Manage Drawdown And Recovery With Dynamic Allocation

In October 2019, S&P Dow Jones Indices launched the S&P ESG Global Macro Index, an ESG-themed, regionally diversified, volatility-managed, multi-asset index. As discussed in my previous blog, the index has generated stable absolute returns of 5.44% annually, a volatility of 4.89%, and downside protection during extreme market scenarios, based on back-tested performance from Aug. 31, 2010, to Dec. 31, 2020.

The global equities market experienced unprecedented fast drawdown and recovery in 2020. Although the S&P ESG Global Macro Index’s performance was not as stunning as that of the S&P 500® in 2020, it outperformed a pure equity and static 60% equity/40% bond portfolio with a risk control mechanism.1 This blog reviews how the S&P ESG Global Macro Index’s dynamic asset allocation helped to achieve this outcome.

(Click on image to enlarge)

Economic- and Market-Signal-Based Allocation

The S&P ESG Global Macro Index uses a short-term economic movement signal and a medium-term market trend signal to revise its asset allocation on a monthly basis (see brochure).  Exhibit 2 provides the timeline of allocation signals of the S&P ESG Global Macro Index in 2020. There were three different phrases.

Phase 1: Before Sell-Off

At the beginning of 2020, the Organization for Economic Co-operation and Development’s composite leading indicator (the OECD’s CLI) was below 100, indicating economic activity was below its long-term potential level. Although the three-month momentum of the equity market was still positive, the index allocated 55% to equities and 45% to fixed income.

Phase 2: COVID-19 Sell-Off

The sell-off started on Feb. 19, and hit bottom on March 23. The S&P 500 declined 33.93% in 23 trading days. The S&P ESG Global Macro Index reduced its equity allocation from 55% to 0% on March 1, as the momentum signal turned negative during that month’s rebalance.

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