Equities

Commerzbank Indices update

Return of multi-asset diversification?

In 2015, a spike in cross-asset correlation caused large drawdowns in many multi-asset strategies (Chart 1). The positive risk adjusted year-on-year performances of both the Commerzbank Global Multi Asset Risk Control Index and Commerzbank Frontier 5%RC ER Index, which both give dynamic exposure to a diverse multi-asset basket, suggests that cross-asset diversification has become a reliable tool once more. We offer structured products on our Frontier Index and have collaborated with Ossiam to launch an ETF, which tracks our Global Multi Asset Risk Control Index.

Cybersecurity stocks keep rising

The Commerzbank Cyber Security Index continued its upward trajectory in March with a positive performance of 1.3% (up 8.7% year to date). Growing reliance on digital technology in all aspects of daily life as well as regulatory pressures are fuelling the growth of spending in cybersecurity by companies and governments. Cybersecurity companies stand to benefit from this trend. The index is value-weighted: a bullish strategy for an industry with bullish prospects.

Implied levels of volatility are low. Realised levels are even lower

The Commerzbank US Flexible Volatility Index, which is a strategy aiming to profit from the volatility risk premium by entering into variance swaps, rose by 0.8% in March. Future implied levels of volatility, measured by the VIX Index, are often higher than the actual realised volatility that follows. This is caused by the fact that there are more buyers of volatility protection than there are sellers. This asymmetry causes a premium, which can be extracted via a variance swap. Usually, when levels of VIX are low, there is not much premium to profit from. However, since equity markets have realised even lower levels of volatility, the index was able to profit. Similarly, the Commerzbank US Volatility Protect 5%RC Index benefits from the volatility premium by taking daily positions on VIX futures. Both of these volatility strategies use Commerzbank’s Aggregate Risk Perception Index in a systematic way, which acts as a leading indicator of higher market volatility.

Chart 1: 60-day correlation of US equities and US treasuries
Chart 1: 60-day correlation of US equities and US treasuries
Source: Bloomberg
Indices updates

Bloomberg ticker

Index name

March per-formance

YTD
per-formance

YOY
per-formance

Comments

CBKICYBS Index

Commerzbank Cyber Security Index

1.3%

8.7%

25.5%

The index continued its upward trajectory in March, gaining in value by 1.3%. The index had high exposure to the big movers such as Fireeye (+12%) and Verint (+15%) and a very low exposure to those stocks which lost value. Palo Alto, which lost 26% due to earnings revisions, only has a 1% exposure in the index, despite having a comparatively large market capitalisation. This is due to the value-weighting scheme within the index.

CBKIRPRU Index

Commerzbank US Risk Premia Rotation Index

0.3%

6.3%

13.2%

The rising level of Commerzbank’s Aggregate Risk Perception Index (ARPI) at the end of February meant that the Risk Premia Rotation Index will be invested in defensive risk premia until June. Namely, MSCI US Quality and MSCI US Min Volatility indices. US stocks rallied in February. Overall, the index was up 0.3%.

CBKIVPU5 Index

Commerzbank US Volatility Protect 5%RC Index

2.7%

7.8%

7.2%

Throughout March, none of the 3 risk-off signals were activated: Commerzbank’s Aggregate Risk Perception Index remained at a low level, and there were no signs of backwardation on the VIX futures curve. As such, the index tried to extract value from the volatility premium by taking a rolling daily position on VIX futures, a profitable strategy as the index finished 2.7% up. Average participation in the core strategy was 2.7%.

CBKIFV30 Index

Commerzbank US Flexible Volatility 0.3% Index

0.8%

2.7%

6.3%

Despite the persistent low levels of implied volatility on US stocks, as measured by the VIX, the index was up 0.8% in March and is up 2.7% year to date. This was due to the even lower levels of realised volatility, which created a volatility risk premia that was extracted by a short position in a variance swap. The low levels of implied volatility in equity markets were mirrored by that on other asset classes too and so Commerzbank’s Aggregate Risk Perception Index (ARPI) remained low also.

CBKIF5EU Index

Commerzbank Frontier 5% Risk Control Excess Return USD

0.9%

1.9%

4.8%

The index posted a positive performance for March, equal to 0.9%. This was mainly driven by an underlying exposure to European equities, which continued to rally throughout the month. Other index constituents had a rather flat month; namely: European government bonds, commodities, UK and US equities. There was a 20% allocation toward cash. Of course, since this index is in excess of risk-free returns, this is essentially an unallocated portion of the index and serves the purpose of reducing the index volatility and potential drawdowns. Going into April, the index takes an even larger position on Western equities. The maximum 50% allocation, in fact. The index remain exposed to commodities, US high-yield bonds and European government bonds, which diversifies the risk from the Western equity exposure. The unallocated portion falls to around 13%.

CBKIFFDH Index

Commerzbank EPFR Dynamic Multi Asset Fund Flow Long Only Index

0.3%

0.1%

1.2%

The index started and ended March with a 50% exposure to the CBK EPFR Equity Fund Flow Index, as the Global Aggregate Risk Perception Index (ARPI) rose slightly in value; indicating rising (but not high) risk aversion in the markets. The other half was exposed to the CBK EPFR US Fixed Income Fund Flow Index, which had a positive performance in March. This leg was invested in US corporate bonds and also US long-term treasuries following significant inflows into funds focussed on these instruments. In between, the index had a 90% exposure to the Equity Fund Flow Index, which was only invested in Japan following significant inflows into equity funds focussed on this region. Overall, the index was rather flat, up 0.3%.

Source: Commerzbank