1. Global Asset Allocation and Stock Selection Assignment #1
Comparison of Investment Styles along Tactical Trading Strategies
Gold Asset Management Artima Suraphongchai Genzo Kimura Andrew (Jing) Liu Joseph Sun Stefan Prawitz

2. AGENDA Methodology Overview Forecasting Model Strategy Evaluation
Key Take-Aways

3. Country-based Investing Sector-based Investing
Methodology Overview: 3 Investment Styles
Country-based Investing US UK JP DE
Sector-based Investing
Financial
Health
Utilities
Material
Mixed Investing US DE
Financial
Health

4. Each Investment Style Evaluated Across 6 Tactical Trading Strategies
Description
Strategy 0:
Buy-and-hold
Buy & Hold sub-strategies assume equal weights for all 4 asset classes.
Strategy 1A:
Long-or-Cash (No Filter Rule)
Compares highest forecasted return to the 1-month Eurodollar deposit return
If forecasted returns exceed the deposit return, go “Long” in the asset class with highest forecasted return.
Strategy 1B:
Long-or-Cash (Filter Rule)
Same as strategy 1A, but highest forecasted return must exceed 1-month Eurodollar deposit return by at least 0.01% on a monthly basis
Only then will we go “Long” on the asset class.
Strategy 2A:
2-Long-Positions
(Equal Weights)
Compares two highest forecasted returns to 1-month Eurodollar deposit return
If both forecast returns exceed deposit return, then go “Long”
If only one asset exceeds deposit return, go only “Long” in one asset and deposit the rest
Equal weights for both positions (50%-50%)
Strategy 2B:
2-Long-Positions (Weights 2:1)
Same as Strategy 2B, but asset with highest forecast twice that of the second highest forecast
Strategy 3:
Long-and-Short
Go “Long” in asset with highest positive forecast and “Short” in the lowest negative return forecast
Positive forecast must also exceed deposit return. If there are no positive forecasts, then deposit. If there are no negative forecast, no short position is taken

5. Country-based Forecasting Model
Variables US
Germany
Japan UK
Oil Price Change
Spread Change
Dividend Yield
Price-Book
Price-Earnings
Relative Change to Term Structure
(3)
(4)
(5)
Should we add more description of the variables?
(1)
(1)
(2)
(6)
Note:
P/E ratio of US equities
P/E ratio of UK equities
Change in spread of 10-year German Bunds over 10-year US Treasuries
Dividend Yield of Japanese equities
Price-Book Ratio of Japanese equities
UK term structure

6. Sector-based Forecasting Model
Finance
Health
Utilities
Material
Oil Price Change
Yield Change in 10Y US-Treasuries
US Price-Earnings
Change of Relative US Term Structure
Should we add more description of the variables?

7. Historical Efficiency Frontier (Strategic View)

8. Predicted Efficiency Frontier (Tactical View)

9. Investment Style Comparison (Return)
MSCI World Return
0.0071

10. Investment Style Comparison (Standard Deviation)
0.0424
MSCI World Std Dev

11. Investment Style Comparison (Sharpe Ratio)
MSCI World Sharpe Ratio
0.1672

12. Two way comparison: Ranking System for Combination Evaluation (I)
Standard Deviation
Rank of Standard Deviation
Sharpe Ratio
Rank of Sharpe Ratio
% of non-negative
Rank of % of non-negative
Maximum Return
Rank of Maximum Return
Minimum Return
Rank of Minimum Return

13. Two way comparison : Ranking System for Combination Evaluation (II)

14. Key Take-Aways Investment Style Comparison
Overall score shows Mixed Strategy is the best
Plot of efficiency frontier favors country-only strategy
Poor sector returns probably due to high inter-correlation
Tactical trading Strategy Comparison
Overall score shows 1b: Long-or-Cash (Filter Rule) is the best
Little difference between 2-Long and Long-Short trading strategies
Buy & Hold strategy has the lowest performance (But still beat MSCI World)
Best combinations is to have Combined asset classes and implement Long-Cash (with Filter) trading strategy

15. Global Asset Allocation and Stock Selection Assignment #1
Any Questions?
Gold Asset Management Artima Suraphongchai Genzo Kimura Andrew (Jing) Liu Joseph Sun Stefan Prawitz

16. Regression Summary: Solid Adj-R2 and High Predicting Power
Adjusted R square
Correct Direction Count
Total Observations
Percentage
Buy & Hold
Country-based US
10.28 %
134
192
70%
63%
Germany
5.78 %
126
60%
58%
Japan
4.32 %
104
180
46% UK
5.13 %
118
61%
57%
Sector-based
Finance
9.18 %
168
262
64%
66%
Health
7.63 %
175
67%
65%
Utility
4.72 %
127
Material
16.57 % 77
108
71%
59%

17. GARCH model (Expected variance)

18. Investment Style Comparison Table

19. Strategy Comparison (Maximum Return)

20. Strategy Comparison (Minimum Return)

21. Global Industry Classification (GICS)
Sector
Description
Financials Sector
Banking, consumer finance, investment banking and brokerage, asset management, insurance and investment, and real estate, including REITs.
Health Care Sector
Two main industry groups. The first includes companies who manufacture health care equipment and supplies or provide health care related services, including distributors of health care products, providers of basic health-care services, and owners and operators of health care facilities and organizations. The second regroups companies primarily involved in the research, development, production and marketing of pharmaceuticals and biotechnology products
Utilities Sector
Electric, gas or water utilities, or companies that operate as independent producers and/or distributors of power. This sector includes both nuclear and non-nuclear facilities.
Materials Sector
Encompasses a wide range of commodity-related manufacturing industries. Included in this sector are companies that manufacture chemicals, construction materials, glass, paper, forest products and related packaging products, and metals, minerals and mining companies, including producers of steel.
Note:
10 Sectors (Other 6 sectors are Energy, Industrial, Consumer Staples, Consumer Discretionary, IT and Telecom)
24 Industry Groups
62 Industries
132 Sub-industries
Source: MSCI website