Last week we highlighted how a popular investment guide simply promoted a long stock approach, here we take issues where their performance, reports Landon Whaley.
We continue to breakdown the bad advice provided by the UBS’ “Bear Market Guidebook,” released earlier this year. Last week we dissected part one, and now it’s time to dig into part two of the guidebook sure to elevate the “my portfolio looks a lot like the Titanic after it struck the iceberg” risk for investors around the world.
Part 2 = Spraint
In this section, UBS lays out its four “damage mitigation” strategies. The reason for these strategies is UBS (like many others) believes that “In a world where stocks usually go higher, strategies that seek to go short or directly hedge equities seem doomed to fail.”
In contrast to the commonly held belief that there are only a few times to be hedged or to have short exposure, we hold the opposing view that there only specific environments when your short book should be limited or eliminated.
During the first nine months of 2018, when the S&P 500 climbed 9.9% to an all-time high on Sept. 21, we booked gains in 73% of our U.S. equity short trades. So far this year, the S&P 500 has rallied 20.5%, has minted new all-time highs on 10 occasions, and yet we’ve managed to book gains on 69% of our U.S. equity short calls. Doomed to fail? I think not.
Rather than dissecting all four strategies, let’s evaluate the “position investors can add to their portfolio during late-cycle that can be seen as mainly hedging in nature.”
UBS recommends a “regime shifting” strategy designed to “add and reduce risk dynamically to manage risk and opportunity through market cycles.” This recommendation is followed by a pitch for UBS’ own Systematic Allocation Portfolio (SAP), which aims “to significantly reduce equity exposure during sustained market drawdowns while maintaining high levels of equity exposure during bullish periods.”
Last year was the worst year for global asset classes since the 1970s with more than 97% of all assets underwater, from a total return perspective. The SAP started the year well enough, gaining 4.3% in just the first four weeks. Unfortunately for UBS clients, the Jan. 24, 2018 peak remains the all-time high for this strategy. The SAP went on to lose 11.1% between that peak and the Dec. 26 low, finishing 2018 with a full-year loss of 6.5%.
Folks, the SAP supposedly “[reduces] equity exposure during sustained market drawdowns” and yet it lost -190 basis points more than the S&P 500’s -4.6% return last year!
Ok, so the strategy didn’t nail the Q4 2018 pivot to a Winter Fundamental Gravity (which we did), but the other side of the SAP’s mandate is to “[maintain] high levels of equity exposure during bullish periods.” The SAP must be crushing it this year, right?
As of Sept. 19, the SAP has returned +4.9% (versus S&P’s +20.5%), while experiencing a peak-to-trough decline of -7.3% (versus the S&P’s -6.6% max drawdown).
UBS’ regime shifting strategy is designed to let you have your cake and eat it too by providing a hedge in bad markets and all the bullish juice you can handle in a good market.
The headline risk bottom line is that rather than cake, it’s delivered clients a cumulative return of +4.2% over the last three years (that’s an annualized return of +1.7%), with moredrawdown risk than an all-equity portfolio. To add insult to injury, UBS charges clients 2.5% upfront and ongoing annual fees of 1.94%. The poor souls hoodwinked by UBS bankers could have stuck their hard-earned savings in a money market fund and earned +3.8% (nearly the same return as SAP) with no risk at all. The Old Institution strikes again!
Next week, we’ll continue our expose of the UBS Bear Market Guidebook with an evaluation of Part 3, “Fewmets.”
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