Yesterday, I referenced a chart comparing the returns of 100% equities versus 50/50 equities/bonds and 50/50 equities/low correlating alternatives. Here's another version of that chart from the Man Institute.
The timeframe in today's chart is more useful because it gets into the period where retail accessible funds started to become available. The title of the Man article is Why Alpha Matters for Retirement Savers and in it, they make their case for portable alpha. Portable alpha combines plain vanilla exposure with alternatives in such a way that leverages up. The idea is that you get the full beta (stocks and bonds) return with just a portion of the portfolio often with futures or some other form of leverage, leaving dollars left over to add alternatives all in pursuit of better nominal returns or better risk adjusted returns.
There are funds that provide the plain vanilla exposures, with leverage, from WisdomTree, ReturnStacked and PIMCO, there might be others too. The PIMCO StocksPLUS suite of funds are the oldest ones I am aware of.
The starting point for the Man article is that defined contribution investors need exposure to risk assets for more years and portable alpha to add alternatives, they say, is a better way to do it.
PSLDX is the PIMCO StocksPLUS Long Duration Fund. I used AQMIX, AQRIX and client/personal holding MERFX because they've all been around for a while and BTAL is also a client/personal holding.
PSLDX is 100% stocks and 100% long bonds so the 50% allocation in Portfolio 1 plus 50% cash could be thought of as leveraging down to a capital efficient portfolio. The results should equal the third portfolio which is 50% stocks, 50% long bonds and they are pretty close even if not exact. The second portfolio is close to what Man has in mind, a full 100% to plain vanilla beta via PSLDX and then 50% worth of lowly correlated assets on top. The fourth portfolio more closely aligns with what we do here. The "leverage" comes in by using the negative correlation to dial up the equity exposure slightly.
I think some of the portfolio stats are distorted. Portfolio 4 has middling stats compared to the others but in 2022 it was only down 8.23% versus 20% for Portfolio 1, 17% for Portfolio 2 and Portfolio 3 was down 22%. Those three all have long bond exposure of course and as we've looked at countless times, long bonds are very volatile. Also PSLDX is capable of some huge drawdowns, dropping 43% in 2022 and 33% in 2008. It also fell 37% in the 2020 Pandemic Crash but it took that back in just four months.
The point is, holding that fund is likely to be a very wild ride. Yeah, yeah line item risk but that is easier to say than it is to live with when a fund comprising half your portfolio is down 40%. Yes, PSLDX has always come back to make new highs but holding a fund like that without have exposure to a couple of very reliable first responder defensives would make those drawdowns very painful.
A final note is that we didn't really recreate the results from the first chart in today's post but I think that is because of how few funds existed 15 years ago versus now. There's no way to know if repeating this same study running from 2015 to 2030 after a flurry of funds came out in the mid-2010's might get us closer but we can check back in five years.
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.
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