Barron's On The Death Of 60/40

After an extensive and exhaustive investigation, Barron's is reporting that The 60/40 Portfolio Is On Life Support and offered ideas from four different money managers on how to overcome the problem. Two of the four said buy more equities so we won't spend time on those. 

Rick Friedman from GMO was quoted in the article with a mix of very short term thoughts and longer term ideas. He suggested the following which is the same allocation used by the GMO Benchmark Free Fund (GBMIX).

• 28% Japanese value equities (short term I would say)
• 15% US value equities 
• 8% other equities (the article wasn't crystal clear on this point)
• 17% into bonds
• 32% into alts like global macro 

GBMIX is a three star fund which has compounded 498 basis points less than VBAIX and 743 basis points less than the Permanent Portfolio (PRPFX) although it was only down 2.33% in 2022. I was flying a little blind but I built the following allocation per Friedman's comments about value and I threw in CWS because it is an active fund that has been around for a while. 

And compared as follows. 

We've probably all been spoiled to not be impressed with an 8% CAGR but that is pretty good considering how far behind the S&P 500 both EWJV and IVE have been. The volatility of the Homemade GMO Allocation is a little lower but not heroically so. The Calmar Ratio is quite a bit better but the kurtosis is not as good as the others, I would note that the Homemade GMO Allocation was only down 3.08% in 2022. 

The results and how the different assets blend together in the Homemade GMO Allocation are interesting. It would be tough for me to put that much into Japan and 32% into MBXIX is fine for blogging purposes but I wouldn't even go 1/3 of that amount into any single macro strategy fund. 

The other interesting 60/40 alternative idea was from Jim Bianco. In addition to all the economic commentary, Jim manages the WisdomTree Bianco Total Return Fund (WTBN). It's a bond fund that looks very similar on the chart to the iShares Aggregate Bond Fund (AGG) but WTBN has been the better performer. 

Jim says investors need bonds (agree to disagree) and would maintain that 40%, he would would put 10% in cash. For the 50% to stocks, he would put 20% into the S&P 500 and then dial up the risk with the last 30% including Mag 7, I'd tweak that to themes and "hot sauce," and crypto as some examples. If you decide to play around with Jim's allocation yourself on Portfoliovisualizer, don't focus on the CAGR you get, pay attention to the standard deviation and other portfolio stats. What does injecting 30% of high volatility do to your numbers and do you think you could handle living with that volatility level? Something like 10% or 15% with enough diversification would be easier to endure, 30% seems like really a lot if I am interpreting his comments correctly. 

When talking of bonds, I often talk about how I think people hope their bonds will do versus what they actually do. The following chart compares WTBN, AGG and two proxies for what I think people hope bonds will do. 

What would you rather own? The argument here against bonds has not been about predicting what interest rates will do it's about the reality that bonds with duration now have a volatility and correlation that are unreliable which makes them less effective as diversifiers.  

A follow up to yesterday's post about the ReturnStacked ETF in Canada that blends equities, bonds and global macro where I said maybe there will be such a fund in the US. Well, there already is. I spaced that RDMIX changed it's strategy to become the ReturnStacked Balanced Allocation & Systematic Macro Fund, so it is a mutual fund, not an ETF.

Finally a new fund alert for the Simplify Currency Strategy ETF (FOXY). Simplify are the kings of complexity and while I pick on quite a few of their funds, a couple of them work very well so something like FOXY is always going to catch my attention. 

FOXY does two different things related to currency. It goes long four high yielding emerging market currencies while shorting four lower yielding emerging market currencies which is the carry trade part of the fund. Then it will go long the three G10 currencies with the "strongest yield momentum" while shorting the three with the "lowest" yield momentum which is the mean reversion part of the fund. 

The fund is pitched as a differentiated return stream and I buy into the idea on day one that it might do that. Currency pairs trading is differentiated generally from equities. Obviously I have no idea how this fund will actually do but I know enough about this market and this sort of trading to be curious. 

A comment I make frequently is along the lines of sifting through a lot of funds/strategies and occasionally adding one into the portfolio. Maybe FOXY pans out or maybe it doesn't, who knows, but the idea is worth following to see. 

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