Ole Hansen
As the Chinese stock market bubble bursts, Saxo's Ole Hansen looks at the dramatic effect this is having on world commodities and growth.
Article / 14 March 2014 at 10:36 GMT

ETF portfolio update: X marks the spot

CIO / Saxo Private Bank

• Exposure in global, developed markets
• Less risky portfolios provide highest returns this year
• Emerging markets remain the asset class to avoid

In this note we are updating our exchange traded fund (ETF) portfolios with returns for the first two months of 2014.

The four ETF portfolios are constructed as global, multi-asset portfolios with a European investor in mind. To reduce currency exposure, we have concentrated fixed income exposure on EUR-denominated asset classes, except for emerging market bonds. Equity exposure is invested in global, developed markets (MSCI World) and emerging markets (MSCI EM), replicating an MSCI All-Countries universe. In general, we aim to provide a transparent, familiar and robust asset allocation universe, suitable for medium to long-term investors. The model portfolios are optimised subject to a volatility constraint. The ETFs are UCITS compliant.

 The four portfolios have delivered positive, if moderate returns in 2014, ranging from 0.8 percent to 1.8 percent. Unlike in 2013, however, this year the highest returns have been achieved by the less risky portfolios. This reflects that longer dated government bonds and corporate bonds all have yielded higher returns than global equities so far this year. 


Figure 1: Portfolio returns, percent

Portfolio returns, %
Source: Saxo Bank, Bloomberg


In the chart below we plot combinations of risk (measured as the standard deviation) and returns for the four portfolios, where the returns for 2014 have been annualised for comparison. The distinct risk/return difference between the two periods can be seen clearly. 


Figure 2: Risk and return

Risk and return
Source: Saxo Bank, Bloomberg


In the table below we show a detailed breakdown of the performance. Emerging markets remain the asset class to avoid, be it bonds or equities. We remain underweight EM relative to a MSCI All Countries universe, but even our modest exposure is reducing portfolio performance. 


Portfolio returns, %
Source: Saxo Bank, Bloomberg


Asset allocation and portfolio construction

In line with our overall view on asset allocation (see here for details), we continue to recommend an overweight of equities relative to bonds. We also continue to have a reduced allocation to emerging market equities bonds, so that only the Aggressive portfolio is allocated to these asset classes. Within the credit segment, we prefer high yield to investment grade.


The detailed portfolio allocation can be found below.

Allocation summary
Source: Saxo Bank, Bloomberg


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