Basic HTML Version
Citi Perspectives for the Public Sector
|
2015 – 2016
49
Figure 2: Global Reserve Portfolio, 1-Jan-02 = 100*
100
120
140
160
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220
02 03 04 05 06 07 08 09 10 11 12 13 14 15
Global reserve portfolio
Global reserve portfolio including currency overlay
Figure 3: Performance of Global Reserve Portfolio**
Reserve
portfolio
Reserve portfolio
inc. currency
overlay
Currency
overlay
impact
Annual return 5.04% 5.43% 0.38%
Annual risk
5.35% 5.23% -0.12%
Information ratio 0.94
1.04
0.09
Sharpe ratio**
0.70
0.79
0.09
Max drawdown -8.03% -8.69% -0.66%
**Over US 1-month T-bills as risk-free rate
Source: Citi; Jan-02 — Jun-15 *Please see disclaimer regarding Hypothetical Results
Figure 4: Historical Effective Currency Exposures of Reserve Portfolio with Currency Management*
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
02
03
04 05 06 07
08 09 10 11
12
13
14
USD
EUR
Other
COFER target bands
Source: Citi; Jan-02 — Jun-15 *Please see disclaimer regarding Hypothetical Results
We then apply the average signal from carry,
trend and value to each of the GBP, EUR, JPY,
CHF, CAD, AUD, NOK and SEK exposures vs.
USD, tilting the currency holdings up or down
vs. the benchmark using one-month forward
contracts. The composite signals vary between
-100% and +100%, but often fall between
the two boundaries because carry, trend and
value may conflict each other. The signals also
take into account strength of factors, i.e. only
very large interest rate differentials, strong
momentum and big mis-valuations would cause
the individual signals to hit the boundary.
We assign the whole foreign (non-USD)
exposure as notional for the overlay, meaning
that at its extremes the signals could potentially
double the holding or reduce it to zero, with the
mirror allocation amount always taken away
or allocated to USD. In practice the variation
is more moderate, typically between 20% and
40% of the notional, because strong signals
fairly align. The results of such variations are
shown in Figure 4, where GBP, JPY, CHF, CAD,
AUD, NOK and SEK exposures are grouped into
‘Other’ because their original COFER weights
are small.
For Institutional Investors Only — Not for Onward Distribution