A lot of good stuff today starting with the Excess Returns podcast with Jack Forehand and Matt Zeigler. They did a best-of with clips of various people weighing in on changes (or not) to 60/40. Quite a few of the ideas are things we've been talking about here for many years so while this might just be a confirmation festival for me, I would say that some of what they talked about added some nuance to the conversation we have here.
Bob Elliott said that 60/40, with the 40% in bonds was optimized for the 40 year bull market in bonds that ended in late 2021 and that the next 40 years will be different. We need to think about wider outcomes going forward which is what we are continually working on here. Other than 1981-2021, bonds never did anywhere near as well which brought up the question, what if 60/40 was just luck? I've never thought of it that way before but it would undermine a lot of assumptions.
Rick Ferri was in there. He said the industry wants to make portfolio construction complex, that complexity is job security. There is absolutely truth in that statement. I try to be consistent in saying that just holding onto an index fund no matter what is clearly a valid strategy but like any valid strategy there are drawbacks. Ferri is very much index fund and hold on, my process is a lot of simplicity hedged with a little complexity with bits of process from various sources added in over the decades and you probably have your own process that works for you.
Cliff Asness was also featured, talking about using higher volatility diversifiers in smaller weightings. BTAL and SH fit that bill as would some VIX and tail risk strategies. He said most products target modest volatility which would include merger arbitrage and macro strategies. Managed futures and equity long/short have a foot in each door and times displaying different volatility characteristics.
Getting a little more in the weeds, he said that allocating to alternatives with too little volatility by pulling from equities will result in a lower Sharpe Ratio but higher volatility alts can improve Sharpe Ratios and that small weightings will have trivial impact when they do poorly. If you've been reading me for a while, you've seen me talk about a little bit going a long way forever which is what Cliff is saying. I do prefer to incorporate alts with different volatility characteristics into the portfolio which is a point of differentiation from Cliff's comments on the pod.
I've seen a couple of Tweets lately from Karan Sood who as best as I can tell, is one of the inventors of buffer funds. He appears to be responding to the AQR takedown of the concept from a few weeks ago. Sood put together a backtest for a long but worthwhile thread.
Testfol.io doesn't show SPRO as being the symbol for a buffer fund. Gemini thinks that BUIGX is the oldest 10% buffer fund so I took that a built the following.
Using BGUIX, I could not recreate the result that Sood got but the time frame is different. The reason I went with 25% in client/personal holding BTAL is that I was trying to match the volatility of 100% BGUIX. The big conclusion from AQR is just own less equity to get the same result as a buffer fund which I generally agree with but I also believe that some index/BTAL mix creates the effect of lowering volatility without capping the upside of the entire portfolio like with a buffer fund. Sood's argument focused on betas not being static which is correct of course but I think that has far less importance than having less equity or adding BTAL in some weighting.
Alpha Architect hosted a podcast featuring their model ETF portfolio which is a mix of their funds and a few outside funds. They said they only have one model but in different weightings as follows.
For this post, let's work with the 60/40 version to be consistent with most other posts and see if we can get anything interesting from their idea. On the surface they have very little in fixed income. SCHR is straight fixed income with some duration, that fund was down about 12.5% in 2022. We've talked about Tail Risk CAOS quite a few times. It is mostly box spreads which is a T-bill proxy with a couple of different put overlay strategies mixed in. I've described it as possibly acting like a tail risk fund in fast events but that in smaller events it may not, I will say they appear to have solved the bleed issue associated with other tail risk strategies.
HIDE is trend-like but it is either in real estate via VNQ or it's not and it can also be in commodities or not, based on the trends of each so it looks at far fewer markets than typical managed futures. Right now it is VNQ, SCHR and T-bills. So the model has a heavy weight to alts if you think CAOS and HIDE are alts. They spent a lot of time differentiating between slow declines and fast declines which we've been talking about forever here and wanting defensives to respond to each one.
Alpha Architect believes in momentum and quality. The dividend factor is not the same as quality but maybe it's quality-ish? ACWX is certainly simpler than using three ETFs for foreign exposure but may not be better. BTAL as a proxy for CAOS speaks to Asness' point about lower weightings to more volatile alts. BTAL is far more volatile than CAOS and I believe more reliably responsive to declines. AQMIX for HIDE is just a straight across the board trend for what they think is a variation on trend and TFLO instead of SCHR to remove interest rate risk.
In 2025, their model is up 1.57% through yesterday, the replication is up 2.79% and VBAIX is down 1.71%.
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2 comments:
WSJ article on dividend strategy: https://www.wsj.com/finance/investing/dividend-strategy-yield-portfolio-profit-9696d390
thanks for the link
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