December 11, 2023

Revisiting Santa's Portfolio

Last Christmas season, we built a festive portfolio from the perspective of everyone's favourite gift giver: Santa.


Based on his goals, risk tolerance and constraints, which can be found in the previous blog, the following portfolio was constructed:

Santa's portfolio (illio)


Unfortunately, Santa didn’t have time to change his portfolio this year. With the cost-of-living crisis reaching as far as the North Pole, Santa and his elves spent their time finding ingenious ways to scrimp and save to build their quota of toys.


Still his portfolio managed to rise by almost 12%. By doing nothing he still made money. But was it enough?


In 2022, equities had a bad year, with the MSCI All World down by ~18%. However, Santa had a gut feel that generally when the equity markets have a bad year, the next year is usually better.


Equity markets performance over time


So, he wanted to find out if he had gone back in time and made some slight adjustments to his portfolio by shifting out of bonds and into equities, he could have done better. Specifically, his Disney bonds were about 20% of his portfolio so he wanted to diversify out of that single name risk.


We decided to help Santa: what if he had made some changes to his portfolio? Using our new What-If tool, we examined how his overall portfolio would have looked based on the following changes:


  1. The Disney bond positions were reduced by half
  2. The funds from Disney bonds were allocated to equities in Snowflake and Marks and Spencer Group


Santa's What if portfolio (illio)


A summary of the differences between Santa’s portfolio and the What-if portfolio are seen below.



The "What-if portfolio" made more money as Santa’s P&L jumped up by $50,882. Note, this came with a slight increase in portfolio volatility from 8.7% to 9.9%, which he hadn’t factored in.



This rosy picture continues with this "What-if portfolio" outperforming Santa’s portfolio by 5.00%. Over the year, Santa’s performance was +11.55% whilst the "What-if" performance was +16.55%. So, his gut was right.


However, this is where the devil in the detail comes in. From an asset allocation point of view, Santa’s mix between Fixed Income and Equities would have changed quite a bit: his allocation to bonds decreased from 30.3% to 21.9%, whilst his allocation to equities went up from 47.3% to 57.1%. This could make Santa think twice about making such changes as he had wanted a certain exposure to bonds for other reasons.



That reason manifested itself with a decrease in the projected income. Santa’s original portfolio has a yield of 2.3% with a projected income of $25,721. However, by making these changes, his yield dropped to 1.8% and his projected income by ~20% down to $20,921. So just looking at a What-If based solely on performance, doesn’t quite tell the full picture as his asset allocation strategy changed.



This is further demonstrated once you dig deep into more risk metrics. As mentioned, his portfolio volatility would have increased but also his largest drawdown was higher at 8.8% compared to 8.4%. His ESG score was also slightly lower. In other words, that higher performance would have come at the cost of other negative factors.



After looking at this "What-If" in a multi-faceted way, Santa is glad he didn’t make those decisions. Just because his performance was higher, his overall future income would have been lower and he was taking more risk to the downside, as well as impacting his values, than he would have liked.


However, going into 2024, he still wants to make changes to his Disney bond positions, but this time, allocate to Snowflake and Marks & Spencer bonds instead. So, we will rebalance his portfolio accordingly in the new year and check back in 12-months.


Happy holidays to all.


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