1. Headline returns on asset classes are all well and good.

    But... 

    How risky are they? The Sharpe Ratio is a powerful way to see. It combines the excess returns with the volatility seen over a given period. 

    The result... 

    A simple, single number, to check the relative value of an asset class. A handy way to decide whether to include it in an investment strategy.

    In this publication we look at a variety of different asset classes. We cover over 1-year, 3-year, 5-year, and 10-year time frames and find some interesting results. 

  2. Over a twelve-month period, UK Government Bonds were the top performer on a risk-adjusted basis, with a Sharpe Ratio of 3.02, more than double the reading from the previous quarter. Index-linked UK government bonds exhibited the highest excess return of 18.3% p.a., a 10.2% p.a. increase on the previous quarter. Emerging Market Equities exhibited poor performance compared to the previous quarter as excess return fell by 6.5% p.a. on Q3 to -2.4% p.a. Commodities also performed badly, primarily driven by the collapse in oil prices, posting an excess return of -17.2% p.a. and the second highest volatility of all asset classes of 13.7% p.a.

    Compared to the previous quarter, excess returns are lower on average and volatility slightly higher leading to lower average Sharpe Ratio in Q4 (1.18) compared to Q3 (1.60). Although useful for evaluating performance on a short-term basis, please note that one year is a short timeframe over which to assess the risk and return characteristics of different asset classes and strategies..

  3. Over a twelve-month period, European High Yield continued to be the top performer on a risk-adjusted basis, with a Sharpe Ratio of 3.10, and an excess return of 8.5%. However, its Sharpe Ratio has fallen considerably from 6.46 in Q2 2014, as excess returns fell and volatility rose. Risk parity had the highest excess return. However, accompanying high volatility led to a lower Sharpe ratio than in the second quarter. Commodities were the only asset class to post negative excess returns during the 12-month period, producing an excess return of -6.8%, a significant fall from 8.0% in the second quarter.

    Compared to the previous quarter, excess returns are generally lower and volatility broadly unchanged leading to lower Sharpe ratios in Q3 on average: UK Government Bonds and UK index-linked Government Bonds were the only asset classes to show an improved performance. Although useful for evaluating performance on a short-term basis, please note that one year is a short time frame over which to assess the risk and return characteristics of different asset classes and strategies.

  4. Over the last twelve months, European High Yield continued to be a top performer, with a Sharpe Ratio of 6.46, and a volatility of 2.1%. However, low spreads indicate repetition of this performance could be difficult. US High Yield performed well on a risk-adjusted basis over the past quarter with a Sharpe ratio rising from 1.48 to 4.01, this was largely due to a rise in excess return from 7.3% to 11.5% per annum. Macro Hedge Funds were the only asset class to post negative excess returns during the 12-month period.

    Compared to Q2 2013, volatilities are largely lower and excess returns higher leading to higher Sharpe Ratios: for example European High Yield, also the top performer in Q2 2013, had a Sharpe Ratio of 3.38. Although useful for evaluating performance on a short-term basis, please note that one year is a short time frame over which to assess the risk and return characteristics of different asset classes and strategies.

  5. Using the Sharpe Ratio, this publication details the Risk-Adjusted Return figures for a variety of different asset classes over 1-year, 3-year, 5-year and 10-year time frames, and provides a useful basis upon which to evaluate their value and aptness for inclusion in an investment strategy. 

  6. Using the Sharpe Ratio, this publication details the Risk-Adjusted Return figures for a variety of different asset classes over 1-year, 3-year, 5-year and 10-year time frames, and provides a useful basis upon which to evaluate their value and aptness for inclusion in an investment strategy. 

  7. Over the last year, European High Yield remains the top performer on a risk-adjusted basis with a Sharpe Ratio of 2.81. Developed Market Equities are the front runners on an excess return basis delivering 19.9%. However, with a higher volatility of 9.2%, the Sharpe Ratio is 2.16. The poor performance of Commodities this year continues with the asset class remaining at the bottom of this group. Although useful for evaluating performance on a short-term basis, please note that one year is a short time frame over which to evaluate the risk and return characteristics of different asset classes.