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 the 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 GMI

Recall that when we looked at the December data, the 3-year Sharpe ratio was still rising, 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

The GMI represents a theoretical benchmark 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 with active asset allocation strategies, especially after adjusting for risk, trading costs and taxes.

For additional perspective, readers can use GMI’s Risk Profile alongside current monthly updates on the performance and expected return of 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.

GMI 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)

Original post

Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.

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