This month of April was marked by a strong surge in Swiss market, with a gain of 3.5%. On the other hand, the American stock market fell slightly (-0.5% in CHF). THE determining portfolio was on a par with the latter. Even though it held up to comparison with the S&P, this result is a bit disappointing compared to the SMI. I would even say that it has something frustrating about it. Let me explain.
The impact of currencies
Indeed, In their respective currencies, PF assets performed as well, if not better than the Swiss market.
The CHF nevertheless exploded this month of April against other currencies. During this period, it gained nearly 3 % against the dollar and even nearly 6% against the Yen. It is difficult, if not impossible, in such conditions to make capital gains on foreign investments. These two currencies are strongly present among the PF's assets. By pendulum effect, the performance was thus pulled down accordingly. In a sense, it is even an exploit in such conditions to have been able to maintain a performance close to zero.
Let's take a step back
It is quite common for exchange rates to vary significantly in the short/medium term, both upwards and downwards. This is not the first time that the extreme strength of the Swiss franc has penalized Swiss investors abroad. We already experienced this in 2011, before the introduction of the floor rate, and then in 2015, when it was removed. Today, the CHF is still breaking historical records against the Euro and the Yen. It is not yet at its highest against the dollar, but it has already gained 12% in just 5 months. In the past, this extreme surge on the franc has always ended up falling fairly quickly, with or without the help of the SNB. Today, the latter is accommodating it, because of inflation, but for how much longer?
A solution?
Exchange rate variations balance out over the longer term, to the benefit of the intrinsic value of assets, as I discuss in my work. The excellent book by J. Siegel also mentions this phenomenon.
To completely avoid these short-term fluctuations, one would have to borrow in the currency of the asset, but in doing so, interest is charged. The transaction may ultimately cost more than it brings in. This is all the more true since recent exchange rate developments are poor predictors of future movements, which may go in the opposite direction. See the very clear article from Quant Investing about this.
As long as you continue to invest over time, you will eventually get your money back. You just have to be aware of it and stay the course during shorter-term fluctuations.
Another possibility is to increase the share of assets in local currencies. I started to do this a little with my Blue Chips strategy. Be careful not to go to the other extreme, however. A local market is by definition small. There are therefore fewer opportunities to be found there. By wanting to favor it too much, we risk investing in a "local" asset of lower quality, which will ultimately do less well than a high-flying foreign stock, despite exchange rate fluctuations. This does not mean that there are no nuggets in Switzerland, just that there are fewer of them.
It should also be noted that when the franc appreciates, in principle, Swiss values also tend to fall. The pendulum effect also exists in this case, which is easily explained by the fact that the economy is mainly export-oriented and is affected by the strength of the franc. Nevertheless, Currently, paradoxically, it is rather the opposite that is happening, with the CHF and the Swiss market progressing simultaneously, because of the increase in prices. The strength of the franc in fact benefits companies in relation to the purchase of raw materials. But, once again, for how long?
In short, solutions exist, but they are not necessarily necessary. In the longer term, they may even prove counterproductive.
Monthly performance in CHF
In detail, here is the performance of the PF and each of its strategies:
The portfolio, as highlighted in the introduction, performed on par with the S&P 500 (-0.5%). The QVM strategy, which is predominant within the PF, has significantly dragged down the overall result. This is not surprising given that it is made up of many Japanese stocks. For the reasons mentioned above, this does not call into question this approach, but on the other hand demonstrates the relevance of the recent introduction of the Trading Auto Signal and the "Blue Chips" strategy which have performed significantly better.
More diversity in methods means allowing them to complement each other, compensate for the temporary weakness of one by the others, thus reducing risks and tending to generate performances that are as stable and positive as possible. These new approaches are set to take on even more importance in terms of allocation in the coming months.
Year-to-date performance in CHF
This gives us a performance in CHF since the beginning of the year of 4.6% for the determining PF, with a volatility of only 10% (annualized). The S&P 500 (in CHF) is very slightly below, at 4.3%, but with a volatility twice as high. Note that currently, the Swiss domestic market is experiencing a small bubble, because of the strength of the franc described above. Since the beginning of the year, we are thus close to a gain of 10%. It remains to be seen how long this will continue.
Determinant portfolio (01.01.2023-30.04.2023)
Portfolio (2010-2022)
"Blue Chips" Strategy
Since April 13, the US Big Caps strategy has been extended to other developed countries, including Switzerland. It focuses on high-quality, blue-chip stocks that enjoy a dominant position on a national or international scale. In principle, these are large capitalizations, but it can also concern mid-caps that have a competitive advantage on a smaller scale.
This strategy is still managed according to the buy & hold principles. In other words, price fluctuations do not trigger a sell signal, despite their impact on valuation and momentum. On the other hand, a significant deterioration in the quality of the company's fundamentals may lead to closing the position. A stock may also be replaced by another if the latter is likely to contribute better to the performance of the strategy.
The name of this strategy changes from “Big Caps US” to “Blue Chips”.
Changes within the PF
From May, the equity indices of developed countries (Switzerland, Europe, UK, USA, Canada, Japan and Australia) will be grouped under a single line (QVM Strategy). Only absolute momentum (in combination with unemployment) will now determine whether the position is invested or not. As a result, the relative momentum indicator for this asset class goes to zero, with a gray color: 
.
Investors who were following an ETF-only approach, without going through direct stocks, can keep their ETFs in developed country stocks, as long as the QVM strategy signal remains invested. Afterwards, it is the CSPX ETF that will do the trick.
This change is the result of several backtests I ran recently that showed that the portfolio performed better when the top part of the portfolio (which included developed country stocks) was managed independently of the bottom part of the portfolio (the ETFs).
As a result, we now have 4 distinct strategies that exist side by side: QVM, Blue Chips, Trading Auto Signal and other ETFs. This makes the table easier to read.
Last corollary of this change, raw materials (or "Commodities") and US Utilities are bowing out. Indeed, with this new approach, they tend to drag down the overall performance in all my backtests.
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Hello Jerome,
I still have a bit of trouble understanding the new strategy of betting on CSPX rather than some ETFs from developed countries. Indeed, CSPX is actually identical to SPY. So why dissociate it from Auto-signal?
The advantage of betting on ETFs from certain developed countries is precisely to benefit from a momentum that can be beneficial compared to another region of the world, right? In my case, it also means that I no longer invest in Japanese assets (so far I only bet on the ETF and not individual stocks) and that I replace it with American assets only.
Can you enlighten me? Thank you
Hi Nico,
I could almost write an entire article on this topic! I'll try to be as clear and brief as possible:
– The portfolio was initially designed as a global tactical asset allocation (with adaptive allocation). Therefore, like other portfolios of this type (such as Meb Faber’s GTAA 13 AGG6), it was necessary to allocate several different lines of equity ETFs so that they were not underweighted relative to other assets.
– The recent introduction of the Trading Auto Signal and the Blue Chips strategy led me to do some additional testing to see how the portfolio as a whole would react. My initial idea was to keep the overall adaptive allocation across all assets. However, I found that, contrary to my initial intuition, it performed better when the strategies were clearly split from each other. This was even true for stocks (the top of the table) versus other assets (the bottom of the table, including gold, bonds, real estate, etc.).
– Based on this, given that equity ETFs performed better on their own, without being subject to adaptive tactical allocation, did it still make sense to split this approach into several ETFs? This requirement came, as we saw in point 1, from the need to sufficiently weight stocks in the PF. Wasn't it simpler to directly allocate a strategic allocation to a smaller group of ETFs, or even just one? My backtests showed me that the S&P 500 (via CSPX or SPY) was the approach that produced the best results, whether in b&h or with moving average/unemployment rate. This is, all in all, quite consistent with other research that has shown the superiority over the very long term of the flagship American index compared to other countries.
– It should also be noted that there is a very strong correlation between the S&P 500 and other national indices (we are hovering around 0.8, except for Japan which is at 0.7, due to poor historical performance). This is also logical. American stocks pull the rest of the herd. The 15 largest capitalizations in the world are American. As a result, when the S&P 500 declines, the others tend to do the same, and vice versa. Maintaining an adaptive tactical allocation on all equity ETFs would have meant generating several more or less useless transactions in the short term, therefore unnecessary work and costs, not to mention that the results would ultimately have been slightly less good. We also note that since this paradigm shift, the ETFs in the portfolio have been more stable from one month to the next.
– Let us clarify, however, that we are talking here, in terms of performance, about marginal differences. Aligning with CSPX alone or keeping ETFs from other developed countries, will not boost results upwards or on the contrary make them collapse. But the new approach is simpler, more comprehensive, easier to implement, requires less work and therefore generates fewer transaction costs. For those who absolutely want to keep an ETF from a developed country, there is nothing to prevent it. They can follow CSPX for transactions (linked to the moving average and the unemployment rate), given the high correlation.
– Finally, let’s highlight the difference with Trading Auto Signal and CSPX (with MM + unemployment). TAS works on a daily basis. Even if the positions only change about twenty times a year on average, they can change several times in the space of a single month. CSPX (with MM + unemployment) is managed during the monthly closing, like asset allocation. We therefore work on different time horizons: TAS on the short term, CSPX on the long term. TAS can be long, cash or short. CSPX can be long or cash. We can therefore find ourselves with six different configurations: long/long, long/cash, cash/long, cash/cash, short/long, short/cash. So, in some cases, TAS reinforces the position of CSPX, in others it is neutral, in others it covers CSPX and in the last one it is purely bearish. In fact, TAS is significantly less correlated to CSPX than other developed country ETFs! That's why we dissociate it.
There you go, I hope I was able to provide a little more clarity 😉
Yes, it's much clearer! It even suits me since I have a small wallet, it reduces the costs 🙂
Thank you Jerome