An article in The Wall Street Journal discusses the recent performance of Invesco Balanced-Risk Retirement 2030 Fund (TNAAX, class A shares). In the fall of 2009, the fund started adopted a risk parity investment strategy, which distributes the risk evenly between stocks, bonds and commodities. To increase bonds’ contribution to the overall risk, the fund uses leverage. Consequently, when interest rates started to rise in May 2013, the fund’s performance took a hit:
Nevertheless, the chart shows that from the beginning of 2010 through August 2013, the total return of the fund was still higher than that of its average peer in the Target Date 2026-2030 category. Morningstar also reports a three-year (to August 31, 2013) Sharpe Ratio of 1.14 and 0.97 for the fund and its category, respectively. While the return of the fund was lower than the category’s average, its volatility was even more so thanks to the relatively high bond position.
Let’s take a look at the fund’s performance from Alpholio™’s perspective. First, the cumulative RealAlpha™ chart:
The chart shows three distinct periods in the fund’s performance:
- From early 2007 through 2009, the cumulative RealAlpha™ was trending down
- In 2010 and 2011, the cumulative RealAlpha™ was largely flat
- In 2012, the cumulative RealAlpha™ started slowly increasing.
Therefore, the switch to a risk parity strategy generally benefited the fund’s shareholders, esp. when compared to the first two years of operation. The next chart shows the reference portfolio weights for the fund:
As a previous Alpholio post indicated, when interest rates rise, correlations among stock, bond and commodity returns increase; hence, risk parity strategies tend to underperform. This negatively affected the fund in mid-2013. However, longer-term performance of the fund since its adoption of the risk parity approach is moderately encouraging.