What is Conservative Investing?

As we talk to investors and advisors, the phrase "conservative investing" comes up a lot. It is an often cited reason for avoiding non-tradtional or “alternative” assets.

It comes up fairly universally. Banks, mutual fund companies, industry experts all make reference. In fact, the largest advisors, the banks, harp on this a lot. They say things like "we keep it simple" or "we believe in conservative investing".

When pressed as to what conservative is, it generally refers to an approach that is a low risk combination of stocks and bonds. The reality is this is false. It is not conservative at all.

First, if you look at a so-called “conservative” portfolio of stocks and bonds, 60/40*, the corrections are still violent. The strategy has a very high correlation to stocks at 96%. It makes money and loses money at the same time. See Chart #1.

  Chart #1

Chart #1

Second, if you look at a reputable balanced fund, the epitome of "conservative", historically it produces a better risk adjusted result and better Sharpe Ratio with lower volatility and drawdown for about the same return. See Table #1 for a performance comparison.

  Chart #2

Chart #2

Yet it should be noted that the correlation to the S&P remains high at 85% (see Table 3). Scary that there is a massive amount of people’s savings managed this way. Some of the largest asset management companies have over 60% of their assets in these type of funds.

Lastly, in this case we have added a diversifying CTA benchmark, the Auspice Managed Futures Index (AMFERI) to the typical Balanced Fund. This is a return stream with a slight negative correlation to the stock market, 60-40 and the Balanced Fund per Table #3.

  Chart #3

Chart #3

Per Table #2, we have achieved significantly better risk-adjusted returns: lower volatility (-25%), drawdown (-58%) along with higher return (+10% relative) and Sharpe Ratio (+39%). It is only in this case that correlation of the combined result is far lower than investing in the stock market or 60/40 portfolio alone.

Per Table #3, combining this Balanced Fund and the CTA Index produces now produces a modest correlation of 56% to the S&P. It also produces the highest Sharpe ratio and lowest drawdown and volatility. It is the best risk-adjusted return per Table #1.

The example is simple. The reasons are obvious. It is actually conservative and reduces portfolio risk.

Some of the most successful and conservative investors, who's mandate it firstly to protect assets, are significant users of alternative strategies like that shown here. The Canadian pensions are a good example of this.

By adding non-correlated investments can you create a better, more conservative portfolio.

Check the definition of conservative at the door.

See disclaimer.

  Table #1

Table #1

  Table #2

Table #2

  Table #3

Table #3

Disclaimer
 

IMPORTANT DISCLAIMERS AND NOTES
Futures trading is speculative and is not suitable for all customers. Past results is not
necessarily indicative of future results. This document is for information purposes only
and should not be construed as an offer, recommendation or solicitation to conclude
a transaction and should not be treated as giving investment advice. Auspice Capital
Advisors Ltd. makes no representation or warranty relating to any information herein,
which is derived from independent sources. No securities regulatory authority has
expressed an opinion about the securities offered herein and it is an offence to
claim otherwise.

COMPARABLE INDICES
Auspice Managed Futures Excess Return Index (AMFERI): The Auspice Managed Futures Index aims to capture upward and downward trends in the commodity and financial markets while carefully managing risk. The strategy focuses on Momentum and Term Structure strategies and uses a quantitative methodology to track either long or short positions in a diversified portfolio of exchange traded futures, which cover the energy, metal, agricultural, interest rate, and currency sectors. The index incorporates dynamic risk management and contract rolling methods. The index is available in total return (collateralized) and excess (non-collateralized) return versions.

Returns for Auspice Managed Futures Excess Return Index (AMFERI) represent returns calculated and published by the NYSE. The index does not have commissions, management/incentive fees, or operating expenses.

Barclay BTOP50 Index seeks to replicate the overall composition of the managed futures industry with regard to trading style and overall market exposure. The BTOP50 employs a top-down approach in selecting its constituents. The largest investable trading advisor programs, as measured by assets under management, are selected for inclusion in the BTOP50.

The S&P 500 is an index of 500 stocks chosen for market size, liquidity and industry
grouping, among other factors. The S&P 500 is designed to be a leading indicator of
U.S. equities and is meant to reflect the risk/return characteristics of the large cap
universe. Price Return data is used (not including dividends).

60-40 Portfolio: 60% investment in SPY (S&P 500), 40% investment in IEF (intermediate-term US Treasuries), rebalanced monthly.


QUALIFIED INVESTORS
For U.S. investors, any reference to the Auspice Diversified Strategy or Program, “ADP”, is only available to Qualified Eligible Persons “QEP’s” as defined by CFTC Regulation 4.7. For Canadian investors, any reference to the Auspice Diversified Strategy or Program, “ADP”, is only available to “Accredited Investors” as defined by CSA NI 45-106.