blog
14Feb 2022

A Small Allocation – Part 2

by Tim Johnston

Please note this article is not personal financial advice. Apollo Capital are not privy to your personal financial circumstance therefore this article is general in its nature. The simulated portfolio weightings included in this article are for illustration purposes and should not be used as a guide for structuring your portfolio. Please do your own research and seek professional advice.

We have always believed that there is a clear and strong case for investors to consider a small allocation to crypto assets in their portfolios.

There are a number of competing tensions investors need to balance. Crypto assets offer enormous return potential, mostly uncorrelated to traditional assets. However, they are not without risk. The asset class is still young and prices are highly volatile.

In balancing the risks and return potential, we believe a key consideration is position sizing. We have analysed the impact of various levels of allocations to crypto assets within the context of a broader portfolio. For the purposes of this analysis, an allocation to crypto assets means an investment in the Apollo Capital Fund.

We have simulated the following:

  1. “Base” portfolio of 60% Australian equities, 40% Australian bonds
  2. 2% crypto
  3. 5% crypto
  4. 10% crypto

In allocating to crypto assets from these portfolios, we decrease equally the allocation to equities and bonds. For example, a 10% crypto allocation results in a portfolio of 55% equities, 35% bonds and 10% in the Apollo Capital Fund. We also note that a 10% allocation crypto is probably on the higher side of what many investors might consider.

We performed this analysis over a four year time frame, the same four years Apollo has been managing the Apollo Capital Fund. It is fascinating to analyse the effect on the portfolio at various points in time.

Scenario 1 – Poor Timing

We launched the Apollo Capital Fund on 1 February 2018, the start of a severe 12 month bear market. Analysing the first year’s returns allows us to analyse the impact of highly negative crypto asset performance on the whole portfolio.

The Apollo Capital Fund was down around 68% between February 2018 and February 2019. The effect of different allocations on the overall portfolio is varied. A 2% allocation (the orange line), at the end of the first year, was a portfolio with a 0.9% return compared to a 3% return for the base portfolio. A 5% allocation (silver line) returned -1.8% and a 10% allocation (yellow line) was affected more significantly with a return of -6.3%. The lowest drawdown of the 10% crypto asset portfolio was -7.71% in November 2018 when the fund returned -33%.

Scenario 2 – Excellent Timing

In Scenario 2, let’s assume an investor allocates to crypto assets through the Apollo Capital Fund with excellent timing on 1 February 2020. This analysis is straightforward – if we assume the timing is excellent, clearly a larger allocation to a high performing asset class will have a more positive impact on the overall portfolio.

Where this analysis is interesting is the magnitude of the impact on the overall portfolio, compared to the magnitude of the impact in Scenario 1.

A 2% allocation generated a return of 8.02% while the base portfolio returned around 3.60%. A 5% allocation returned 16.11% and a 10% allocation returned 27.53%.

Scenario 3 – Long Term

The last time frame to analyse is the effect on the portfolio over a longer period of time, the four year period of the Apollo Capital Fund. This time frame includes both periods of severe drawdowns and periods of strong performance. It starts with Scenario 1 and ends with Scenario 2.

Overall the performance of the Apollo Capital Fund has been very strong over the last four years. The 10% allocation has performed well returning 50.16%, clear evidence of the strong return potential of crypto assets. The 2% allocation has made a material impact on the portfolio, returning 31.01% compared to 26.38% for the base portfolio. The 5% allocation returned 38.1%.

Perhaps most notably, the 2% and 5% allocation delivered a material positive impact on the overall portfolio, but with minimal downside in Scenario 1.

By analysing the historical returns of an Australian portfolio consisting of equities, bonds and an allocation into the Apollo Capital Fund, we are able to see the potential benefits that crypto asset exposure can have on a traditional portfolio. During a bear market, a drawdown in crypto assets may not have a significant negative effect on the portfolio. During a bull market, the overall portfolio can benefit greatly. We describe this as crypto asset exposure offering traditional portfolios an asymmetrical return profile – the upside is much larger than the downside.

Hindsight

It is important to remember that this analysis is performed with the benefit of perfect hindsight. While we remain bullish on crypto assets over a long period, it remains to be seen if we are the start of another Scenario 1, another Scenario 2 or something in between.

We think this analysis is important and helpful in quantifying the effect of crypto assets within a broader portfolio. Of course, future returns might be more negative or more positive, and may affect an overall portfolio more drastically. Investors’ portfolios vary, likely containing other assets and not just 60% Australian Equities and 60% Australian Bonds.

While all investors in the Apollo Capital Fund are optimistic crypto assets will continue to perform strongly, they need to be prepared and able to withstand the ups and downs along the way.

Disclaimer

The information in this blog post is of a general nature only. It does not take into account your personal objectives, financial situation or needs. The information is not intended to constitute investment, legal or taxation advice as it is of a general nature only. Accordingly, before making any decisions, taking any action or refraining from taking any action, Apollo Capital recommends that you seek independent professional advice prior to taking any action in reliance upon the information given your particular circumstances.

Tim Johnston

Tim is the Managing Director at Apollo Capital. He has substantial expertise in both traditional financial services and technology investing. In financial investing, he worked at DMP Asset Management, a boutique Australian Equities Fund Manager, and was part of the investment team that managed a $33 billion super fund. On the technology side, Tim has worked as a venture capital Associate at Dominet Venture Partners and has been active in crypto markets for over four years. Tim is a CFA charterholder.