Tuttle Capital put out a report that covered a lot of ground. There are two things I wanted to focus on from the report. First was his dour conclusion about 60/40 going forward, he calls 60/40 a lie, using AI. Bonds are the problem says his AI queries. There are problems with correlation which we cover all the time as well as now price inflation which sets the stage for higher interest rates. My focus has not been to try to predict what interest rates will do but to point out (many years ago) that rates at all time lows and going lower take on enormous risk and now today pointing out the longer dated bonds and bond funds have equity like volatility and the correlation of bonds to stocks has become unreliable.
A more interesting observation he makes is that "the simplistic, passive nature of the 60/40 approach inherently lacks strategic adaptability. It doesn't adjust dynamically to volatility or exploit market anomalies effectively." There is certainly something to that but it implies a dichotomy of passive 60/40 or something very actively managed without other paths. I don't think Tuttle actually believes that there are only two ways to go but I do take that from the passage.
On these AI queries they run, they ask it to assign a ranking out of ten so 8, 9 or 10 out of 10 is good and lower numbers are not good. ChatGPT 4.5 gave plain vanilla 60/40 a 2/10 going forward. There other reasons cited that you can see in the report. The odds are pretty good that plain vanilla 60/40 will still get the job done over longer periods but I would caution that the ride has been much bumpier since late 2021 and will stay that way for a while.
Adaptability is a great word for portfolio construction and ongoing management. I don't believe adaptability has to mean very actively trading a portfolio but there will be occasional trades that need to be made. In terms of across the board trades in the last few months that fit this discussion of adaptability, I sold one stock that I believe is vulnerable to tariffs, I added an inverse fund around the election and I bought a gold ETF a few weeks ago. The trades were an attempt to adapt to changes in the macro environment. None of them were hideously wrong out of the blocks but it's too soon to declare victory with them.
The Tuttle report also included a model portfolio based on their HEAT ideology which is an acronym for hedges, edges, asymmetry and themes. The asset allocation was 10% to hedges, 30% to T-bills for asymmetry but that seems more like optionality to me, 9% to edges which included one broad stock picking ETF, a derivative income fund and a short volatility product. The other 51% was spread across about 20 thematic ETFs including countries, tech related niches and crypto. It's probably not ok to list out the ETFs he used but you can see for yourself of course but I want to try to replicate the asset class exposures.
CASHX is the T-bill/asymmetry/optionality exposure, PUTW, CWS and client/personal holding PPFIX are the edges sleeve while client/personal holdings BTAL and CBOE are the hedges. For the themes, I just chose the seven stocks and ETFs from the basic client portfolio, weighting five of them at 7% each and two of them at 8%.
And the drawdown chart.
The results are surprising to me. Although it has a better growth rate, my version of HEAT has lagged in five out of nine full and partial years. There might be a selection issue if you grant me that BTAL and CBOE are effective tools for defense.
Random Roger HEAT being less volatile makes sense given the cash position and the 10% split between BTAL and CBOE. There is for sure 62% in equities between the themes, edges and CBOE. I would not include BTAL as being equity beta and PPFIX while a bullish strategy has almost no equity beta.
Picking themes can be tricky. My version of HEAT doesn't cherry pick themes from the portfolio, it's all of the holdings that I think are themes. For example, JNJ is not one I consider a theme but NVO is. NVO has been a great hold for most the the period studied but of course the price has struggled for a while now. Putting half of a portfolio into themes is a big bet versus a little more into broad holdings, combined with themes as being less risky.
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2 comments:
Roger, you state it was surprising. I am not sure if it is surprising good or surprising bad. Maybe I’m too dense to read the following comments as an interpretation….
Sorry that wasn't clear, I am surprised that the volatility and beta were that much lower. In terms of the thematic names, volatility management is not the first objective, yes it has BTAL and CBOE which along with the cash help but, I don't know I may not be articulating it very well :-)
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