Main asset classes February 2022 Risk profile

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The risk-adjusted performance of the Global Market Index (GMI) continues to decline after peaking in December, based on the 3-year Sharpe ratio, a volatility-adjusted measure of return. The sharp reversal also dragged down the rolling 10-year Sharpe ratio. Both metrics fell in February to their lowest levels in nearly a year for this multi-asset class benchmark.

As usual, there are specific factors that led to the reversal of GMI’s Sharpe ratio. But the decline is not unusual. Sharp spikes in risk-adjusted performance tend to reverse quickly and this playbook is alive and well in 2022.

Sharpe ratio annualized 3- and 10-year GMI

Recall that when we , the 3-year Sharpe ratio was still booming, reaching its highest level in over four years. At the time, I noted: “History suggests that the upward spikes in the GMI’s Sharpe ratio are rapidly reversing, implying that choppy market activity lies ahead.” That more or less describes the performance of the index so far this year.

Meanwhile, the GMI decline continues to slide deeper into the red. After December’s zero reading (marking a new high), the GMI’s peak-to-trough decline collapsed to -6.8% last month, near a two-year low.

History of GMI direct debits

History of GMI direct debits

The GMI represents a theoretical reference for the “optimal” portfolio. Using standard financial theory as a guide, this portfolio is considered a preferred strategy for the average investor with an infinite time horizon. These assumptions are, of course, unrealistic in the real world.

Nonetheless, the GMI is useful as a baseline for beginning research into asset allocation and portfolio design. GMI’s track record suggests that the performance of this benchmark is broadly competitive against active asset allocation strategies, especially after adjusting for risk, trading costs and taxes.

For additional perspective, readers can use the risk profile for GMI alongside the current monthly performance updates and for the benchmark and its constituents.

The table below outlines additional risk metrics for GMI and its underlying asset classes, based on a 10-year window to last month.

Performance and Risk Summary
Performance and Risk Summary

Here are brief definitions of each risk metric:

  • Volatility: annualized standard deviation of monthly return
  • Sharp Report: monthly returns/monthly volatility ratio (the risk-free rate is assumed to be zero)
  • Sorting report: excess performance of downside semi-variance (assuming 0% threshold target)
  • Ulcer index: duration of drawdowns by selecting a negative return for each period below the previous peak or high point
  • Maximum charge: the deepest decline from peak to trough
  • Quiet report: annualized return/maximum loss ratio
  • Beta: measurement of volatility relative to a benchmark (in this case GMI)
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