It’s been a while since I discussed markets on Alpha Sources, so I’d thought I resume my coverage by introducing something new; a portfolio tracker. I used to run a page on this site with an occasionally updated PnL table of some of my investments. It was drawn from a home cooked PnL sheet using the API from one of the more famous professional market platforms. I have since lost (regular) access to that service, so it died on the vine, and I have, quite frankly, been too lazy to spin it back up using Google finance or some other open-source resource. But I have recently signed up to Investing.com’s premium service, which, among other things, has a nice portfolio app. It has spurred me on to rebuild a simple PnL model, which I will use in the future, on occasion, to discuss some of my investments, markets more generally and the wider economy. The portfolio I want do highlight today, which I hold in tax free savings account—as opposed to a riskier portfolio in my SIPP pension savings account—looks as follow.
Read MoreIt’s been a while since I updated these pages, mainly because I have recently moved across the country, back to the Big Smoke, where I am now nestling in the hopefully up-and-coming part of southern London. I will be up and running with my market updates and videos soon enough, but first things first. I have been sitting on this piece, mentally more than anything, for a while, and I thought it would be a nice way to re-start my posting. I have long been thinking about whether it is possible to provide a good quantitative argument in favor of the defunct value equities, or more specifically the value “factor”. I think it is, but as always, I leave to you to judge. In my last post before my temporary hiatus, I made the argument that the vast majority of investors are structurally short volatility. Accepting this premise raises the obvious question; how does one achieve a cheap and effective long vol position? In this post I will try to offer a concrete and quantitative perspective on this question using the simplest tools available to us from finance theory. Before I get to that, though, I want to state the problem more precisely. In a nutshell, the traditional 60/40 portfolio is doing too well. The increasingly concentrated leadership in equity beta centered around the ubiquitous growth factor—essentially U.S. technology firms—and the correlation of this position to the performance of government bonds—driven by structurally falling interest rates—has been a boon for investors. A 60/40 portfolio with a concentration in growth stocks has increased by a factor of almost 4 since 2010, beating the MSCI World by almost 25%, not to mention breezing past the main regional indices—MSCI EM and MSCI Europe—by a factor of 2-to-2.5. That’s great news, but it also puts investors in a bind. If a balanced portfolio is winning on both legs what happens when the tide turns?
Read MoreIt's never easy when bonds and stocks decline at the same time, but despite the much-publicised death of the "risk parity" strategy, I don't think the past few weeks' price action qualifies as decisive evidence. After all, the S&P 500 is down a mere 0.6% from its peak in the beginning of June, while US 10-year futures are off only 1.5%. In writing this, though, I remember that many punters in this business use leverage. This acts as an accelerant not only for the volatility of their PnLs, but also for the speed with which a meme can take hold in the peanut gallery. I sympathise with the plight of bond traders in Europe where the dislocation in yields has been particularly nasty. When yields are near zero, or even negative, the relationship between small changes in yield and prices can be brutal. This is even acuter in Japan, where the BOJ might soon have to actually defend that 0% target on the 10-year yield, to avoid an accident in the domestic asset management industry. In the U.S., the 10-year yields has been altogether less dramatic, but big enough to raise questions about whether we have made a switch from a flattener to a steepener.
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