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Quality Matters -'Asymmetric equity returns: Creating multi-asset optionality'

17th February, 2020

In our white paper we make the case that for investors needing to service real financial liabilities, the loss of capital is more damaging than foregoing the opportunity to earn excess returns.  We therefore argue that downside protection is a more relevant measure of risk for most investors than volatility of returns.  This leads us to construct an alternative view of the efficient frontier using equity downside capture as a proxy for risk. 

We show that the asymmetric risk profile generated by QUALITY1 equities relative to equity market indices has important – and positive – consequences for risk-return in a multi-asset environment. Based on 15 years of back-tested data we show empirically that a multi-asset portfolio comprised of QUALITY equities and Global Government Bonds (GGB) creates risk and return optionality for investors. Using back-tested data we show that equity allocations ranging from 30% to 80% to QUALITY equities, in conjunction with GGB, allows investors to enhance risk-return characteristics compared to a standard 60/40 balanced portfolio as highlighted in Figure 1 and 2.

 

Figure 1: Growth of $1,000 invested in QUALITY portfolio, World, Global Government Bonds and select balanced portfolio

 

Growth of $1,000 invested

Source: Davy Global Fund Management, MSCI and Bloomberg as at 31st December 2018

 

 

Figure 2:15-year historic data showing improved risk-return with c.30-80% equity allocations to QUALITY compared to a standard 60/40 balanced portfolio. (2003-2018)

15-year historic data showing improved risk-return

 

Source: Davy Global Fund Management, MSCI and Bloomberg as at 31st December 2018. Figures shown in the chart represent the percentage allocation to the World and QUALITY portfolio with remaining percentage allocated to Global Government Bonds. The area within the grey triangle represents enhanced risk-return outcomes compared to a standard 60/40 balanced portfolio. 

 

 

1Note that this philosophy relates to that as developed within Davy Asset Management prior to its merger on 29th November 2019 with another entity of the Davy Group, Davy Investment Funds Services Ltd. It now reflects the QUALITY philosophy within the merged entity, Davy Global Fund Management.

Download Quality Matters - 'Asymmetric equity returns: Creating multi-asset optionality'

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Download Quality Matters - 'Asymmetric equity returns: Creating multi-asset optionality'

Read our whitepaper

Download here

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