New Fund Fact Finding Part 2

Today, a follow up to yesterday's post by plugging the Catalyst/Warrington Strategic Program Fund (CWXIX) and the Rational Tactical Return Fund (HRSTX) into a portfolio as bond substitutes. The primary strategy for both is primarily using option combos to create a T-bill like return similar to client holding Alpha Architect Box ETF (BOXX).The funds have a little more going on with trend and volatility trading than BOXX does. 

First, for a little context is 60% Vanguard S&P 500 (VOO) with 40% in AGG, then CWXIX and then HRSTX for a full bond replacement look. 

There's not much differentiation between the three except for 2022.

Next, we'll incorporate them into the type of portfolio we often work with here. Each of the following have 65% in Invesco S&P 500 Momentum (SPMO), 5% in client/personal holding BTAL as a first responder defensive, 10% in managed futures and the final 20% in AGG, CWXIX or HRSTX as noted. 

Again not a ton of variation most of the time except for 2022 and 2024 where all three outperformed VBAIX dramatically.

While it's nice that the three outperformed VBAIX, the driver of the result is most likely attributable to the top down decision to avoid or at least minimize exposure to fixed income duration. 

As for the correlations of the two funds to a couple of core holdings as well as several other alts;

The yellow highlighted symbols are in my ownership universe. It's interesting that the correlations between BOXX, CWXIX and HRSTX are all quite low. 

This exercise was productive. 

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.

New Fund Fact Finding

The guys at RCM Alternatives had a blog post that was right out of our playbook here in terms of looking at alternative strategy funds as substitutes for plainer vanilla stock and bond exposures. They listed out quite a few funds that I've never heard of so looking at them was fun. Today we'll dig in and see if any of the funds should go on our radar. 

The first question in the post was about how to categorize various types of alts which can be difficult, the article said, with the blending of strategies in one fund as well as the blending of assets classes in one fund. This is where the idea of expectations can help. That's an important question and issue for any holding in your portfolio. For example, a fund with the word arbitrage in the name is unlikely to keep up with the stock market when the stock market is up a lot. An inverse fund is going to go down a lot if stocks are up a lot. When stocks go down a lot, sectors like tech and discretionary are probably going to go down more. Bitcoin is likely to be very volatile far more often than not. 

On this point, we've gravitated labeling alts with influence from Jason Josephiak as first responders and second responders and the third category that I coined was horizontal lines that tilt upward. I guess another type would be alts that are legitimately uncorrelated, that just do their own thing.

The first grouping of funds were intended replacements for 60/40 due to the "limitations" that the current environment poses for the basic portfolio. 

The Standpoint fund is a client and personal holding that I write about frequently. The Q3 All Seasons Tactical has symbol QAITX. In its description of QAISX, RCM refers to it as an absolute return fund but I didn't find that term on the fund's page. It generally has equity and fixed income exposure via derivatives and ETFs and there is an element of capital efficiency here as well. 

The fund is the same age as BLNDX. QAISX outperformed VBAIX by a good bit in every year except 2022. Based on the holdings I see now, I would bet that it got caught with too much duration and it fell 37% versus 16.87% for VBAIX. In doing a quick read through, I was unable to find whether the find might be levered up like PIMCO Stocks Plus Long Duration or maybe one of the ReturnStacked Funds. If so then maybe that decline isn't quite what it appears. Generically, if a fund creates the effect of an entire portfolio with just a 50% allocation, then of course it would go down more in nominal terms in a year like 2022 (expectations).

Also mentioned in this section of 60/40 replacements was RDMIX and RSST. RDMIX just changed its strategy a month ago and RSST is less than two years old so it is too early know whether they can turn out to be replacements for something like VBAIX. 

The next category was "equity replacement" which I am not going to drill down on. Regular equity exposure still works just fine, is much simpler and much cheaper. Some sort of "equity replacement" around the edges to add some sort of attribute or effect, maybe, but in terms of a core exposure, I would not abandon plain vanilla equity exposure. 

Next up, bond replacements. 

I've never heard of either fund but at first glance they do appear to differentiate from AGG which makes them worth looking at. CWXIX, the Catalyst fund, uses option combos to create income along with treasury bills. It seems similar to client holding BOXX. The fact sheet is useful if you want to check it out. The Rational fund does almost the exact same thing. Like I said, they appear to be differentiated and if eyeballing them as being similar to BOXX is correct then it would be worth learning more because they create a pretty smooth ride akin to how people hope bonds will behave. If you play around with those funds, you might want to truncate any backtesting, there's either a distortion in the early years or the funds changed strategies. 

The RCM post closes out with a catch all of "stand alone diversifiers" that includes Bitcoin and Ether products, a couple of trend following funds and funds that short the VIX. Around here, we think of anything crypto related as being asymmetry so size it prudently. We look at managed futures all the time, check out the funds if you want, a couple are new to me, maybe there will be something interesting there. The VIX is very difficult to get right on both the long side and the short side. We wrote frequently about the Simplify Tail Risk ETF (CYA) that I believe shut down for getting VIX trades wrong...although for all I know there could have been no getting VIX right. 

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.

Watch Out For Bull Market Geniuses

We've got a lot to cover today.

First up, have you ever heard the pejorative term bull market genius? Here's an example of a high yield fund that shuttered in 2023. It started many years ago with lights out, 5 star performance and then floundered from there before closing. I'm leaving the name out of it, here though is a comparison to the benchmark iShares fund with symbol HYG.

Bull market geniuses come along all the time which is worth remembering if you're ever tempted to chase some sort of heat like Cathie Wood a few years ago maybe. The opposite of bull market genius might be bear market genius but I would settle for bear market kind of smart guy, avoiding some of the full impact of a large drawdown. 

Jeff Ptak from Morningstar wrote an article dissing using 2x leveraged ETFs noting that so called volatility decay causes most of them to underperform the effect versus their respective reference securities meaning that a 2x Meta ETF won't return anywhere near twice the return of the underlying common stock and it might even lag the common stock on a nominal basis too. For ages, I've been saying that 2x S&P 500 ETFs are the only ones that are fairly close to tracking twice the S&P 500 more often than not.

Any time we have this conversation, I include a similar chart to the above and ask what you think, is that close enough? Putting 100% into the levered SSO is not something I think is smart. The potential application is something closer to portfolio three, where whatever percentage you'd put into an S&P 500 fund, put half that amount into SSO leaving cash left over for some sort of capital efficient strategy. In the times of zero percent interest rates, putting the leftover cash into T-bills would not have made up the 70 basis point difference versus SPY but now it would, but there is no guarantee that the previous 70 basis point lag would carry on in the future. It is interesting to me that portfolio 3 has a lower beta and lower volatility. 

I'm never going to do something like this with SSO but the recently listed Tradr 2x ETFs with longer reset periods of weekly, monthly and quarterly could prove out as a way to actually implement some version of this. They're only a few months old but so far, there's been nothing catastrophic that has happened. Here's maybe a more realistic way of what this could look like.

Portfolio 2 leverages down with 10% in cash while portfolio 3 leverages up with an alternative strategy ETF.

VolatilityShares launched two 100/100 ETFs that include Bitcoin. OOSB owns the S&P 500 and Bitcoin while OOQB owns the NASDAQ 100 and Bitcoin. I figured out a better way to articulate why I am not a big fan of these. If you listen to the ReturnStacked guys talk about their funds that do something very similar to OOSB and OOQB, they talk about needing to be able to dismiss line item risk. Ok but....my understanding of line item risk predates the ReturnStacked funds and pertains to a holding that appears to be doing poorly. Managed futures is an easy one to use as an example. 

Managed futures is a diversifier that fairly reliably has a negative correlation to stocks so if stocks are doing well, you might expect managed future to be doing poorly on a nominal basis although I would argue they are doing exactly what they should be doing, going the other way from stocks. 

The intended use is not putting an entire portfolio into RSSY or RSST. The idea is to put some portion of a portfolio into one or both funds and then the rest into a simpler stock fund as one example. By using RSSY and/or RSST you are getting some of your equity allocation from them. 

I'm sure they both track what they are supposed to track, that isn't my point, but the funds don't look like the stock sleeve of what they own. Fine, line item risk but tell me those two aren't tough to hold when you're looking to them to provide some of your equity exposure.

If you put 50% into SPY and 5% each into RSSY and RSST, to whatever extent they might be stock proxies, they've looked nothing like stocks which I believe makes them much harder to own versus stocks up 15% as a made up example while my stand alone managed futures fund is down 10%. I don't know why someone has to have the leverage but if you do, one of the Tradr ETFs paired with stand along alt funds might be better.

Ricky Cobb aka @Super70sSports on Twitter does a daily poll called Why Not where followers pick a favorite from four totally unrelated items. As an example Stairway To Heaven, Apple Jacks, Planet of The Apes, Moses Malone. It's a fun thing. In that spirit....Why Not...

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.

Golden Era For Risk Parity?

Alfonso Peccatiello Tweeted out the following;

We are not in a 5% world (yet?) for US treasuries but I could see where that level would entice more investors to lock in for longer than a year or two. I would want to see yields up near the bottom end of the normal range of equity returns, like maybe 7%, before I would consider taking on any sort of real duration and even then I don't know if the volatility would be worth it.

But that's me, that doesn't make me correct, maybe you would decide 5% is worth the volatility that goes with duration. My point with is though is if you want plain vanilla treasury exposure, just buy an individual issue not an ETF. Unless there is a BulletShares type of treasury ETF out there that matures, the typical treasury ETF will distribute at the prevailing interest rate.

If you bought when yields were at 5% and yields then went to 2% over the next year or whatever, yes you'd have a nice capital gain but the fund would then be yielding 2%. If rates went from 5% up to 7%, then the fund would pay 7% but the price would drop a lot and unlike an individual issue there is no par value for an ETF to revert to at maturity. The TLT ETF is at $89. It topped out around $170. Yields would have to go well under 1% for the fund to ever see $170 again. If nothing else, a terribly timed purchase of an individual treasury would revert to its par value at maturity. 

Next, an interesting reader comment from yesterday's post that I will try to respond to here;

If the reader is asking me how I value services, ok, I wasn't thinking on those terms, I wasn't thinking about what he describes as subtext. How anyone values things like access to healthcare, how convenient it is or isn't for everyday errands like groceries as well as utilities probably factor into these decisions.

I say probably to acknowledge that they could be important but don't have to be for everyone. We don't have access to good healthcare here. For something acute and not serious then yes there are a couple of hospitals and several urgent cares but we don't have any level 1 trauma centers here, those are in Phoenix and Flagstaff and my physician is in Phoenix. I try to avoid needing healthcare beyond a physical with habits related to diet and exercise. 

The reader mentioned homestead sites in New Mexico that have no services. These properties are also very inexpensive.

The picture is from Ramah, NM which is in the far western part of the state, due south of Gallup. There is a restaurant there, a volunteer fire department and I believe a store of some sort but if you need to make a real grocery run you'd go to Gallup or to go to Costco you'd need to go to Albuquerque for an overnight. The road between Ramah and Gallup has a relatively high number of vehicle accidents though. The picture is from the Airbnb where we stayed for one night. It's on a 100 acre parcel. The property is tucked way back in there off the main road and when we visited, a couple of the other nearby parcels were for sale. 

I don't know if there are any utilities or if the power was generated through some combo of wind and solar. Internet can be had via several different satellite services (now there is Starlink too) and the properties in the area all had their own wells. There are some similarities to where my wife and I live and some big differences. We could be self-sufficient for utilities if the grid failed here, we're on a well, internet is via satellite. The big difference, although it feels like we are out there a ways, we're 8-9 miles from Costco, Trader Joe's and Walmart. Amazon delivers to the bottom of our hill but the delivery times are longer than most other people. 

One other thing about Ramah though, as secluded as it feels, both El Morro National Monument and El Malpais National Monument are both pretty close. 

The reader's last sentence, how do you prioritize those items? Chances are you know what role they play in your life and the extent to which they would influence ever making a big change in life or deciding not to. The point of the original post was about being open to the possibility that it is ok to deviate away from the track that most people go on. Plenty of people think they want something only to achieve it and realize it was not what really mattered to them. 

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.

The Grass Is Not Always Greener

The Wall Street Journal took an interesting look at the current migration and demographic problems the state of Vermont is dealing with. The state benefitted from something of a get me out of the city bid during Covid but that has started to reverse due some winding down of the WFH movement, high real estate prices and very high property taxes. If you think about those three reasons, you see they have more impact on younger people which contributes to the state skewing older. 

Forgetting every other moving part, the idea of moving to a less crowded area with a slower pace of life near some sort of natural beauty is going to appeal to a lot of people. That sentiment probably captures how my wife and I felt in our 20's as we set out on a path to that sort of outcome. 

The following comment resonated though in terms of behavior we've seen here in Walker as people have come and gone (this still happens, people move here and do not stay very long). 

This is nothing new. Most urbanites who move anywhere out to the country don't stay there, though they try to initially. Only a few will stay and put down true roots. The dumbest move of all, is those who take over a rural B&B and think it will be quaint and cool.

The idea of making a big change in life, like uprooting to a small town, is a pursuit of what is hopefully a better life or put another way going on the assumption that the grass is greener on the other side of the hill. Things will be better if....we get out of the city or I get that promotion or any others you can think of. 

It takes tremendous self-awareness to discern between running a way from a problem and making a well thought out lifestyle change that truly aligns with what you actually value. Unfortunately, I don't have any secret to share about how to get this right. Maybe the answer lies in taking more of an intermediate approach. 

I've told this story before, make fun if you want, but the catalyst for me going from city kid to semi-rural adult was the tv show Northern Exposure. It gave permission to live a different life than what 24 year old me envisioned. I visited Walker on my second date with my future wife in 1991 and realized it was the answer but we didn't land there full time until 2002. 

It took a while to get here and then a couple of more to find my career groove as an RIA but once I did, I knew that was exactly where I wanted to be. The odds of the grass getting greener were pretty low. There's been the occasional job offer along the way but the autonomy of setting your own schedule is worth a lot to me and anything that hinted of giving that up was non-negotiable. I did side gig at AdvisorShares and there were some schedule constraints related to meetings but I was working from home and while I don't know if they realized, it was very part time for me. 

The most important the grass isn't greener moment was of course saying no to being a partner at my old firm. The partners got in a lot of trouble later and I am 99% certain they are banned from practicing again. I didn't think they were capable of malfeasance or nonfeasance but it was clear we did not align on simplicity. I wanted a small practice and they were trying to build an empire. I still have my small practice and the "empire" has fallen. 

Put in a different context, saying no to them turned out to be preventing a problem I didn't even know I would have.

Looking around a corner or two to prevent or solve your own problems is pretty high on my priority list. The idea of waiting around for them to "fix it" is something I cannot do. Some of the scare headlines lately have focused on changes to the healthcare system that, as bad as things have been, will make it even worse. Will it actually be worse? I have no idea but the risk to us is that it does get worse, that access to healthcare gets more expensive, wait times get longer or any other negative outcome you can think of. 

The healthcare system has been an absolute mess for a long time, I certainly have no brilliant ideas about what to do and again, I don't now if it will get worse now but the risk is easy to identify. The risk is it does get worse. This is part of why I'm kind of a health nut, I've always exercised vigorously but have been learning more about the importance of diet for a long time too to minimize the odds of needing to rely on the healthcare system from some point of being desperately sick, needing care but not being able to get it. 

I think this general approach applies to many or maybe even all aspects of life. If you're 50, you should have at least a general sense of when you want to retire how much you might need (rough number is fine) and where you stand in relation to that number. Is there any sort of problem with your numbers adding up the way you need them to? If you've looked at your situation in this type of manner then you've looked around one corner, starting to figure out what you might do about it is looking around a second corner toward solving your own problem. 

Could Complexity Be Better Than Simplicity?

Torsten Slok blogged about how ineffective bonds have been in terms of providing any return or diversification benefits lately in the context of a 60/40 portfolio. He talked about the need to replace bond exposure and stock exposure too but the point he was making about stocks wasn't too clear to me. He said that "there are years when Treasuries are not the correct hedge against downside risks in the S&P 500" which is a conversation we've been having here for years. 

We talk about several different structures that can potentially replace 60/40 as Slok is referring to it. Some version of the Permanent Portfolio which includes risk parity, lately we've been talking about portable alpha quite a bit and the one that I think is the simplest, and closest to what I do in real life, is getting rid of most or all of the bond exposure and replacing it with shorter dated fixed income that mostly avoids interest rate risk and long bond volatility as well as various types of alternative strategies the might function as bond market substitutes, strategies with some degree of negative correlation to equities or some sort of uncorrelated absolute return ideas. 

Right or wrong, I think of endowment style investing as being a similar to the Permanent Portfolio, not so much quadrants but more like disparate asset class segments which gets us to a paper about endowment asset allocation from True North Institute. 

Based on the following excerpt;

I built out the following leveraged allocation, taking some liberty with shortening the duration quite a bit.

The third portfolio is just the Vanguard Balanced Index Fund (VBAIX). QGMIX is a client and personal holding. These portfolios don't really look anything like what we usually play around with here but the results are interesting. 

Despite all the leverage, Portfolio 1 has a very smooth ride including up a lot in 2022. It's only down year was 2018 with a decline of 7.91%. Both True North portfolios also held up relatively well in the 2020 Pandemic Crash which are the max drawdown numbers in the chart. 

I'm not a fan of leverage but that doesn't mean it can't be used effectively. This leverage in the True North portfolio appears to be effective for giving an adequate return with a very smooth ride as I mentioned. It would take a lot of things going wrong at the same time for this mix of disparate asset classes to have a horrible year, more things going wrong than in a plain vanilla 60/40 portfolio. Maybe this is an exception that proves the rule about simplicity being better than complexity. 

And a quick closing note. One of the Bloomberg pre-market newsletters mentioned the brand new Locorr Strategic Allocation Fund (LSAIX) that we've mentioned a couple of times. The context of the newsletter like today's blog post, looking for bond alternatives for a diversified portfolio. And a couple of tidbits about LSAIX that I picked up. The managed futures sleeve is multi-manager. None of the managers are replicators and the fund can be long and short the same market. For example the fund could be long tin based on one manager's slower signal and it could be short based on another manager's faster signal. The alternative to being long and short the same market would be netting the two out but LSAIX doesn't do that. 

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.

A "Safe" Way To Use A 100/100 Fund?

Yesterday, we mentioned the PIMCO StocksPLUS suite of funds. The PIMCO StocksPLUS Absolute Return Fund seems to play right into what we do here in terms of theoretical portfolio construction. The fund has a bunch symbols, I'm going to go with PSPTX. 

The fund leverages up 100/100, S&P 500 equities and absolute return. Absolute return can be a nebulous concept but the big idea is a low volatility strategy that maintains a relatively even growth rate no matter what is going on in the world. Ideally it would be a very boring hold. Using testfol.io, I stripped the equities out of PSPTX using Profunds Bear Fund (BRPFX) which has been around much longer than inverse ETFs and in doing that, I get the absolute return sleeve compounding at 0.48% per year. I have a feeling that understates the actual return but if nothing else it gives an indication of the behavior of that sleeve. 

PSPTX benchmarks to the S&P 500, it outperforms its benchmark but interestingly it does so with more volatility. The absolute return doesn't reduce volatility which surprises me but that first backtest probably isn't how the fund is intended to be used. In 2022, the first two portfolios were down slightly less than the S&P 500 while portfolios 3 and 5 were down more than the S&P 500. PSPTX also fared worse during the Financial Crisis and the 2020 Pandemic Crash. 

Now, we're getting closer to what we play around with here. Client/personal holding MERFX is merger arb, AQMIX is managed futures, PSRIX is a longer standing floating rate fund with very little volatility that I chose just to extend the backtest. Client/personal holding BTAL is a first responder defensive.

Portfolios 1 doesn't leverage up, it uses PSPTX to allow a larger allocation to PSRIX, more like leveraging down. Portfolio 3 does leverage up, it has 70% in equities, compared to 60% for the others and the numbers reflect the leveraging up to 70% equities. All three portfolios held up much better in 2022, dropping 7, 6% and 9% respectively versus 16.87% for VBAIX. None of them though helped in the 2020 Pandemic crash. Portfolio 3 fell the most. 

Is the leveraging up in the third portfolio worth the extra volatility and the likelihood of larger drawdowns? The concept of leveraging seems to work in this instance with a couple of tradeoffs, there are always tradeoff, so is it worth it? That is of course up to the end user but I don't think the worst case outcome would be catastrophic versus an unleveraged implementation, if something went wrong. The leverage would be a little worse, clearly, I'm just saying it wouldn't be catastrophic.

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.