Obsidian’s Portfolio Management System improves Ratios.
The Sharpe Ratio is one of the most commonly used and important measures of the performance of an investment. It normalises returns by historic/released volatility, thereby allowing comparison across investment thesis and even asset classes. It essentially demonstrates how well a proposition uses its inherent risk.
Despite its popularity it has flaws and detractors; for instance, it penalises ‘upside volatility’ and gives no indication of an investment’s ability to overcome losses. Though less popular, the Calmar and Sortino Ratios attempt to overcome these deficiencies.
The Calmar Ratio compares the compounded annualised return to the absolute value of the worst draw-down, all over a three-year period. It indicates how well an investment overcomes its worst historic performance.
The Sortino Ratio compares the compounded annualised return to the volatility of downside moves only, also over a three-year period. It indicates how well an investment ameliorates the impact of downside moves.
Obsidian’s Portfolio Management System consistently improves on all three of these measures.
As can been seen in the graph Obsidian consistently reduces realised volatility whilst simultaneously improving returns thereby resulting in improved Sharpe Ratios across all sample portfolios:
The five benchmarks represent the following:
DIA: Dow Jones Industrial Average
IWM: Russell 2000
QQQ: NASDAQ 100
SPY: S&P 500
SHARIAH: Equally weighted portfolio of Shariah Compliant stocks
Obsidian’s Portfolios are as follows:
OBS-DJI: Obsidian’s Dow Jones Portfolio
OBS-NDX: Obsidian’s NASDAQ 100 Portfolio
OBS-SHARIAH: Obsidian’s Portfolio of Shariah Compliant Stocks
OBS-SPX LOW VOL: Obsidian’s S&P 500 Low Volatility portfolio
OBS-SPX MID CAP+: Obsidian’s S&P 500 enhanced portfolio
OBS-RUSSELL: Obsidian’s Russell 2000 Portfolio
OBS-RUSSELL+: Obsidian’s enhanced Russell 2000 Portfolio
Similarly, Obsidian reduces the worst draw-down whilst improving returns thereby improving the Calmar Ratios, across the example portfolios:
Finally, Sortino Ratios are also improved by reducing downside volatility in combination with increased returns:
Through judicious capital allocation Obsidian’s Portfolio Management System consistently improves on the three commonly used risk/return ratios. Whilst the focus above is on US, similar results are achieved in other markets and even other asset classes.
Faisal Khan (Nov 2019)