Getting The Bond Effect Without Bonds

Morningstar has a writeup about interval funds that led me down a little bit of a rabbit hole looking at a couple of interval funds that focus on infrastructure. I found three of them via Intervalfundtracker. I would guess there are more than three but that's what they had.

• Meketa Infrastructure Fund (MAFIX)
• Cantor Fitzgerald Infrastructure Fund (CAFIX)
• Stepstone Private Infrastructure Fund (STDUX)

Interval funds usually have a mutual fund-like symbol but they cannot be sold anytime you want. Usually there is a limit to how much of the fund can be redeemed so if you had to get out for some reason, it could take a long time.

The link in the name of two of the funds above goes to a schedule of holdings. I couldn't find one for CAFIX. MAFIX is supposed to have 80% in private investments, 10% in cash and 10% in publicly traded securities but it looks like the weightings to cash and public companies is higher than the stated targets. The Stepstone fund appears to be all private holdings. 

IFRA has been much more volatile than the others and IGF obviously has been the best performer. If an infrastructure fund owns a lot of utilities as some do, it will be less volatile and if it owns a lot of industrial stocks it should be expected to be more volatile. If CAFIX targets more utilities then the modest return with less volatility is what should be expected or we could be seeing the result of infrequent marking to market or as Cliff Asness calls it, volatility laundering. Utilities are the largest sector in IFRA but industrials, materials and energy add up to more. 

It is my nature to want to learn about this stuff. The ETFs are competitive with the interval funds, so far. That could change, If you think the managers of the interval funds might know what they are doing then we might be able to learn something new about portfolio construction even with delayed reporting. 

Speaking of things that are worth learning about even if you never use them, Calamos just launched an Autocallable Income ETF (CAIE). It appears that it is somewhere in the defined outcome/buffer/derivative income fund realm. The literature refers to it being like a structured product. I signed up for a webinar to learn more but it purports to have income and low volatility. Based on reading what is available, it makes it seem like it could be similar to catastrophe bonds.

Finally, as we look at getting the bond effect without bonds, I wanted to revisit the Innovator Defined Wealth Shield ETF (BALT) which is a buffer fund. During the April panic, I blogged about whether BALT was malfunctioning. I got feedback on Twitter that it should square up at the end of the quarter. I'm not sure if it squared up or just got lucky in the market but the April drop has been recovered. The decline was very modest but more than someone might expect at 3.4% per Yahoo. 

I am a hard no on using buffer funds for equity exposure but there is something to them, BALT anyway, as a fixed income substitute. 

Using BALT instead of AGG has given a higher compounded return with less volatility. The outperformance isn't solely because of 2022, VOO/BALT outperformed in partial year, 2021, 2023 and 2024. This year it is trailing a little bit.

The volatility of BALT seems similar to SHRIX but obviously SHRIX which is catastrophe bonds has outperformed considerably. That big drop in SHRIX in late 2022 was from the threat of Hurricane Ian but it turned out there was no triggering event from that one. I threw in XYLD which is a long standing covered call fund. I don't think that one works in the context of a bond substitute. It looks like bonds on the way up but it looks like stocks on the way down. The 3.4% drop for BALT appears to me to be it's largest drop and as Dennis Eckersly would say when he was calling Red Sox games, AGG goes down 3.4% "just to stay in shape."

This last backtest has interesting results. As great as I think catastrophe bonds are, I wouldn't put anywhere near 40% in them IRL. I wouldn't put anywhere near 20%. The point is that BALT and SHRIX are just two examples that could be blended in with others that have similar attributes and maybe CAIE will too, we'll see. Having four of these that have different risk factors, weighted at 10% each seems like a reasonable risk. 

I don't use BALT and I am unlikely to do so but the exercise of looking for a different effect than the stated objective is worthwhile.

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