Redington have today launched a Risk-Adjusted Return publication.
This publication looks at the Risk-Adjusted Return figures for a variety of different asset classes over 1-year, 3-year and 5-year time frames using the Sharpe Ratio.
The Sharpe ratio measures the excess return per unit of volatility in an investment asset, typically referred to as risk; it is named after William Forsyth Sharpe.
• Freddie Ewer, the author of the publication, said: “Regular Risk-Adjusted Return analysis is an integral part of pension funds’ efforts to maximise the return generated from the use of their risk budget.”
• David Bennett, Managing Director of Redington’s Investment Consulting team, added: “In the present challenging investment environment, we are finding increasing focus by clients on trying to find more reliable and diversified sources of investment return and an increasing use of risk adjusted returns to help allocate their risk budget between competing opportunities.”
The key points that can be drawn from the analysis are:
On an excess return basis equities performed relatively well over the 1 year, 3 year and 5 year time frames. However, our Risk-Adjusted measure sees them drop to the bottom of the table. The fall is most pronounced over the 1 year time frame where equities drop from 3rd and 5th in the table to 11th and 12th.
Credit, in its various guises, performed extremely well over the 1 year, 3 year and 5 year time frames, on a Risk-Adjusted basis. Credit made up 7 of the top 8 asset classes over one year, 8 of the top 9 over three years and 5 of the top 6 over five years. The exception to the dominance of credit was Risk-Parity which performed well over all three time-frames.
• Patrick O’Sullivan, Vice-President of Investment Consulting, commented: “When it comes to investment returns over the last 1, 3 and 5 years, the Risk-Adjusted Return publication shows it has been a story of continued compression in sovereign yields and the risk premium associated with developing economies. The persistence of this compression has benefited risk parity based strategies relative to capital based allocation strategies and fed into credit spreads as investors have searched for absolute yield.”
Download the publication below.
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