Note: We published a version of this article back in 2014. We’ve updated this article (read below) with 2017 data, and it’s interesting to see that many of the long-term trends still remain intact even though the iSectors Post-MPT Growth Allocation has underperformed the S&P 500 from 2014 to 2017.
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.
These tables give you risk or return numbers over annual intervals since inception. Each interval begins on 2/1 for the year indicated (Post-MPT Growth’s inception date is 2/1/2005) across the top of the graph and ends on 1/31 for the year indicated along the side of the graph. 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 5% represents all of the two-year performance numbers annualized. The number at the lower left corner (9%) is the twelve-year number ending 1/31/2017.
Although the points that can be made from these graphs are endless, some of the most interesting points are:
- Annual Rate of Return Graph (Graph 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 the returns are between 6% and 14%
- Annual Rate of Return Minus Those of the S&P 500 (Graph 2 above)
o Post-MPT Growth only underperformed the S&P 500 in 3 out of 21 periods at least 7 years in length
o Over long periods of time, it is not unreasonable to expect the strategy to outperform the S&P 500 by 1 to 2 percentage points
- Annualized Standard Deviations (Graph 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 13% to 14% range comparable with that of the S&P 500 (the standard deviation for the S&P 500 during the twelve years ending 1/31/2017 was 14.2%)
- Correlation of the Allocation’s Returns With Those of the S&P 500 (Graph 4 above)
o Although the correlations vary widely in one-year periods, they settle in the 0.55 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