portfolio REVIEW
Updated on March 2024.
As an Investment Office, one of our favourite ways of measuring the growth of our invested dollar is the Money Multiple.
For instance, if our investments achieve an annualized growth rate of 20% over a period of 10 years, we will experience a 6x Money Multiple, meaning that $1 will grow to $6. If we can sustain this growth rate for 20 years, the Money Multiple will reach approximately 40x. Remarkably, at 30 years, it will skyrocket to approximately 240x.
Hence to get decent Money Multiple returns, we need to have:
Ample time; and
Consistently high annual rate of returns.
UNICORNS
Historically, investments or managers who can deliver over 10% annualised returns over multiple decades are exceedingly rare. Without such eternal unicorns, we would be running an endowment-style investment strategy that seeks 5% - 8% returns annually through global equity and bonds. In 2006 however, we stumbled upon an esoteric money manager who went on to deliver 18% annualised returns over 16 years. Not to be outdone, we invested in another manager who registered over 40% annualised returns over 9 years before suffering a devastating blow on its 10th anniversary. What’s the catch with these outlier managers?
THE GRAND BARGAIN
These Managers use Risk-Based Allocation strategies whose foundations were laid by past Nobel-prize winners. However, they added modifications that diversified and substantially increased the target risk (volatility) of the portfolio at the same time.
Hence investors are asked to accept the grand bargain of tolerating uncomfortable paper losses for high absolute returns. After all, there is no such thing as a free lunch.
Largest Declines (Months to recover)
For instance, the largest drawdown that the managers experienced was -30% in a single month and -45% during the 2008 Global Financial Crisis. Faced with such daunting numbers, most institutional managers would err on the side of caution as their careers may be swiftly ended by a violent portfolio loss even if it is temporal in nature. On the flip side, an underperforming portfolio may be explained away by conservatism, capital preservation, cost of diversification and a multitude of prioritised financial matrices (low volatility, low correlation, high Sharpe ratio, high Sortino ratio, high information ratio etc).
Hence, these esoteric unicorn money managers are destined to remain niche as they can only attract investors who are willing to accept the grand bargain.
VINTAGE RETURNS
Credits: The Drops of God (神の雫), Tadashi Agi
We borrow the concept of vintage returns from the realm of Private Equity / Venture Capital investments. A vintage return refers to your annualised return that is measured by the calendar year the investment was made. For instance a 1970 vintage would reflect 50 year of returns that is presented in an average annual manner (CAGR to be precise). We favor this approach as it allows us to:
Smoothen the violent year-to-year fluctuations that are associated with our managers’ investment strategy.
Redistribute supernormal year return such as 2019 (> 70%) to earlier vintages and likewise for losses.
Mitigate ‘front loading’ effect where most of the outsized returns were attained in earlier periods and are unavailable to more recent investors (e.g. Warren Buffett’s Berkshire Hathaway has an impressive ~20% annualised return since 1965 however the real figure post 2000 hovers around 10%).
CORE ALLOCATION: QUANTEDGE
13% vintage Return (MEDIAN)
13% median return across 17 vintages (2006 - 2023).
Its yearly vintage return ranged from a low of 1% (in 2022) to a high of 30% (in 2023).
Quantedge's asset allocation philosophy is to have exposure across all major asset classes (to take advantage of diversification) and to target very high levels of volatility (to maximise returns). This unique approach, which does not aim for a ‘steady’ return profile, leads to annual swings ranging from -40% to +110%.
CORE ALLOCATION: MULTISTRATS
11% Vintage Return (median)
11% median return across 17 vintages (2006 - 2023).
Its yearly vintage return ranged from a low of 6.7% (in 2023) to a high of 12.5% (in 2020).
The illustrative MultiStrats portfolio are generally consistent performers over long periods of time. That being said, their simple annual returns can vary from low single digits to over 20% in an outlier year.
Growth of $1.00
BENCHMARKS & MONEY MUltiple
Over the years, the recurring high annual rate of return from the Managers translate to a Money Multiple of:
6x - 19x
Even if we halved the returns, they would handily beat 3x from the top performing equity asset class over the same period.
The harsh reality is that we need to embrace a healthy dose of market risk if we’re aiming for significant returns. That’s why we prefer to maximise our risk tolerance to seek the highest available returns.
Ultimately, fortune (and hubris) favors the bold. The distinction, however, boils down to the right mix and sizing of risky investments.
Regards,
Stega Investment Team
Credits: ‘Don’t spill a drop’ scene, 頭文字D (Inisharu Dī)
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