Campbell Harvey, a professor of finance at Duke University, is best known for developing the Recession Curve Indicator, known for its sterling record in predicting downturns.
In a new paper he co-authored with Edward Hoyle, Sandy Rattray and Otto van Hemert of hedge fund giant Man Group, Harvey points to a 60/40 portfolio – 60% in equities, 40% in bonds – is not purely passive strategy.
Besibbe: Economic expert with perfect reviews for record betting, this bet will be this end until the end of 2020
“We argued that rebalancing is an active strategy because assets are sold after they rise in value and bought when they fall in value. Buying (rebalancing) as stocks in a downtrend are leading to bigger drawdowns, ”they say.
A rule that the authors advocate earlier calls for re-equilibrium if the trend of 1 month, 3 months or 12 months in the relative return of the stock bond is above the historical average in the long run. Moreover, moving only half the distance back to the 60/40 mix, they advise.
According to the rebalancing rule, the decline of 60/40 in the first quarter would be limited to 7.2% or 7.4%, against a fall of 8% in the automatic rebalancing.
The impact of the rule is not as great as during the financial crisis of 2007-2009 (then about 5 percentage points), when equities experienced a slower and greater underperformance. But the strategic rebalancing rule reduced the 2020Q1 deduction, despite the purity of the crisis, ‘they say.
See also:Vanguard comes to the defense of the 60/40 portfolio as it expects stock market forecasts for the next decade
The same paper also examines which strategies work best during the drawdown. They have previously argued that call options were insufficiently expensive in normal times, and gold was not reliable.
Momentum strategies, which Man Group EMG,
is known for, well executed during sales.
Another interesting finding was that so-called security strategies – those targeting companies whose stocks are not as volatile as those not heavily indebted – did not work well.
“This is similar to the episode of financial crisis in 2007-09. We maintain that this is due to stricter credit terms. For example, if leverage is used to boost the returns of low-risk stocks, then an increase in borrowing costs could be detrimental, both as additional upfront costs and indirectly by forcing positions to be liquidated, ”the authors say.
.
