An interesting look at Post-MPT Growth performance numbers with risk/return triangles

Posted on: 11/12/2014

Among the many ways we can look at the Post-MPT Growth performance numbers, you may find risk/return triangles interesting.  There are four triangles presented:

  • Annual Rate of Return
    iSectors Post-MPT Growth performance numbers - Annual Rate of Return

    Chart 1

     

  • Annual Rate of Return Minus Those of the S&P 500
    Annual Rate of Return Minus Those of the S&P 500

    Chart 2

     

  • Annualized Standard Deviations
iSectors - Annualized Standard Deviations Chart 3

Chart 3

 

  • Correlation of the Allocation’s Returns With Those of the S&P 500
iSectors Correlation of the Allocation’s Returns With Those of the S&P 500 Chart 4

Chart 4

 

These tables give you risk or return numbers over annual intervals since inception.  Each interval begins on 2/1 for the year indicated across the top of the chart and ends on 1/31 for the year indicated along the side of the chart.  Thus, in the Annual Rate of Return table, the return from 2/1/2005 to 1/31/2007 was 16% on an annual basis.  These different interval numbers can:

  • Give different insights into future values
  • Raise questions on when the strategy exceeds or fall behind expectations
  • Provide perspective on how the long-term risk and return numbers develop

Looking at the Annual Rate of Return table, the numbers in the hypotenuse of the triangle are the Allocation’s gross rates of return for 12 month periods (fiscal year ending 1/31.)  The next diagonal to the left represents all of the numbers for one additional year period of time.  Thus, the diagonal starting with 16% and ending with 14% represents all of the two-year performance numbers annualized. The number at the lower left corner (10%) is the nine-year number ending 1/31/2014.

Although the points that can be made from these charts are endless, some of the most interesting points to me are:

  • Annual Rate of Return Chart (Chart 1 above)
    o   Every four-year or greater period presented has positive returns during a time including the greatest recession since the 1930s
    o   At six-year periods and longer, all of the returns are between 6% and 10%
  • Annual Rate of Return Minus Those of the S&P 500 (Chart 2 above)
    o   Every six-year or greater period shows Post-MPT Growth outperforming the S&P 500
    o   Over long periods of time, it is  not unreasonable to expect the strategy to outperform the S&P 500 by 2 to 3 percentage points
  • Annualized Standard Deviations (Chart 3 above)
    o   Every four-year or greater period has a standard deviation under 20%
    o   Over long periods of time, the standard deviation should be in the 15% to 16% range comparable with that of the S&P 500 (the standard deviation for the S&P 500 during the nine years ending 1/31/2014 was 15.2%)
  • Correlation of the Allocation’s Returns With Those of the S&P 500 (Chart 4 above)
    o   Although the correlations vary widely in one-year periods, they settle in the .55 range over longer periods of time
    o   As we would expect, the strategy is mildly correlated with the stock market.  But to outperform the S&P 500 with similar levels of risk and moderate correlation makes the Allocation an attractive addition to or substitute for traditional equity strategies in client portfolios

In a few short months, we will be able to add another row and column to see if we able to receive additional insights.



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