In Part 1, we looked at how Alex’s investment thesis was laid out and explored his allocations. Now we will look at the results.
The total profit and loss (PnL) for the investment period is £1,154,365. This equates to 1.15% over the 3-week investment horizon.
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Over this three-week period equity markets sharply fell due to inflation concerns and the expected Fed rate hike. CPI for the month of May was 0.3% less than predicted and the Fed rose interest rates by 75 basis points: “This resulted in declines of 2.9% in the S&P500, 2.7% in the Dow Jones Index and 3.5% in the Nasdaq on June 10th alone. Equity markets continued to fall until the 15th June with the S&P500 and the Nasdaq both falling a further 6.5%. This is clearly seen by the strong portfolio performance in this period, mainly driven by both the PSQ (ProShares Short QQQ) which rose as much as 13% by the 15th of June and by the USD appreciation of 5.4% vs GBP between the 9th of June and the 15th.”
“The equity markets have since rallied off the low but are still below the start date of the investment portfolio, with a price increase of 7.39% in the ProShares Short QQQ and a 2.8% increase in the USD.”
As many Central banks globally had begun to raise interest rates due to the rise in inflation, investors are were still bearish on Fixed Income. “The portfolio was seeking to earn income, but in anticipation of likely rate rises, the portfolio only allocated to short duration bonds, the UK Gilt 0.125% 31 January 2023 (7 months). Although the debt market fell over the period, this bond was not impacted by rate hikes with the price remaining almost unchanged over the period”.
The Pound has fallen 11% vs USD in the past year and is down 2.82% since the portfolio’s inception (Yahoo Finance, 2022). The USD/GBP exchange rate strengthened from 1.2548 to 1.2194. FX represented a large portion of the total PnL given 40% of the portfolio (ProShares QQQ and the Invesco DB Agriculture Fund) was in USD. £1,120,240 was attributed to FX PnL.
Commodity market: “The largest downside of the portfolio came from the Long Invesco DB Agriculture Fund position. This recorded a negative price move of 7.26%. In particular, Wheat, Corn and Soy, which each account for 14% of the ETF’s futures allocation, fell sharply over the investment timeline.
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Portfolio performance is represented by a large PnL drop in the Commodities asset class on June 23rd. The announcement on June 22nd of Russia and Turkey wanting to discuss a safe passage for ships transporting Ukrainian grain through the Black Sea is a likely rational for falling wheat prices (Reuters, 2022).”
While Alex outperformed his objective, it is crucial to compare results to a benchmark. Alex’s portfolio outperformed the Financial Times Stock Exchange 100 (FTSE100)5 benchmark over the given period and offered considerably less volatility with 12.4% compared to 24.6%.
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In the next article, I will look at how Alex would have done if he was given a few more weeks in his investment horizon.
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