Over the past two years we have seen charts like the one below all over the place. They show the supposed superiority of the SP500 over pretty much anything. In this case it is showing how it is killing the Credit Suisse Macro Index. The problem with charts like this is not that they are inaccurate, after all the data is the data, but that it is totally cherry picked.
If I gave you the stats to my best 10 free throws ever I could say I went 10 for 10 (actually 13 in a row). So am I a 100% free throw shooter? No, sadly I am not. If I include the rest of that shooting session I quickly came back to reality. After 13 in a row I missed the next five and went to my typical 65-75% free throw shooting. I am a decent shooter over time but if I can pick my start and end point I can look like a GREAT shooter.
The SP500, or any index for that matter, is no different. The start and end dates you use matter. If you look at the chart again you can see that the starting date is 12/30/08 which is missing the carnage of the crash, in other words it almost marks the exact bottom. With this as the starting date stocks are the clear winner.
In the next chart we have the same $1000 invested but this time we start at the end of 2006 BEFORE the crash. To no ones surprise, the results look totally different. Instead of the SP500 killing macro, the SP500 is getting killed by macro. Turns out that in the crash of 2008, and we see similar observations in other crashes as well, macro killed it. Instead of going down over -50% like the SP500, the drawdown was only -15%. another thing you can see more clearly is that macro has also been FAR less volatile over this period. Yes, the SPX is playing catch up but even in this bull market we have had a few good sized drawdowns in the SPX that barely show up in the Macro index.
We can see this volatility in returns another way if we look at the rolling 12-Month returns. In the chart below we look at the SPX, Barclays Agg Bond Index, and the Credit Suisse Macro Index. Each month we plot the returns you would have gotten if you had bought the index one year ago. As you can see the red line, the SPX, has higher highs and lower lows. This would not be so bad if the lower lows were not so LOW. Buying and holding stocks and losing almost 50% of your wealth in a 12-Month period can’t be very comforting.
Remember that if you have $100 and then lose 50% you now need the remaining $50 to grow 100% just to get to breakeven. Drawdown math on the SPX is a beast and totally kills your long term compound annual growth rate . Looking at the Bond and Macro indices however you can see that not only are their drawdowns smaller in magnitude but that they are far shorter in duration. One more bonus is that they are both usually positive when the SPX is negative.
As you can guess we can go on and on and on about this topic but we will end with this chart of the entire history of the Macro Index along with the SPX and Barclays Agg Bond Index. If you had invested $1000 in each of these your Macro investment be worth more than the other two combined. The flexibility in the Macro mandate, namely the ability to buy, sell, and sell short anything allows traders to construct portfolios with better risk to reward characteristics. Over cycles the strategy has proven itself to be a far less volatile and yet still consistently profitable strategy. It is not perfect, it can lose money, it can under-perform, etc. but history shows that over time it keeps coming out ahead. So next time you see some article saying that macro is dead, that active management is dead, and that stocks for the long run are the only way to go (and yes that was a dig at the bible of the buy and holders) remember that history proves otherwise.
The haters among you will say that we are just talking our book. We won’t argue with that because to some extent we are, but instead just point out that the data says their book is really weak. It makes zero sense to us why anyone would willingly be a zombie and just accept whatever happens to their money by being in an index. On the other hand it makes total sense to us to adjust our risk as the markets and opportunity set dictate and to be opportunistic in our search for alpha and absolute returns.