B.U.Y. Global Macro
Balanced
Uncorrelated
Yield
Global Macro - Absolute Return
All Weather Investing
*Benchmark: Conventional Balanced Portfolio Portfolio (EUR)
Total Return (EUR)*
WHY
Most investors derive over 95% of their returns from equities or equity-like instruments, leading to a heavily skewed asset allocation that struggles in periods when equities underperform.
As we transition into a new economic landscape characterized by overvalued equity markets and rising inflation, the outlook for traditional portfolio allocations appears increasingly constrained, if not negative.
B.U.Y.'s Global Macro Strategy does not attempt to forecast the precise future economic landscape. Instead, it aims to establish a robust balance, enabling investors to navigate through uncertain times with confidence.
By diversifying beyond conventional assets, our strategy offers a pathway to resilience and potential growth in challenging market conditions.
1.2 Currencies and Geographies
The B.U.Y. Index allocates capital across the world - holding, directly and indirectly, each country's respective currency.
The balance and the type of assets held is different in each country, taking into consideration:
- Productivity growth
- Capacity and tools available to Central Banks to reflate the economy
- Favorable environment for trade
Geographic diversification is paramount to preserve capital, so underperformance of one economy does not compromise the overall portfolio, as different economic environments can exist simultaneously in different countries.
2. Balance
Holding uncorrelated assets is not enough because each asset class has its own volatility.
For diversification to be effective, the portfolio has to be balanced so that each asset class provides the same risk to the overall portfolio.
In other words, there must be an equal risk allocation for each economic scenario.
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STRATEGY PRINCIPLES
1. Diversification
Our foremost concern is to achieve a broader diversification among Asset Classes, Countries and Currencies.
1.1 Economic Environments
The two major forces in the economy that most influence the real value of future asset cash flows (i.e. their pricing) are economic growth and inflation.
These forces can create four possible scenarios depending on how they occur: Stagflation, Inflationary Boom, Deflation, Dis-inflationary Boom.
The Index holds asset assets that prosper in each scenario so that it purposely avoids making specific forecasts on future market movements.
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3. Rebalancing
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For the strategy to be effective, the risk allocation must be rebalanced regularly.
The weights in the B.U.Y. Index are set to shift in the short term to accommodate changes in asset values and then rebalance quarterly to maintain equal overall exposure over the longer term.
This process has two significant effects:
- Reduces the probability of severe losses in case of tail-risk events
- Enhances a buy-low/sell-high methodology that boosts long-term performances.
BACKTEST
B.U.Y. is compared to a fund that represents classic balanced portfolios with similar volatility level.
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It is evident how additional diversification improves risk-adjusted returns, especially during periods of equities
underperformance.
Our idea of portfolio management is to have a core allocation to a well-diversified and balanced basket of assets that can be adjusted with leverage to achieve ideal levels of return and/or supplemented with alpha strategies.
STRESS TEST
Covid
EUR (FY2020)
PHASE 1 (14/02 - 21/03)
Covid outbreak major economic events:
-
Contraction of Liquidity -> Deflation
Index Response:
-
During the first phase, the index performed better than benchmarks due to exposure to rates and long volatility
PHASE 2 (21/03-31/12)
Covid outbreak major economic events:
-
Expansion of Liquidity -> Monetary and fiscal policy kicked in
Index Response:
-
As the scenario shifted toward reflation, long volatility continued to perform well along with equities and commodities.
Finally, Diversification created a smaller drawdown, relative to benchmarks, which allowed for the rebalancing of poorly performing assets at a relatively low price.
The results are clear by comparing Total Returns and Volatility.
Ukraine Conflict
EUR (1st Semester 2022)
The conflict between Russia and Ukraine has resulted in:
-
Higher commodity prices -> due to sanctions/limited supply.
-
Lower Equity prices -> contraction of earnings expectation due to higher input costs.
-
Stable nominal rates -> inflationary pressures balanced by deflationary pressures created by the conflict.
-
Higher gold prices relative to fiat currencies -> expectation of monetary inflation.
-
Increase in discounted implied volatility
Our Index significantly outperformed traditional balanced portfolios that are overexposed to equities and nominal rates.