Quarterly Outlook
Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?
John J. Hardy
Global Head of Trader Strategy
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Stronghold EUR: up 0.6% in January and 2019 update
Peter Garnry
Chief Investment Strategist
Summary: The Stronghold EUR portfolio was up 11% in 2019 the best year since inception. This was much better than the benchmark and the portfolio is also off to a good start in 2020 up 0.6% in January. Last year was evidence of the model's ability to quickly react to changing market conditions and our hope is that the model will be able to navigate a challenging 2020.
Last year marked the best year for the Stronghold EUR portfolio since inception gaining 11% net of all fees beating the benchmark up only 8.3%. What stands out last year was the model’s ability to quickly increase exposure to equities when the equity market rebounded on the historical Fed pivot on monetary policy. It also marked the first year when Saxo clients could invest into the strategy online through SaxoSelect and we experienced a record inflow of clients and AUM for which we are grateful. We hope to continue to earn the trust our clients have put in our strategy. The model has also started the year on a good note up 0.6% in January whereas the benchmark is down 0.2%. In January the model initially increased exposure to emerging market equities which made sense given the reflation trade dominated markets in the early weeks but the coronavirus outbreak in China crushed returns in emerging market equities and as a result negatively impacted the model’s tail-risk assessment and as a result the exposure has been bought to zero in early February.
Since inception in July 2017 the Stronghold EUR portfolio has delivered 3.5% annualized return which is lower than the returns we observe in the backtest but these returns are for many reasons an upper limit for what to expect in the future. The annualized volatility has been 4.5% which is a bit lower than what we observe in the backtest. Combining the two metrics the annualized Sharpe ratio (assuming 0% risk-free return) is realized 0.8 and our outperformance over the benchmark (which is calibrated to have the same risk profile as our target) is 0.9% annualized.
Stronghold EUR increased equity exposure in early January but has since scaled it somewhat back but with an equity exposure of 32.3% the portfolio still has a historically high level of equities. That means that the portfolio will benefit from improvements in economic activity and the coronavirus only being a temporary event with minor economic impact for China and the global economy. Obviously the key risks are the coronavirus, weaker USD (due to its USD exposure via minimum volatility stocks) and higher interest rates.
For those not familiar with the Stronghold portfolio is a tactical asset allocation strategy offered by Saxo Bank through its managed portfolio platform SaxoSelect.The minimum investment amount is EUR 30,000 and the annual performance fee is 0.75%. The portfolio is based on a mathematical framework which aims to limit large drawdowns by dynamically responding to changes financial markets while aiming to provide stable returns. Saxo clients can invest in the Stronghold EUR portfolio through SaxoSelect in the trading platform after a suitability test has been taken (see screenshot).
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