The Absolute Convertible Arbitrage Fund (ARBIX) compares itself to the index underlying the iShares iBoxx High Yield Corporate Bond ETF (HYG). These tables are in their latest email update.
Testfol.io has the following numbers for five years.
I wouldn't be too concerned about the different numbers because they both paint a very similar picture. The returns have been similar but ARBIX gets there with much less volatility.
Sizing alts correctly is a big topic around here. I suspect my weighting to high yield is lower than normal so I asked Copilot and Claude what a typical allocation is in a 60/40 portfolio and they said 12.5-25% of the fixed income portion (so topping out at 10% overall) and 5-15% respectively. I'm more inline with Claude's numbers. ARBIX is not in my ownership universe but 10% of the overall portfolio would be too much for me but 5% would be fine.
Reducing volatility where it can be done is something I am always interested in. That is not ideal for certain equity sectors like tech, discretionary and some others but makes sense in fixed income or strategies that are fixed income substitutes. ARBIX has no yield so it is a fixed income substitute which has its pros and cons.
Adding a 50/50 mix with portfolio 3 has an interesting result. If someone was 10% allocated HYG, having 5% in each has done a little better than the two funds individually.
The other day we looked at the Lazard Global Listed Infrastructure Portfolio (GLIFX). The fund has a good track record and a 5 Star rating. I wrote the post because I got a marketing email from Lazard which nudged me to check out the fund. Maybe the reason the email was pushed out was because Lazard came out with an ETF version a couple of days later. I don't believe it is a conversion but the managers are the same and it appears to seek out a low volatility outcome like GLIFX. The fund is the Lazard Listed Infrastructure ETF (GLIX). Please leave a comment if I have wrong about this being share conversion or different class of the same fund.
Rob Forsyth from Lazard was on ETF IQ on Monday to talk about several things including GLIX. Eric Balchunas noted that the Global X Infrastructure ETF (PAVE) has become the largest thematic ETF, probably because it has compounded at 26.5% for the last five years per Bloomberg's data. PAVE has been a client holding since early 2021 and it is up a lot.
Infrastructure can go in a couple different directions in terms of sector composition. One way is to lean into utilities. iShares Global Infrastructure ETF (IGF) currently has 40% in utilities as it's largest sector. The other way it can go is more cyclical with industrials and materials stocks. A fund that goes heavier into utilities is going to have less equity beta and a lower standard deviation than a fund that is heavy in industrials and materials.
PAVE has a higher growth rate because it should have a higher growth rate. I bought it believing it could outperform the broad market based on its sector makeup which it has done in six of nine full and partial years of trading. The tradeoff is to realize the drawdowns will probably be larger, including a 44% decline in the 2020 Covid Crash, which has been the case except for 2022 which I think of as being anomalous.
Having the correct expectations for what a holding will do is crucial for portfolio success. Buying PAVE because you expected it to have defensive attributes like GLIFX would have been disappointing over and over. PAVE was down 25% in the April panic.
The success of buying PAVE has not been the performance, it has been in understanding what the fund should do.
I threw SPDR Utility Sector ETF (XLU) into the chart because GLIFX and IGF are utility-ish but XLU's performance has been skewed for many years by the strong results from client holding NextEra Energy (NEE) which currently has an 11.5% weighting in XLU and has compounded at 13.9% in the period studied. Any time you see a study from the last 20 years that relies on utilities, assume it is favorably skewed by past results from NEE until proven otherwise.
There was a fund that came out in the early 2010 that equal weighted the ten S&P 500 sectors (there were only ten back then) and the backtest looked fantastic. Utilities via XLU had a 10% weight in the fund versus a 3% weight in the S&P 500. It probably is not correct to say that NEE alone was the source of the glorious backtested returns but I bet it did a lot of the heavy lifting.
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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