Set & Forget? Morningstar Has Thoughts

Christine Benz wrote about How to Build a Portfolio You Don’t Have to Babysit. She cited research from Jeff Ptak that found that if mutual fund managers didn't make any trades, they just held on to their original portfolios they would have had better results than the funds actually had. Benz supported the conclusion saying she'll "take a policy of benign neglect any old day." 

I am sympathetic to the point and depending on what is chosen, it can be a valid approach for the end result even if there is a little pain along the way. Benz talks about target date funds for example. I am not a fan but they can absolutely get the job done. I have never met anyone who liked target date funds. My sample size is small but the few I've met, I've never heard anyone who owns one say something positive. They generally did poorly in 2008 and in 2022.

As we've talked about before, there are quite a few individual stocks and narrower ETFs in client accounts that have been there since I started back at the old firm in 2004. 

This Canadian bank, the name is unimportant, is one I have owned for 22 years. It's has always had a good dividend but has been very unremarkable the vast majority of the time. It's had a few years where it was up a lot including last year and a few years it has been down a lot on the way to compounding at a pretty good clip. The role it plays is exactly what I hoped it would do when I first bought it, yield and not a lot of drama (there's been some but not a lot). I've literally never had a client ask about it. 

The only reason that I think someone would have sold it would have been impatience. 

If you use any individual stocks have you held them for a very long time? The more often someone checks their portfolio the more difficult I suppose it is to just hold on because great stocks will go through some terrible periods. 

If you use broad based index funds, why would you ever need to sell beyond rebalancing and meeting cash needs? The reasons people sell have to do with short term thinking that they cannot see beyond like being afraid of the tariff decline. 

We spend a lot of time here experimenting with how to build set and almost forget portfolios, it certainly is intellectually appealing to have something that will give a decent return and be robust in the face of turmoil. Some sort of domestic equity exposure (broad based index or narrower holdings) some sort of foreign equity exposure (broad based index or narrower holdings), a couple of very boring holdings (not bonds with duration) that will offset equity market volatility and a small slice to negative convexity will probably get it done a little better than a target date fund but you still can't completely ignore it. 

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.

Understanding The Tape

Here's a bunch of items that point to how narrow the recent lift in equity prices has been.

They are all going down except tech and communications.

Since the start of 2023, healthcare as measured by XLV has compounded ay 3.7% versus XLK for tech which has compounded at 35%.

Semiconductors have never been this large in the S&P 500

This next one is difficult to conceptualize...at least for me it is.

I don't know if this specific 70% datapoint is correct but we've all seen items like this. 

You probably have heard the phrase don't fight the tape and I don't want to do that but I think there is value in understanding the tape which is what these snippets help us do.

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.

Getting Defensive Without Selling

GraniteShares launched several new funds in its YieldBoost suite. The basic idea is that the funds sell puts on levered single stock and index funds. The newest ones are industry funds and one that references long term bonds. 

The funds are pretty popular with AUM that is just shy of $500 million. So not wildly popular but pretty popular.

YSPY is the YieldBoost that references the S&P 500 and SPYI is a lower yielding covered call ETF that also references the S&P 500. The distribution amounts for YSPY are generally going down as the price has gone down. Early on, most of the distributions were in the $0.18  range and now they are in the $0.14 range. 

The price only return shows it has dropped by more than 1/3 since February, 2025. It's too linear to just assume that an investment on day one of the fund will be vaporized in another two years but it creates a little context that it is eroding quickly and anyone trying to build a strategy to bridge to the next financial milestone should probably keep that in mind. In real life, the fund will reverse split at some point and new money will come in unless GraniteShares ends up closing the fund. 

The question that I think is relevant is whether just spending money out of an account sitting in cash will deplete slower or faster than spending YSPI's distributions. Taking the difference between the total return and the price only return and starting with $10,000 someone in bridge/depletion mode would be a little head having spent the distributions versus sitting in cash. Obviously YSPI is vulnerable to declines in the market but since it's inception, the declines have all been very short and recovered quickly. 

I'm not making the case for using crazy high yielders but there is a siren's song to all of the derivative income funds. Simply labeling them as bad is less productive then understanding how they actually work before buying one. 

There is a new fund from ReturnStacked that combines foreign stocks and managed futures, levered up like the other funds in its lineup. The fund has symbol RSIT and allocates 75% to SPDW for foreign exposure and uses MSCI EAFE futures to complete equity sleeve and then adds managed futures on top of the equity exposure. 

If you look at yesterday's post about how well most managed futures funds have done since the low of the Tariff Panic then you can imagine that the ReturnStacked funds that use managed futures have also done very well. 

I'll close out with some real portfolio stuff. The S&P 500 has been ripping, making new highs. So is that it, is the war over? More precisely, have markets stopped caring about the war? Obviously I have no idea. I added a little bit of an inverse fund in early March and then sold it early last week. During that stretch I sent out an email or two to clients saying what I always say which is that without knowing how serious this (the Iran war in this instance) is, we do know it will end at some point and then the market will start to work higher, eventually making a new high. The only variable is how long that all takes. 

This time around it didn't take too long...assuming it's over as a market event. The purchase from early March was a tweak that would have grown to be a big helper if something hideous had happened in the market. 

I am not convinced it is over but will be happy to be proven wrong. Nothing about how this was done makes sense to me, I don't know how you believe the announcements coming from either side and if you can make an argument for an outcome that is better than returning to how things were before it started, please leave comment. The big thing now seems to be trying to negotiate free passage through the Straits which we had before. I am skeptical that we get an outcome we want regarding uranium enrichment but will be glad to be proven wrong there too. 

Faced with uncertainty it is now very easy to make portfolios very defensive without needing to sell anything which is a great offset to being wrong.

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.

What Happens When You Replace SPY With XLV?

First, an update on the the Millman Healthcare Inflation Guard ETF (MHIG) and the Millman Healthcare Inflation Plus ETF (MHIP). We tried to look at these a couple of times and the most recent time I got information from Copilot that was off by a little bit. 

Here is the "risk" allocation for MHIG

And here it is for MHIP

As I look at the holdings for each fund, they don't quite seem to correspond to the respective "risk" allocations. If they really mean risk allocation then there is probably a risk parity sort of dynamic to the funds, not that they seek equal risk weightings but that they target risk weightings from each segment. Both slides say long term treasuries but it looks like the furthest they go out is five years. I also didn't see any gold, instead they both have Van Eck Gold Miners (GDX), far less than 30%. GDX is much more volatile than GLD so using GDX appears to be a sort of leverage, they'd need to own a lot more GLD to equal the volatility of GDX. Note that volatility and risk are not the same thing but this does create some context for using a smaller weighting to GDX versus putting 30% in GLD. 

The vast majority of the equity is in healthcare stocks with both MHIG and MHIP having small weightings to the S&P 500. For this post, we'll treat the risk allocation as the asset allocation. To backtest we'll use XLV for healthcare equities, GLD for gold and SHY for short term treasuries. Using a five year proxy for "long term" treasuries seems off to me so we'll use TLH which is 10-20 years. 

The results are good. The drawdowns have generally been less than VBAIX or the Permanent Portfolio Fund (PRPFX). Part of the long term success stems from XLV going down much less than the S&P 500 in 2008. There's a low or minimum volatility effect that the backtest benefitted from. Low/min vol is just a factor so sometimes it helps performance and sometimes it doesn't. If we were to shorten the back test to just 15 years then it is almost a dead heat between the MHIP replication and VBAIX. 

The idea of healthcare companies as a proxy for broad based equity exposure is not something we've looked at before. 

The low volatility idea doesn't quite stick in this table but the standard deviation of XLV has been 12.13 versus 9.47 for USMV and 13.92 for SPY.

I didn't include it in the back test but comparing the MHIG replication to AGG, for the entire period MHIP compounded at 7.00% versus 3.03% for AGG and for the last 15 years MHIG compounded at 5.86% versus 2.2% for for AGG. That may not be the best comparison though.

Resolve Asset Management has a paper up about how to diversify within trend following that concludes three distinct management styles is the way to go. Not just three different funds but funds that come at trend differently; different risk weighting or different signal speeds and maybe replication versus full implementation. 

Copilot read the paper and it concluded that the best three funds to capture the intended effect was AQMIX, DBMF and KMLM. I was not wowed by the paper so I asked Copilot "Is the paper compelling or is the conclusion just so-so?" Copilot said it is moderately compelling but not a breakthrough. 

I am all in on having some exposure to managed futures but we've talked regularly about it being a difficult hold.

Over the last year, most funds have ripped higher but the chart makes the point about considering more than one fund. The worst performer in the last year, the pink line, has had plenty of instances where it was one of the best performers. Clients own one dedicated managed futures fund and get more exposure through BLNDX.

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.

More Questions Than Answers

Here's an update from mid-day Monday on the Pershing Square closed end fund and management company situation.

Using the math from Friday's blog post, the combo is worth $4850.40 for someone who put $5000 into the share offering. Gemini found that the sales charge was $1.25/share ($125 on the $5000 number we're working with). Both closed a little higher from when I took the screenshot and the math at the close was $4935.20.

Barron's had more on PSUS and closed end funds in general if you're interested. 

For all the coverage, what's the Seinfeld quote...I'm repulsed but I can't look away, I am not seeing anyone talk about the sales charge and the no free lunch aspect. Bill Ackman was on Bloomberg and he said something about the fund still being all cash and thinking it is odd that anyone paid $50 for a cash portfolio and then immediately sold it at a huge discount. Part of his explanation was that they favored retail investors, retail investors usually don't expect to get their full ask of shares but this time they did and they had to sell to get down to what they really want. 

I am skeptical about all of it.

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.

Retirement Is Inflationary

The WSJ has a write up noting that not all core bond ETFs are the same. Here's a table that shows the differences.

Or, you could just go an entirely different route.

A few people have talked about the importance of knowing what to avoid which is a concept I believe in. The core funds are more volatile than many investors realize and if rates ever take another meaningful leg higher, then the core funds will get hit hard again. The charts for CGCP and AGG are total return. Anyone who has held CGCP since inception and taking out the dividends is down 11.9% on a price basis and there is no guarantee that they will ever be whole on a price basis. 

Are interest rates going to go up? I don't know but John Authers laid out a theory that is interesting because it is simple and it relies on something that is very hard to argue with. Essentially, the act of saving for retirement is deflationary while the act of retirement spending is inflationary. The country is obviously pivoting older to a much larger percentage of the population being of retirement age. 

If price inflation keeps moving up or stays elevated then that creates visibility for higher interest rates. Maybe it won't play out that way but in terms of assessing risk, the risk here is that this simple theory plays out. 

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.

Money For Nothing And Your Shares For Free

Joachim Klement wrote a provocatively titled article, No, Stocks Are Not A Good Inflation Hedge. The link is to his substack which only provides a short summary to the original article at Reuters which is behind a paywall. 

Ok, is he right? The focal point is when inflation is 3% or higher, "history shows that real returns on U.S. stocks tend to drop quickly once inflation rates top 3%." First, the S&P 500 versus inflation for 55 years which I chose in order to take in the 1970's.

Long term, stocks are well ahead of inflation regardless of the inflation rate. 

Manually counting the year by year layout from testfol.io there were 28 years out of 55 when inflation was 3% or more. In those 28 years, the S&P 500 declined in 7 of them, 25% of the time which is very close to the percentage of years that the stock market is down overall. According to Copilot, in those 55 years, in the years where inflation was 3% or greater the S&P 500 compounded at 9.4% while inflation in those years ran at 6.1%. For just the 1970's, testfol.io shows the S&P 500 compounding at 8.38% versus 8.05 for inflation. Not great but not a negative real return.

Yes there were more instances in the 1970's but I'm not seeing Klement's conclusion. My favorite quote from the show Deadwood was when Hearst said to Bullock, "I am having a conversation you cannot hear." Maybe that's the case here as well with me playing the role of Bullock.  

PSUS is the latest investment vehicle from Bill Ackman. It is a closed end fund that just started trading on Wednesday. It was priced at $50 and to offset the normal decline associated with new closed end funds, the deal also included shares of the management company which has symbol PS for "free." This link might fill in the gaps.

Here's an exchange that Ackman apparently engaged in about the precipitous drop in PSUS' price. 

For a while it was common for new closed end funds to price at $25/share and very quickly fall by the amount of the sales charge which I seem to remember being about $1.50 but regardless of the exact amount, the sales charge built in to the $25 price is not part of the NAV of the fund and the market corrected that quickly. 

The ratio looks like for every 5 shares of PSUS that investors bought, they got one share of PS. So 100 shares on the IPO would have been $5000 and the would have received 20 shares of PS. On Friday, PS was up a ton to $37.99 and PSUS closed at $42.75. Twenty shares of PS plus 100 shares of PSUS adds up to $5034.80 at the close on Friday. I don't know why PS was up $9.99 on Friday but doing the same math 24 hours ago and the two would have added up to $4831.

If this process was correct then it's certainly not catastrophic (let's see what PS does on Monday) but no one got shares of the management company for free. 

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.