How Much Is Enough?
Let's posit the classic 60/40 portfolio as our starting point: 60 percent stocks and 40 percent bonds. We'll sample the effect of 10- and 20-percent carve-outs from stocks to managed futures—with monthly rebalancing—over the past three years in Chart 2. We'll use the Chart 1 indexes as stand-ins for our portfolio components.
Table 2 - Three-Year Portfolio Performance (March 2008 - March 2011)
|
|
With 10% Managed Futures |
With 20% Managed Futures |
Without Managed Futures |
|
Average Annual Return |
2.9% |
3.3% |
2.2% |
|
Annualized Volatility |
9.8% |
7.8% |
11.3% |
|
Sharpe Ratio |
0.13 |
0.23 |
0.06 |
From the track record, two things become readily apparent. First, adding managed futures boosts overall portfolio performance by enhancing returns and dampening volatility. The portfolio's risk-adjusted return, indicated by its Sharpe ratio, doubles when a managed futures allocation is added.
Second, more is better. Doubling the managed futures allocation increases the risk-adjusted return by a further 75 percent.
Chart 2 - Managed Futures' Portfolio Impacts
Limited Investment Options
Before 2003, the recommendation and brokering of managed futures products was effectively foreclosed to anyone who wasn't a commodity broker. The commodity pools and separately managed accounts then available were also heavily fee-laden. Changes in the regulatory scheme have since allowed the creation of lower-cost commodity-based mutual funds and exchange-traded products that can be marketed by stock brokers or bought by self-directed investors.
The trouble is, many products touted as "managed," really aren't. The first generation of commodity securities was index-based. It's only been within the past two or three years that actively managed products have debuted. Of those, the first to market were mutual funds. It's the rare exchange-traded fund or note that can claim to be actively managed. And some of those, in fact, are really index trackers in disguise.
A flurry of new products have launched recently, but their short track records necessarily limits analysis. We'll look at representative managed futures products that have been around for more than a year, benchmark their performance against the returns generated by a commodity index tracker and see if any alpha's been earned recently.
