(December 10, 2012) — Emerging market currencies and risk parity led the pack of asset classes offering the best risk-adjusted returns in the 12 months to the end of September, research from investment consultant Redington has shown.
The firm used the Sharpe Ratio calculation to show where investors received the best level of compensation for the risk taken on an investment. The higher the number, the better. Over the year-long period, emerging market currencies produced a 20.1% return, but crucially the risk taken to achieve it was relatively low, producing the highest Sharpe Ratio in the range of asset classes measured. It stood at 2.85.
Risk parity strategies produced 20.4% over the 12 month period, Redington reported. While this was a higher overall return rate, the risk taken to achieve it was higher than emerging market currency investments, so the Sharpe Ratio was 2.78.
Last week, attendees at aiCIO’s inaugural Influential Investors Forum in New York City, discussed the importance of managing the risk in their portfolios.
Jim Dunn, CIO of Wake Forest University Endowment, told the audience that since his arrival at the fund he had earned similar returns as his predecessor, but had massively reduced the risk he had taken in doing so. Dunn said: “You can control two things: fees and risk. You can’t control returns.”
Despite the suggestion that high yield debt was an uncertain bet, investors willing to take the plunge were rewarded over the 12-month period. Redington’s research showed US high yield debt made 15% with the third best Sharpe Ratio of 1.94.
Equities were some of the worst performers, barely compensating investors for taking considerable market risk. Redington found developed market equities made the highest returns with the best Sharpe Ratio – 18.3% and 1.11 respectively – while emerging market equities only made 13.5% and rewarded investors poorly for the level of risk taken (0.68).
David Bennett, Managing Director of Redington’s Investment Consulting team, said: “In the present challenging investment environment, we are finding increasing focus by clients on trying to find more reliable and diversified sources of investment return and an increasing use of risk adjusted returns to help allocate their risk budget between competing opportunities.”
To access the full report with analysis over three and five-year periods, click here.