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.
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