Barron's Gets The Memo

Our conversation here might be getting some mainstream traction from Barron's with the article The 60/40 Portfolio Isn’t Doing Its Job. It May Be Time to Ditch Bonds. That would have been a more timely prognosis in 2018 or so but that's ok. While anyone having meaningful exposure to bond duration up to this point has suffered, what is likely to happen going forward? My assertion has been bonds will continue to be unreliably volatile and have been writing for years that I want to avoid that headache. 

Honest to God, if you're cut in half on TLT or close to half in TLH, even AGG is down 20% from its high, I don't know what the answer is. I don't think the price can recover but eventually you'd get back to even on yield but what if rates go up further from here, the hole gets deeper. The tradeoff for these folks is permanently impairing their capital versus from here going forward, getting the same yield for now (or close to it) with essentially no volatility switching short dated treasuries or just a little volatility in something like bank loans. The bank loan fund I use has a standard deviation of 4.81 according to Portfoliovisualizer versus 14.09 for TLT and I doubt my bank loan fund is unique from the others. 

The three catastrophe bond funds we talk about here occasionally have standard deviations in the twos with very high yields, higher than bank loans. For blogging purposes we build portfolios with pretty large allocations to cat bonds but in real life, something yielding 10 or more percent should not dominate the portfolio, that kind of yield above treasuries has risk even if the consequences don't manifest very often. If you're wondering, there's not much exposure to the fires in Los Angeles County. Wildfires, and tornadoes too, are referred to as secondary perils and while it's not correct to say cat bond funds have zero exposure to secondary perils, they typically do not have much. 

If you care about using bonds to manage volatility, arbitrage strategies seems to do that, they trade in a manner that I think people hope bonds will trade. The names below don't even matter, this is what most of them look like. I think that's a great result as a volatility buffer but don't expect any sort of meaningful yield.

We talk frequently about horizontal lines that tilt upward. That's what the above three do and there are other niches available through funds that look similar but are vulnerable to different things. Merger arb has wobbled a couple of times over the years when rates move up which sometimes is perceived to threaten deal financing. It's never become a serious problem in the more than 15 years I've been involved with merger arb beyond just what I said, a wobble. 

The article recommended the iShares 3-7 Year Treasury Bond ETF (IEI) as "a good core position." A comment I would point toward advisors first is if you want this part of the curve, just buy individual issues. It should be very easy to do on whatever platform you're using. IEI is down almost 15% and if rates go up, that fund could keep going down with no par value to return to. If you need to rent something for a couple of months, ok but as a real holding, if you buy a five year note and the timing stinks, it will go back to its par value pretty soon. If you're a do-it-yourselfer, buying individual treasuries is very straightforward. Sure, other fixed income sectors can be trickier for several different reasons but not treasuries. 

The other day I made a comment in passing about having a watchlist of maybe 50 different alts in various categories that I monitor/follow. There was a surprising amount of interest in that list. One reader posited that I've probably mentioned them all in various blog posts which is correct. I pulled the  number 50 out of the air, turns out it's exactly 50 which make me snort out loud when I counted. 

I'm not going just rattle off the names because quite a few, I'm certain I will never use but there are categories. The list includes quite a few managed futures funds. No fund in a category can always be best but tracking a few helps me better understand the manner in which I do access the space. There are several macro or macro-ish funds, quite a few actively managed ETFs that try to beat the S&P 500, various derivative income funds, commodity funds, tail risk, all the cat bond funds, one odd ball is the CNIC US ICE Carbon Neutral Power Futures ETF (AMPD). Hell if I know what AMPD really does but it isn't correlated to anything. There are also some oddball fixed income proxies that I think are worth tracking. 

Finally, big news for Walker Fire.

We have a new to us Type 1 Engine, a truck for structure fires, on its way to us from Pennsylvania. As I write this, it is in Tallulah, LA and should be here Monday or Tuesday. A couple of years ago we got a grant for a brand new Type 3 engine, wildland truck that looks very similar to the Type 1 but with different equipment and capabilities. The Type 3 was hopefully going to bring in revenue from out of area assignments so that we could start upgrading older parts of the fleet. That plan worked and we had to start with out Type 1 which because of its age is now heavily rusted. 

I am beyond excited. We're going to probably keep it this color but it does need some work. The tires are out of date for the standards we use out here and we need to swap out the SCBA seats in the cab. And even if we do stick with this color, we'll need to take of the graphics on the truck. 

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.