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- 22 FebVector Flexible wins De Tijd/L'Echo Awards for the third year in a row!
- 16 FebNavigator wins Morningstar France Award!
The advantages of a flexible approach
09 Dec 2015
When accounting for exchange rate effects it is clear that global stock markets did not really bear an impressive reward for the volatility investors had to experience since the turn of the year. Moreover, in the months to come, it is possible that the diversion in Central Banks’ policy as well as continued concerns about the state of the Chinese economy will further destabilize the precarious situation on the global equity markets. While Vector Navigator seeks to exploit mispricing opportunities regardless of what the market circumstances might be, Vector Flexible has more tools at its disposal to face periods of fluctuating investor sentiment effectively.
Even though Vector Navigator and Flexible invest in the same pool of stocks, the market exposure of both funds can be very different. Where, with the exception of a marginal cash position, Navigator is always fully invested in equity, Flexible has some built-in protection against unexpected market downturns by systematically hedging 25 % of market risk. Moreover, when market conditions so require, the fund may reduce its exposure to the market entirely (currently we hedge 35% of market risk). The decision to increase or decrease futures coverage is driven by both the insights from a separate market-timing model and the investment manager’s perceptions of the world economy.
The goal of this flexibility in terms of equity exposure is to end up with a much smoother path of investment growth compared to the MSCI ACWI. Since the turn of the year, Flexible has returned 11.8% with an annualized standard deviation of 10.0%. The ACWI on the other hand recorded a superior return of 13.9%, but at the expense of a much higher volatility of 17.5%. This means that while the benchmark only paid out 0.79% (13.9%/17.5%) return per unit of risk, Flexible netted investors 1.18% return per unit of risk. Put differently, Flexible’s market timing overlay has allowed our investors to enjoy a substantial improvement of 48.6% in their reward-to-volatility ratio in 2015.
However, does this performance also compare favorably to other allocation funds? Since November 2015 Flexible has obtained a 5-year track record. Over this period the fund has beaten 96% of its competitors - receiving 5 Morningstars on both the 3 and 5-year horizons. Moreover, the fund has done this in a very consistent manner, as in 4 out of 5 years Flexible was ranked amongst the top 10% of its peers. Lastly, Vector Flexible did not earn its outperformance at the expense of underperforming the category during market downturns. Since the start of the dynamic hedging program (Jan. 2012) the fund has captured 80.5% of returns when markets are rising, foregoing 19.5% of the remaining ‘good’ returns. When MSCI ACWI fell, however, Flexible only tended to drop by half (55%) of the decline. This compares rather favorably with the category, which captured much less (41.5%) of the upturn and more (60.5%) of the downturn than Vector Flexible. The graph we included shows the returns of both Vector Flexible and the category in months were the stock markets are either on the rise or in decline.
For a Belgian investor, however, the Morningstar category returns mentioned above are vastly overstated. After all, if you are invested in a fund that holds more than 25% of its assets in fixed income securities then you will see 27% of your profits on the bond part of the portfolio evaporate in the form of a taxation. The advantage of Vector Flexible is that it makes use of derivative products, which allows the fund to circumvent this tax in lieu of a flat tax of 1.32%, which is due on all capitalization funds, but often much more advantageous to the investor than the 27% withholding tax.