Back To The Lab Again

With all the blog posts lately about experimental portfolios and exploring things like return stacking, capital efficiency and leveraging down (I think leveraging down is a phrase I can take credit for) I think I might change the name of this site to Random Roger's Portfolio Lab.

This post will focus on what I think are sophisticated outcomes from a very simple portfolio using funds we talk about all the time. Here's the starting point.

And for disclosures, BLNDX and TAIL are client and personal holdings. VBAIX is of course a proxy for a 60/40 portfolio. BLNDX started trading pretty close to Jan 1, 2020 which is a short time period but it has had two serious tests in its time with the 2020 Pandemic Crash and this year's bear market. Here are the results.

 

The portfolio stats are very strong, the average annual return is 345 basis points better than VBAIX with a noticeably lower standard deviation. The chart provides a good visual for the smoother ride provided during the 2020 Pandemic Crash and this year's bear market. Note that in 2021 in lagged 100% equities by a mile but was ahead of VBAIX by 363 basis points. Important to understand that it outperformed VBAIX with less volatility. 

One reason to look at these experimental allocations is that I believe bonds will be a source of increased or un-bond-like volatility for awhile but not in a way that will provide a reliable buffer for equity volatility. I am not trying to predict what interest rates will do, just making an observation that owning them, beyond short maturities, is now more difficult and less protective. 

Portfolio 1 is essentially 65% equities; 50% from SPY and 15% from BLNDX (that fund is 50% stocks, 50% managed futures). Let's redo this a little to go with a longer standing managed futures fund with RYMFX, another fund we've been talking about for years. Keeping it apples to apples, we'd have 65% in SPY and 15% in RYMFX. The result goes back to when TAIL first listed.

 

RYMFX isn't so great I don't believe but am sticking with it to be consistent with other blog posts. The portfolio stats are fine but what is really surprising is that it has the identical return as VBAIX with a standard deviation 199 basis points lower than VBAIX. So equal return with less volatility relying on a 15% allocation to fund that might not be a leader in its space. 

To the top of this post, I believe we have a sophisticated outcome with a very simple portfolio comprised mostly of plain vanilla equities with a little help from simple complexity as we've described the alts I prefer to use.

One idea from the earliest days of the blog, an obvious observation more like, was that the evolution of investment products would make it much easier for individual investors inclined to spend the time to create sophisticated portfolios pretty easily. The alt strategies employed are easily understood. Managed futures goes long things in an uptrend and short things in a downtrend and the result is a low correlation to equities. One sentence and you have the whole idea. TAIL offers crash protection with put options. That's it. 

Back to the real world, 20% in TAIL is probably too much. When the S&P 500 was about 20% above it's 200 day moving average, I added in SH which is an inverse S&P 500 ETF. That is an enhancement to the 200 DMA strategy I have always used that I picked up ages ago from either Bespoke Investment Group or from Paul and Justin when they were still at Birinyi & Associates. I had that in my back pocket for years and it came into play almost a year ago and that helped in late 2021 and into the start of this year until I sold it when the SPX hit 15% on the way down. I don't know if I would ever go 20% in TAIL but the time to consider it would be some sort of seriously over-extended situation similar to SPX 20% above its 200 DMA.

After a large decline, right now were probably somewhere in between, maybe the large allocation earmarked for TAIL when the market is overextended could go into an absolute return fund or maybe 15% to absolute return and just 5% to TAIL. The point is you don't need a lot of crash protection after a crash and using absolute as described in the previous sentence allows avoiding the bond market in case I am right about unreliable bond market volatility. 

This is all very simple and even if you disagree, there certainly are very few moving parts. I think many people even if not everyone, could wrap their heads around 3 or 4 funds.