, , , , , , , , , , , , , , , ,

Continued from here. Sorry for that tease earlier this week, I promise we’ll actually get to YTD performance of the TGISVP Portfolios in this post..! My H1 post is good background – particularly note the following:

Q3 2012 YTD performance for each stock is TGISVP specific – i.e., measured from the specific (Q1) date I set a target price for each stock – because this was/is intended to be a real-time exercise in portfolio construction & management

Two exceptions: Fastnet Oil & Gas (FAST:LN) & US Oil & Gas (USOP) were added in Sep. Based on their significant Downside Potential rankings, both are now included as EUR (3) shorts in the Alpha Portfolios (see here for more detail on overall portfolio construction)

ISEQ YTD performance is measured from Feb-6th**. I noted: ‘I think the fairest, and most comparable, benchmark to use is the ISEQ’s performance since Feb-6th. The valuation stage of the Project was stretched out over Jan-March, but on that date I reached the half-way point, so this is a good average starting point for a benchmark comparison. It’s not perfect, but I think it’s the simplest and most obvious solution.

NOTE: Actual ISEQ Q3 2012 YTD performance (i.e. from Dec-30th) of 13.0% is significantly higher than my benchmark (due to strong ISEQ gains in the first 5 weeks of 2012). However, if yr-end share prices were used to evaluate the TGISVP portfolios, YTD performance would presumably be much higher also.

Now, a quick recap of the four TGISVP Portfolios:

Beta Portfolio:   We assume an investor goes equally long all 36 stocks with positive Upside Potential (e.g. invests EUR 1 in each stock, for a total of EUR 36). The 39 other stocks, identified as neutral (2) or over-valued (37), are ignored. Gain/Loss% on each stock’s measured from the share price at the time of valuation/publication to the end of Q3. The portfolio return contribution for each stock’s simply its Gain/Loss%/36.

Smart Beta Portfolio:   Stocks chosen on the same basis as the Beta Portfolio, with one key twist: All 36 stocks are divided into quartiles, and it’s assumed EUR 4 is invested in each of the top quartile stocks, 3 EUR in the next quartile, and so on down to EUR 1 in the bottom quartile stocks (for a total of EUR 90). This preserves diversification, but concentrates portfolio bets on the stocks with the most Upside Potential.

Alpha Portfolio:   Exactly the same as the Beta Portfolio, on the Long side… But we also assume a Short overlay (yes, rather theoretical I know..!) of all 37 over-valued stocks. We’ll invest EUR (1) in a short position in each of these stocks, so essentially we’re adding a (different) inverse Beta Portfolio.

Smart Alpha Portfolio:   Exactly the same as the Smart Beta Portfolio on the Long side. But again we assume a Short overlay of all 37 over-valued stocks. In a similar manner, we’ll divide these into quartiles also, and invest from EUR (1) to EUR (4) (for the most over-valued quartile) in short positions in these stocks.

We can certainly hope for out-performance in the Beta portfolios, but obviously they’re heavily dependent on a positive market environment (so 2012’s shaping up v nicely!). In comparison, conventional wisdom suggests the Alpha portfolios offer a safer alternative – that is, (ideally) a less volatile & market independent return. The price for this safety is presumably a lower average return, i.e. one is hoping to extract a steady stream of alpha return, while avoiding a volatile (but longer-term positive) beta return. In reality, the small size & breadth of the Irish market really doesn’t offer the best opportunity to construct genuinely market neutral long/short portfolios…

Instead, the Alpha portfolios (by necessity) really boil down to classic stock selection – going long the good stuff & going short the crap..!

As a result, it’s really not so clear how the Alpha & Beta portfolios actually stack up in terms of respective volatility/return. I think the jury will remain out on that one for quite some time to come! But discussing this topic at end-H1, I plumped for the Alpha Smart Portfolio as my favourite… :-)

So, let’s just leave it to the numbers to do the talking:

For reference, here’s my complete TGISVP file:

TGISVP Q3 2012 YTD     (xlsx file)

TGISVP Q3 2012 YTD     (xls file)

About these ads