Portfolio Risk Management RAR+ ESG
Concious money seeks ESG related investments. But apart from making responsible and socially acceptable investments, one needs to aim for a decent risk return relationship.
Some savvy investors consider increased volatility as a positive factor to generate a good return. But in the actual period of low cost margin, I dont totally agree with this concept.
I attached below 2 charts. The first one shows a low volatility ESG Index based on the S&P ESG Index using SPY (the largest ETF in the world) as Benchmark. SPY is the best-recognized and oldest ETF and typically tops rankings for largest AUM and greatest trading volume. The fund tracks the massively popular US index, the S&P 500. https://www.etf.com/SPY
Is it feasible to outperform SPY using the ESG S&P Index as Investment Universe? Yes, it seems to be possible if you control the volatility. This is what we do when applying a RAR+ filter. (RAR+ was developped by Azzilon and it stands for Enhanced Risk Adjusted Return)
First Step of the RAR+ Strategy: Lower the volatility. Our RAR+ model reach a similar average yearly return as SPY with less than 50% of the risk and the main reason for this is that RAR+ ESG model portfolio was not hit so hard in 2008. Will 2008 repeat itself? Who knows. But if you are happy with this low risk return, you could stop at this first Step.
Second Step: If you tolerate SPY's volatility, then you can leverage the Low Vol RAR+ ESG Model. We used Interactive Brokers margin interest rates published at the time of writing this article. https://www.interactivebrokers.co.uk/en/index.php?f=45171
If you apply a leverage of 3 on the RAR+ ESG Model Portfolio the annual return goes up to 13.97% versus 8.65% for SPY during the same period. Since january 1, 2005, this would mean a total return of 678% versus 330%, and a very quiet 2008.
Investing in ESG related companies makes a lot of sense, it is a must, but the investment needs to be profitable and should not be too risky.
Azzilon is not an asset manager, nor do we want to be. We focus on portfolio risk management. Whatever is your preferred invesment theme, or sector, we can build a low risk portfolio model respecting your market view. Contact us if you want to discuss.
email: [email protected]