PBS SMART : A disciplined strategy
Appearances can be deceiving: looking at the performance of the major indices, an investor would be quite right in thinking that October was an uneventful month: Global Bonds – flat, Global Equities – up a little less than a percent. Yet, this month witnessed the largest intra-month ranges in US and European stock prices (-8% and -12% respectively) since the third quarter of 2011, while Treasuries experienced a nine-sigma event! Thankfully, this turned out to be a v-shape correction as US stocks have already eclipsed their previous peak while European shares are halfway through recouping their drawdown.
In light of this, what did the SMART do? As expected, nothing. The disciplined approach played its part and did not over-react during this correction. Hence capital was preserved (-0.3% in October). Indeed, one of the key strengths of our approach is precisely to offer an answer to the most important question facing investors and money managers alike: “what if?” What if I buy stocks and markets continue to fall? What if I miss the rally? What if my clients withdraw their money because I didn’t cut soon enough? What if they withdraw because I cut too soon? What if, what if, what if…
By definition, whether a rally was not to last or whether a pullback would not extend further is only known after the fact. Yet successful money management differs from outright gambling by the use of a process that is disciplined, repeatable and consistent because no one knows beforehand what the future will bring. In other words, what makes the SMART interesting is that it doesn’t attempt to pick tops or bottoms. The allocation does not claim to be optimal at any given point in time, but when changes in trends emerge, the consecutive portfolio rebalancings will take into account these new parameters and dynamically reposition SMART with the right allocation.
Take Japan for example: November brought a number of structural changes, among which the news that the Japanese GPIF would be increasing its allocation to stocks. The chart below highlights the evolution of SMART’s allocation to this asset class over the past six months. The strategy clearly captured the trend that emerged over this period and thus progressively increased its holdings of Japanese Equities – which now stand at their maximum weighting (7%) – before the news came out.
Japan Equity in PBS SMART (Equity pocket)
Banque Pâris Bertrand Sturdza SA
In conclusion, the low levels of dispersion across asset classes and the compression of yields have been two dominant forces in markets this year but with current USD strength, the coming normalization of US monetary policy, a new round of quantitative easing in Japan and the sell-off in the energy complex, dispersion seems ready to find a bottom. Coupled with asset class rotations (at the style and regional level), this should create a favorable set up for the PBS SMART strategy, as passive investing enters a maximum risk zone with demanding valuations across all asset classes.