Plagued by the novel coronavirus pandemic and election uncertainty, 2020 was a year that many are happy to forget. Nonetheless, the S&P 500® finished strong, up 12.15% for the fourth quarter and 18.40% for the year, driven largely by newly developed vaccines and aggressive economic stimulus measures. In the fourth quarter, yields on the U.S. 10-Year Treasury Bond rose to 0.92%, and in commodities, the S&P GSCI posted a gain of 14.49%, finishing the year down 23.72%.
The S&P Risk Parity Indices built on strong performance in the second and third quarters, reaching new highs in the fourth quarter (see Exhibit 1). The S&P Risk Parity Index – 10% Target Volatility posted a double-digit gain in the fourth quarter, ending the year up 11.48%.
Remarkably, the full-year performance of the S&P Risk Parity Indices significantly exceeded that of the HFR Risk Parity Indices, which represent the weighted-average performance of the universe of active fund managers employing an equal-risk-contribution approach in their portfolio construction.
While the S&P Risk Parity Index – 10% Target Volatility slightly underperformed the HFR Risk Parity Vol 10 Index in the first quarter, it outperformed in the subsequent quarters and finished the year 7.43 percentage points higher than the manager composite index (see Exhibit 2).
The S&P Risk Parity Indices comprise three asset class sub-components: equities, fixed income, and commodities. Let’s analyze the individual asset class performance contribution for the S&P Risk Parity Index – 10% Target Volatility (using excess returns).
The positive performance in the Q4 2020 was driven by commodities and equities, up 5.3% and 5.1%, respectively (see Exhibit 3). For the full year, the performance was driven by equities and fixed income, which finished up 3.8% and 7.6%, respectively.
While 2020 ended up being a strong year for equities, it’s possible that some of the concerns from last year will carry over to 2021. Market participants will have to remain vigilant and make prudent investment choices, and the S&P Risk Parity Indices may be able to help by offering diversification.The posts on this blog are opinions, not advice. Please read our Disclaimers.