Blending Factors

Over the last few days I've fished around looking at multi-asset ETFs that I perceive are intended to be either one fund, portfolio solutions or the major core holding with a little room left for maybe alternatives or thematic exposures or whatever. Often, these funds have a lot going on under the hood and it seems that very few are adequate replacements for the benchmark Vanguard Balanced Index Fund (VBAIX). If an investor wants just one fund that targets 60/40, I do not, most of them simply are not better than VBAIX. There could easily be a role for some of these other funds with a smaller allocation to a more involved portfolio though.

In working through some of these, I circled back to the Leuthold Core ETF (LCF) which I wrote about in more detail in July. By my count it has not quite 60% in equities, 21.5% in fixed income including the iShares 1-3 Treasury ETF (SHY), 9.9% in cash, almost 6.5% in inverse equity funds and then a little bit in euro and yen ETFs. When we looked at in July it had a little Bitcoin. The asset allocation numbers are similar to what they were when we looked three months ago so comparing it VBAIX makes some sense.

Since inception, LCR has compounded at 8.52% with a standard deviation of 10.16 compared to 8.62% growth and 13.10 standard dev for VBAIX. LCR has lagged every year but been close to VBAIX except for 2022 obviously when it outperformed by 930 basis points. If we go the rest of the decade without a meaningful decline, which seems unlikely, then LCR would probably continue to lag but be close most of the time. Lag most of the time but close with real defensive properties is very good outcome for a fund.

I wanted to try to figure out how to work LCR into a robust backtest and think I figured something out. A ratio of 65% Invesco S&P 500 Momentum (SPMO) and 35% LCR just about equaled the return of the S&P 500, the blend was better by 26 basis points, but with a standard deviation that was lower by 277 basis points which I think is a noteworthy difference. 

Portfolio 3 simply takes that last 20% and splits it between TFLO and SHRIX and the benchmark is VBAIX. BTAL is a client and personal holding. 

The three generally outperform by 300-400 basis points and the standard deviations are quite a bit lower. The long term results, as long as they can be for LCR's age, are of course compelling but as you can see below, anyone holding this portfolio needs to be prepared to lag at times. 

If someone had put some version of this portfolio on as soon as LCR listed in early 2020, they'd have been behind by a lot by the end of year and it would have been easy to throw in the towel. With some time under its belt, I think we have some expectation of LCR as I said above. Jumping right in, there probably would have been no reasonable expectation of what LCR would do. If you actually put 17.5% into one fund, you probably should have some sort of expectation for what it will do, in this case I think that is lag some but be close and then offer some defense during a decline. You already have some idea of what a broad based index fund that isn't the S&P 500 will do....sometimes it will be ahead and sometimes it will lag. In ten full and partial years, SPMO has lagged the S&P 4 times and outperformed 6 on the way to CAGR that was better by 232 basis points. In a different ten year window, maybe SPMO would lag a little but it will very likely be close. 

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