It has been another strong year for C8 Technologies, as we continue to expand and spread the direct indexing message worldwide. We could not have done it without you all, our clients, partners and friends. We are very grateful for all your support in sharing our journey and achievements. Thank you! May we wish you the season’s greetings and best wishes for 2023
For our final issue of the year, we highlight the recent recovery in interest rate and bond markets, and in ‘long-only’ allocation strategies, both of which were hit hard in the first three quarters of 2022.
Bright Spots Amidst High Interest Rates
The USD and EUR credit markets end the year on a more positive note amidst the downshift in the pace of Fed policy tightening. S&P’s iBoxx High Yield indices for both USD and EUR have bounced by around 5%, although they still post substantial declines (-10.0% and -9.5%, respectively) for the year as a whole.
Notably, the iBoxx high yield benchmarks have outperformed those for the broader debt market universe – whilst C8’s HY tracker portfolios have, in turn, outperformed these overall iBoxx HY benchmarks. Amongst the C8 Studio indices from external providers, those focused on short-term maturities have, unsurprisingly, posted the smallest year-to-date losses (the PIMCO Enhanced Short Maturity Active ETF has edged just 1.0% lower). Amongst the long only ‘whole bond market’ indices, the Smooth Sailing Tactical Multi-Sector Bond Index has posted a very modest -2.2% drop in 2022 – reinforcing its defensive status in adverse market environments (indeed C8 Studio reports a Sortino ratio of 3.3 for this Index).
While 2022 credit market losses may have been unwelcome for existing investors, they have substantially boosted yields for new entrants to these markets in 2023. HY benchmark yields are now double those prevailing at end-2021 (8.5% up from 4.3% in USD, 8.0% up from 3.1% in EUR) and carry may play a much bigger a role in supporting total returns in the year ahead.
‘Long Only’ Portfolio Allocation Indices Recover
The C8 platform has a broad range of ‘long only’ strategies, from external providers and developed in-house. Whilst the chart above shows that this year’s large equity sector divergence has not been narrowed by the bounce in US equity markets, nevertheless there has been a marked recovery in ‘long only’ allocation strategies.
In the latest month, both JP Omega and Alpha Vee strategies have been able to recover over half of the losses sustained over Q1-Q3 . In the case of JP Omega these losses were rather modest in any case – reflecting the broader asset mix (including cash) and the momentum-focus of their strategies. The Ned Davis US Sector Allocation Strategy invests purely in large-cap equity sector ETFs so showing a more volatile year than cross-asset strategies. However, the strategy outperformed the overall S&P 500 index over the first three quarters of Q3 (-21.6% vs -24.8% for the index) and broadly matched the October index bounce.
In the table below, we highlight the October bounce-back for these external provider indices in the context of Q1-Q3 losses and 2017-21 gains (whilst more detailed analytics can, as always, be found on C8 Studio).