Spain portfolio recommendation (from 3, September 2012)

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%.

These strategies use advanced Optimization and Statistics techniques to hedge against the estimation risk of the associated models. As a result, they attain consistently better risk-adjusted returns than market indexes, as these portfolio recommendations show.

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_20120903.csv

Although I recommend a portfolio composition every month, it is desirable to maintain this composition for a quarter year, and then rebalance with the new composition.

The current long-only portfolio composition contains 7 stocks and has changed a bit respect to the previous quarter (one stock has been purchased). The turnover is 22% (due to this change and the portfolio growth). On the other hand, the 130:30 portfolio contains 17 stocks and the corresponding turnover is a bit larger: 51%.

Regarding the performance, over the last year (52 weeks), the long-only strategy attained a volatility of 20% (versus 31% of the IBEX35). The volatility of the 130:30 strategy is even better: 19%.

The weekly 95%-VaR of the long-only portfolio was 4.0% (versus 6.6% of the IBEX35). The corresponding VaR for the 130:30 portfolio was 4.1%.

The last year annualized Sharpe ratio of the long-only strategy was 0.02 (after proportional transaction costs of 40 bps were discounted). On the other hand, the SR of the 130:30 strategy was -0.02. Finally, the SR of the IBEX35 was -0.16 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 almost always (100% and 96% of the time, respectively) 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.