF figures, not in the cash. It amounts to 1.8% of the total allocation figures shown here. You could argue that the bond ETF figures are more like 10.9% and cash 15.7%.
Other: I had some random property and metals ETFs that I've cleared out in the cull of small holdings I mentioned above.
Risk allocation
|Asset |Strategic|Start of year|Current|
-------------------------------------------
|Bonds | 25% | 17.4% | 7.0% |
|Equity | 50% | 50.2% | 71.6% |
|Futures | 25% | 35.2% | 21.4% |
|Other | 0% | 0.3% | 0.0% |
The bond/equity change is again based on momentum. My futures risk has gone down, but only as a percentage; my futures risk in money terms is unchanged, but my overall risk is higher because I'm holding less cash and more equities.
Current regional exposures (rows add up to 100%)
| | Asia | EM | Euro | UK | US |
---------------------------------------------
|Bonds | 0% | 39% | 17% | 42% | 2% |
|Equity| 12% | 23% | 23% | 30% | 12% |
Relative to the tactical allocations I would like to have (in the absence of paying capital gains tax), I'm overweight UK and EM bonds, and European equities; and underweight Asian, EM and US equities.
Summary, and what now
Performance has obviously been good, but I prefer to focus on process. Things have gradually calmed down this year, and I've brought some more rigour to my methodology (in the form of the model portfolio) and also done some cleaning and tidying to simplify things.
So my structure is now much cleaner:
- In my investment accounts:
- 1 UK stocks
- 2 Various ETFs, covering stocks, bonds, gold and property
- 3 Usually some uninvested cash
- In my trading account:
- 4 Futures contracts traded by my fully automated trading system
- 5 Cash needed for futures margin, and to cover potential trading losses (there is also some cash in my investment accounts, but it's pretty much a rounding error). Some of this cash is held in the form of a 'cash like' ETF XSTR.
For the purposes of benchmarking it makes most sense to lump my investments in the following way:
- A: UK single stocks
- Benchmarked against ISF
- B: Long only investments: All ETFs (in both investment and trading accounts) and UK stocks
- Benchmarked against a cheap 60:40 fund.
- C: Futures trading: Return from the futures contracts traded by my fully automated system.
- Benchmarks are a similar fund run by my ex employers AHL, and the SG CTA index, adjusted for volatility.
- D: Everything: Long only investments, plus futures trading. I include the value of any cash included in my trading or investment accounts, since if I wasn't trading I could invest this.
- For the benchmark here again I use a cheap 60:40 fund.
If you prefer maths, then the relationship to the first set of categories is:
A = 1
B = 1 + 2
C = 4 + 5
D = 1 + 2 + 3 + 4 + 5
UK stockpicking has obviously done well, but I have no interest in substantially increasing the size of my book here, that's now up to 25 names and is also a fraction over it's tactical target allocation. If some stop losses start being hit then I will look at the target, and if neccessary add or delete some capital from any investment I make into new shares.
I'm happy with my new model portfolio based approach to managing my ETF exposure; now much more formally in line with the sort of thing outlined in Smart Portfolios, and only a few minutes of work every month to keep updated. I have to do this years ISA and pension allocations which should allow me to get a bit closer to the ideal tactical allocations. Almost nothing I own has the potential for a capital gains tax loss, so it might be hard to do a huge amount of rebalancing.
I'm currently in the middle of a massive refactoring of my pysystemtrade research code; once completed I hope to research and implement some new futures trading systems. Watch this space!
wonderful work as always Robert. Thank you for all your sharing!
ReplyDeleteYou're welcome
DeleteHope you are well.
Wow thank you so much! I am new to your blog and glad I checked it today for something new!
ReplyDeleteJust seeing your PL curve is real "enlightening"!
Is that what AHL's PL curve is looking like or other hedge funds? I've always had this idea, theirs was literally a straight line going horizontally up, thats why they make billions, because they got the secret key to something.
(apologies for the delay, your comment got lost amongst hundreds of spam comments)
DeleteWell AHL's P&L curve isn't going to be that different from mine; only Rentech I guess has anything close to a straight line account curve amongst the larger non HFT funds.
very interesting - thanks for sharing Rob. I am moving my own long only investing towards an ETF Model Portfolio as described in Smart Portfolios but keep it fairly stable (for now at least) i.e. don't re-allocate based on momentum/forecast. I underestimated the time you can spend finding ETFs that are right for you :-) !
ReplyDeleteWhat's your opinion on ESG focused ETF's? A friend of mine had been to a seminar, where they were pushing ESG etf's by saying that they perform better than ACWI index and that they will be even more popular in the coming years.
ReplyDeleteAlso what about sector etf's such as Automation/robotics, clean tech, digitalisation etc? As far as I can see they don't bring much diversification.
I'm curious about this as well, my broker (DEGIRO) has included many of those ESG and automation/robotics/clean/digitalization focused ETFs in the list of ETFs they offer without commission.
DeleteAlso, if sector specific ETFs are not available for some countries or are too expensive in terms of TER, I'm wondering at what conditions it would be better to buy worldwide sector specific etfs instead of mktcap weighted country specific etfs (or which mixture of the two)
Obviously there are non financial reasons for investing in ESG (I'm leaving aside the question of whether ESG really means ESG, i.e. how meaningful it is to say whether a particular company really is ESG or has just ticked some boxes). But let's focus on the financial reasons. I noted in my second book (Smart Portfolios) that the loss in diversification from excluding a few sectors from your portfolio was minimal. That suggests ESG screened ETFs like Vanguards, which also have very low management fees, are a low risk change to your portfolio. Of course if you believe you can forecast SR, and you think ESG will outperform, that makes the case even more compelling.
Delete'Made up' sector ETFs like robotics (versus using the standard industry weightings which tend to cover much broader sectors) strike me as a bit of marketing hype. If you buy these *instead* of industry ETFs you will be missing big chunks of the overall market. If you buy them *as well* then you'll be tilting your exposure in a particular direction, which I suppose isn't quite so bad. They also often have higher fees than the industry index ETFs. Of course, again, if you believe the hype, can forecast Sharpe Ratios, and think these subsectors will outperform then you will buy them.
Worldwide sector ETFs: again I think I noted in Smart Portfolios that these are vastly inferior to country ETFs since the concentration problem is worse across countries (too much US) than it is across sectors.
Also, I would like to know how come most of your equity etf's are dividend oriented? I don't remember having read much about dividend etf's in Smart Portfolios.
ReplyDeleteIs it because of tax? Or is it because such companies are more stable and you avoid the desperation of indexing (Oldfield) where new is 'better'? I just read Oldfields book. Great one.
Last question is. Why do you have several etf's for the same region. I saw 3 for Europe!
Thank you.
Matt
Denmark