Spain portfolio recommendation (from 13, June 2011)

The portfolio recommendation is based on two low-volatility strategies: a long-only minimum-variance portfolio and a “130:30” minimum-variance portfolio, which is long 130% and short 30%.

For more details about the implementation of these strategies, please read the following post: Some efficient low-volatility portfolios: the minimum-variance policy.

The long-only and the 130:30 low-volatility portfolios recommended for this week, with their corresponding weights, can be found in this file: Spain_weights_20110613.csv

Although I recommend a portfolio composition every week, it is desirable to maintain this composition for several weeks (for instance a quarter year), and then rebalance with the new composition.

For the current long-only low-volatility portfolio, there is no difference respect to the previous quarter composition. The turnover is 6.2% (due to the portfolio growth). On the other hand, the turnover of the current 130:30 portfolio is a bit larger: 22%.

Regarding the performance, over the last year (52 weeks), the long-only strategy attained a volatility of 13.8% (versus 23.5% of the IBEX35). The volatility of the 130:30 strategy is even better: 13.4%.

The weekly 95%-VaR of the long-only portfolio was 3.2% (versus 3.5% of the IBEX35). The corresponding VaR for the 130:30 portfolio was 2. 8%.

The last year annualized Sharpe ratio of the long-only strategy was 1.15 (after proportional transaction costs of 40 bps were discounted). On the other hand, the SR of the 130:30 strategy was 1.42. Finally, the SR of the IBEX35 was 0.57 over the same period.

In the next figure, you can see the compounded return over the last 52 weeks of the three considered portfolios.

Both low-volatility portfolios attain better returns than those of the IBEX35.

But let add information about the risk. The next graph shows the risk-return space for the three considered portfolios.

The red point represents the mean return and volatility of the long-only portfolio over the past 52 weeks. On the other hand, the green point represents the 130:30 portfolio, and finally the blue point represents the IBEX35 index over the same 52 past weeks.

We can see the two low-volatility portfolios have better mean returns than that of the IBEX35, and also their volatilities are better. In this case, we say the low-vol portfolios dominate the index.

I have computed the same risk-return space for every week over the last year, using the same 52-weeks historical method to estimate the mean returns and the volatilities. The long-only and 130:30 portfolios attained always a higher return than that of the IBEX35. Moreover, the volatility of both low-vol portfolios was always less than that of the IBEX35.  

As a summary, the low-volatility strategies dominate the market index most of the time, showing they attain consistently better risk-adjusted returns.