Model Portfolio Agathos World

M7 Absolute Return Portfolio

Definition of Mandate

Permitted shall be investments in the M7 universe of countries (Switzerland, USA, Japan, Great Britain, Eurozone, Australia, and Canada). Performance is measured in Swiss Francs (base currency). Investments may be in stocks, cash, and sovereign bonds. No minimum or maximum exposure weightings apply for any category of assets, except that total exposure of must never exceed 100% (gearing in any form is prohibited).  Derivative instruments will not be deployed. The mandate seeks a (positive) return in absolute terms, disregarding the composition of indices. Strategic exposure as well as stock picking are driven entirely based on a methodical assessment of investment outlook derived from the application of Agathos Vector Analysis. Investment policy is equal to the investment outlook adapted to the requirements of a specific (here a self-chosen) investment mandate.

Risk Tolerance

Any erosion in value of the total mandate at the end of 12 months after inception should not exceed a loss of 7.5%. Thereafter the pain threshold increases at an annualised rate equal to the return target (see Graph “Performance”).

Return Target

Over the medium term (trailing 36 months), performance shall be 10% p.a. or above.

Performance Graph 

Shown are the portfolio at market value, it’s value adjusted for perceived tactical risk (tactical risk value), the return target (pro rata temporis), and the risk tolerance level (pain threshold). Purely for comparison’s sake, the aggregate performance of Swiss pension funds is also shown. With regard to pension fund management, it should be pointed out that their investments are in effect run with an excessive focus on benchmarking, and thus entirely without noteworthy attempt to achieve value-added. Hence. pension funds accept massive shifts in the level of risk, and thus also of risk efficiency  (passive investing).

The first quarter since inception surpassed expectations by far. This is particularly true in view of the heightened level of unease recognisable in financial markets. The methodical and uncompromising selection executed here in favour of stocks with low overall risk and with low risk probability has been rewarded. In spite of meaningful cash reserves, market value of the portfolio increased by 17.7%. Welcome as it may have been, this extraordinarily favourable development must not be extrapolated into the near future. The unexpectedly swift rise of many investments purchased in January has had a corresponding impact on the level of tactical risk in the portfolio. Much sooner than anticipated it became necessary to take profits, largely for the purpose of keeping risk under control (see transaction volume). The handsome buffer between performance and mandate parameters (not least the pain threshold) that has built so soon, may be very valuable during the course of the year. In the 2nd Quarter 2021 markets will continue to be torn back and forth between hopes for growth, and concerns about the return of inflation. In addition to that, fears of a systemic crisis are now tangible once again, if only because of Archego Capital Management, Credit Suisse, and Nomura Securities. Certainly, the challenges to any responsible investor remain very high.

Mandate Compliance Monitor

In the research methodology applied here (Agathos Vector Analysis) as well as in the general philosophy applied within this style of investment management, the ongoing assessment and handling of risk is of paramount importance. In the graph below, the routine monitoring of the portfolios’ status against tangible investment parameters is illustrated. Shown is always the margin between status quo and requirements. For the purpose of depicting risk, risk is deducted from market value. Total risk refers to a scenario where all (estimated) risk materialises simultaneously, without any intervention. Tactical risk is the term used for risk impact having been weighted by perceived probability. The risk-adjusted value of any investments tends to be comparatively stable. What changes more frequently are price and probability. Thus, risk typically rises with rising price but it is usually any change in assigned probability that impacts this calculation the most. This dynamic may trigger transactions in the portfolio, where the overall allocation remains intentionally unchanged, while underneath, stock specific risk is being enhanced. An example is found when comparing March and February 2021.

In the graph, positive values correspond to a buffer over and above mandate parameters. To illustrate: At the end of March 2021 market value is some 25% above risk tolerance (at that point still at 92.5% of initial value) and some 15% above return target. If all risk were to manifest overnight, the resulting value of the portfolio would still stand more than 5% above pain threshold. When adjusted for tactical risk, performance is still ahead of the return target by approximately 10%.

Strategy & Actual Exposure

Even with the high degree of caution and scepticism towards financial markets and their underlying fragility, it was possible to identify (within the M7 universe of nearly 700 stocks) a sufficient number of potential investments with lucrative ratios between risk and reward. In the wake of that, exposure of the portfolio was easily brought into the strategic exposure bandwidth (60% to 80%). In part caused by rapid advances of some of the stocks selected, exposure began to exceed the intended ceiling. Almost without trace in this graph are transactions that were executed for the sake of risk control.

Unrealised Profit & Loss

The graph illustrating P&L status of holdings shows the sums of unrealised gains, and unrealised losses respectively, each expressed in proportion to total book value (cash excluded). For the vast majority of holdings, market value stands comfortably above book value. In some countries this was further helped by advances of the local currency against the Swiss Franc.

Transaction Volume

The graph above plots purchases and sales in proportion to market value (previous month). Columns indicate cumulative turnover, ½ the sum of purchases and sales.

Overall transaction volume is much higher than intended. This is not least the consequence of swifter than usual price appreciation of initial investments during Februar and March. It emerged a conflict between stock picking and investment policy. This conflict was resolved in favour of keeping risk within acceptable levels.  The exposure ceiling was given dominance over the lure exerted by additional investments. Purchases were thus funded through the disposal of holdings.

The table below lists concluded transactions, identifying details of the investments and profit or loss thus realised. The yield on transaction shown at the end of the table reflects the capital-weighted average.