Model Portfolio Watchouts

Finominal did a review of the Russell Investments Growth Portfolio. It's a model portfolio consisting entirely of Russell's mutual funds. The review came via email so no link to share.

Some of their funds are shockingly big. The first two listed have $3 billion and almost $4 billion respectively. The Morningstar ratings for the various funds are mixed. 

Finominal notes general underperformance and a slightly lower Sharpe Ratio versus the All Country World Index which can be tracked with the ACWI ETF and is suggested as a one fund replacement for the entire Russell Portfolio. There is quite a bit of overlap/duplication between the two largest funds which I believe makes for poor model construction.

Arguably, the 79% split between RUSTX, RGDTX and RNTTX could just all go into RGDTX, the global fund. 

The concept of building model portfolios is very useful but too often, models are more about fund sales than providing robust or even just differentiated solutions. 

Portfolio 3 is close to what we looked at recently, using factors (dividends and quality) to get sort of broad exposure to global markets while being intentionally light on tech. EMXC is very heavy in tech that is volatile but adding 10% in still leaves the portfolio underweight versus the model and ACWI at about 15% versus 30%. Portfolio 3 tracked pretty closely for most of the backtest but in 2022, at its low it was 500 basis points better than the model and ACWI so it differentiated when you'd want it to. Going forward, if something bad happens with tech I would expect Portfolio 3 to do a little better than the model and if tech continues to do very well then Portfolio 3 should lag. 

Models really can be a good way to go but owning more funds just to create the appearance of complexity is something to watch out for and another one is when all the funds are from the same provider like in the case of Russell using only their funds. That's pretty common but there's no reasonable way that can be optimal. 

False complexity and just one fund provider are pretty simple filters to narrow the field and then better focus on more useful models and what they likely to do. For example, the SCHD/IQLT dominated model should lag if tech takes another big move up as I said. The model, simple as it is, is valid and potentially robust, at a least bit, but eventually the regime will change and it would need to be updated. If the model is well constructed, it shouldn't need to be changed constantly though, frequent changes is a different type of strategy than a model portfolio. 

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. 

Blasphemy, BLASPHEMY!

Let's start with the following.

The long term result of the mystery portfolio and plain vanilla 60/40 are identical. There's really only two years with meaningful differentiation. The mystery lagged by a lot in 2020 and went down much less in 2022. The stats in the fist screen grab do favor 60/40 but mystery has a lower standard deviation and slightly better excess kurtosis reading. 

The 60/40 does better in fast declines but the mystery portfolio did quite a bit better in the one slow decline available in the study period. I might prefer the mystery portfolio but I think the time frame is long enough to say they are both valid, returning CPI plus more than 6%. 

Quick detour. Goldman Sachs is buying Neos Investments an ETF provider that specializes in derivative income funds. SPYI references the S&P 500, QQQI references the QQQ, BTCI references Bitcoin and they have other funds which gets them to sneaky high $32 billion in AUM. Back in April, Goldman closed its deal to buy Innovator Capital which is known for its buffer funds. Goldman moved heavy into derivative income and buffer funds because investors like both types of products a lot. Really a lot. 

Back to the mystery portfolio which is 70% buffer fund and 30% derivative income fund. The buffer fund is Innovator (BJUL) which I chose because AI thinks it is the first buffer fund. Despite it being older and newer funds presumably having improvements, Portfoliolab, via Gemini, ranks it above 83% of the buffer field.

The derivative income fund isn't even an ETF, it's the Nuveen S&P 500 Dynamic Overwrite Fund (SPXX), a closed end fund, which has been around for about 20 years. Right now it trades at about a 9% discount to NAV and yields 8.8%. The mystery buffer/derivative income portfolio's price only return was 7.66% annualized. 

When I first built the buffer/derivative income portfolio I used Invesco Buywrite (PBP) which I believe is the oldest covered call ETF and the CAGR using that fund was 9.14% which is still pretty good, still CPI plus 5.54%. 

Since I've mentioned Portfoliolab a couple of times recently, here's part of how they evaluate portfolios. 

This tells us there is nothing especially bad or good about the BJUL/SPXX blend, it's very ordinary. To the same point, here is the same analysis for 60% SPY/40% IUSB.

Yes, BJUL/SPXX scores a little better but the free version of the website only goes back one year and for the last year, the buffer/derivative income portfolio outperformed by 98 basis points with slightly less volatility. 

Both covered calls and buffer funds get a lot of bad press. Here's AQR on covered calls funds and here they are on buffer funds. Many times I've said "just don't with buffer funds." I concede most of the negatives about these funds but the outputs can be just fine, they can be ordinary and ordinary can get it done. 

Gemini took data from a report by Commonfund that calculates the collective CAGR for endowments for the last eight years was 8.92%. The time frame isn't exact to our BJUL/SPXX study but it gives some context of the validity of the result by building a portfolio with two of the most hated (by the smart money) types of products there is. The lesson here, for me too, is to not be so snooty. If an investor has taken the time to actually understand the pros and cons of buffer funds and derivative income funds and they still want to use them, then why not? I'd never thought about the type of portfolio we looked at today so I feel like I learned something. 

We'll close out with a quote from a Barron's article about managing stock market volatility.

A popular choice is a fixed indexed annuity with an income rider. Fixed indexed annuities offer protection against market downturns by limiting upside in a bull market. With an income rider, there’s the option to turn on an income stream at any time and collect guaranteed income for life.

Or, instead of an annuity, someone could use a buffer strategy for a while and then flip that into derivative income when they are ready to take income (it may not last for life though). No need, I'll show myself 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. 

Put It All Into FMAGX And Forget About It?

Yahoo had an article about....wait for it....people 55 years old and up retiring early because they feel emboldened by portfolio growth over the last few years. They post an avalanche of retirement doom and then this. Both can be true. The vast majority of Americans of all ages could be woefully undersaved while those who are not undersaved could easily have enough to retire earlier than they planned.  

Make of it what you will but there was this comment which is constructive for digging into sequence of return risk and maybe a couple of other things.

Well congrats on your good 'TIMING,' recent retirees; you just got LUCKY! I was in the Magellan fund in the early 2000's and my 10-YEAR return at one point was -0.5% !!! Yes, you heard it!!! You got lucky and I didn't!!! Timing Timing Timing!!!! And watch out below; these returns are NOT sustainable. Especially when the left get power again.

Gaming this out, if he retired on Dec 31, 2000 with $400,000, here's where he stood after ten years taking 4% per year.

The time period comes pretty close to capturing his experience. Carrying it forward to today, if he stuck at 4% withdrawals, he's about 25 years into his retirement and he has more than double what he started with. 

Yes, he would have been better off in SPY but back then, Magellan seemed like a good bet. This reader's bad luck for timing is a great example for defining sequence of return risk, it was a terrible time from a market standpoint to retire. I'm not saying there wouldn't have been real fear in this scenario, the scenario bottomed out at $152,000 in March 2009 but markets worked over his long term.

Above, I said Magellan was a good bet which it was and maybe is now, not sure about that but no matter how good something might appear to be, the comment implies he put it all into Magellan. No matter how good something might be, it should be obvious what a bad idea that is. Maybe the fund would have done very badly versus the market (not the case for this guy) or maybe the market itself would do badly (that was the story with this one). Back then, bonds were fine to invest in. 

Same scenario with 60% Magellan, 40% in intermediate treasuries.

He would have compounded at 3.7% which of course is not so hot but not negative. At the low, he'd have been at $265,000 not $152,000 and at the end of this ten year run, he'd have been down a couple of hundred bucks in nominal terms not $100,000. Being 100% Magellan wouldn't have caught up to 60/40 until late 2021 all the while running at about half the volatility of 100% Magellan. 

For a little more context for unlucky timing versus lucky timing, if he had put his $400,000 into Magellan at the end of 2009, taking out the same 4% along the way, he'd now have $1,578,000.

Back in 2000/2001 it was obvious we were in some sort of serious market event but no real sense that something like a lost decade could be coming other than probably Grantham or Hussman. The market action of the financial crisis wasn't as collectively new because stocks had just cut in half a few years earlier but the real estate aspect and the rest of it was new. 

Most events have a combination of some familiar aspects with some that seem different and it's not that events don't all end at some point leading to new highs but that each path might be different. This is why you diversify equity exposure and why you diversify your diversifiers. 

This example is also why I always talk about optionality and resiliency both in life and in the portfolio. For anyone believing in the importance of this in a similar manner, the path to their ideas for optionality and resiliency will probably be unique. I think it is easier now to add portfolio resiliency thanks to dramatically improved access to sophisticated strategies that didn't exist when this guy loaded up on Magellan. Creating optionality and resiliency in life probably needs to come from within. Success comes from being motivated for whatever reason versus the outcome of being forced to take whatever part time job you'd least want to take.

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. 

Avoiding Unnecessary Anguish

Today's post starts with this image from a paper about alts published by Simplify.

Simplify says their funds focus on the upper left quadrant. Not included in the lower left, that I would mention so we don't forget about it is litigation finance. I am aware of one fund that doesn't have daily liquidity. I'm not going to use funds that don't have daily liquidity but the way things evolve, this might come in a daily liquid vehicle or be added to a multi strategy fund. 

Cat bonds are in Simplify's illiquid bucket but there are three dedicate mutual funds and one ETF in the space. As a quick note, I use SHRIX for blogging purposes because it has by far the longest track record but I use a different fund in real life. Hedge funds aren't liquid but there are countless funds with daily liquidity that do track hedge fund strategies. The Unlimited suite of ETFs are all hedge fund-like so if you're interested it's accessible. 

Then we get to royalties and again, there are more than a handful of companies that collect royalties that are usually in the MLP neck of the woods. There are a outside of natural resources but they don't appear to be very yieldy. This brought me around to Dorchester Minerals (DMLP). I've looked at this name a couple of times in the past but not sure whether I ever brought it to the blog. DMLP collects royalties from oil and natural gas with a very wide geographic footprint including the Permian Basin. It fits in with our recent conversations about seeking yields in the face of a decade to nowhere for stocks. 

It has had a good yield all the way through but man it is a wild ride at times. 

Dennis Eckersley might say that it goes down 30% just to stay in shape. 

The growth rate numbers for Saba Closed End Fund ETF (CEFS) are pretty much identical to DMLP over its shorter lifespan but the drawdown pain is quite a bit less. The 40% drop in the Covid Crash was big but nothing like some of the drops put in by DMLP.

Now here is the lasted on the GraniteShares NVDA Autocallable ETF (ANV). The chart compares ANV to the common and the YieldMax for NVDA.

The chart is price only. What is interesting is that during that big lift for the common for April into mid-May, ANV didn't move. Then in that serious decline from mid-May early July, ANV didn't move. So far, ANV has paid out $2.07 in distributions including the one that will pay later this week which annualizes out to an 18% yield compared to a 40.14% distribution rate posted on NVDY's website. 

To even consider a single stock autocallable or single stock covered call fund, or one of the put sellers for that matter, it is very important to realize you are not buying the common stock. NVDA is the reference security but that is not what you're buying. To buy ANV for NVDY you need to believe that the common won't blow up but these are not the common repeating for emphasis. If NVDA goes up 100%, you're not going to get anywhere close to that from ANV or NVDY.

Does harnessing the volatility of NVDA or another stock that has funds like this referenced to it interest you? Does it fit into your strategy? I am spending time on how to make portfolio's yieldier. That won't mean blowing up the portfolio as it sits now, it means adding a little yield here and there and while the odds are low that I will end up with a single stock autocallable or YieldMax product "yielding" 40%, there's no need to ignore how these both evolve. 

Buying DMLP in this context would probably just result in anguish for clients but understanding the name a little helps me define the space some. MLPs are yieldy and could play role in the context we've been talking about. My nit to pick as I mentioned the other day is that a 20-25% weighting in MLPs is a terrible idea, if stocks go down a lot, there's a good chance MLPs will go down a lot too. That has been the case sometimes but not in others so I'd assume the worst on that front but a lost decade doesn't necessarily mean down a lot, it could mean down a little to up a little, very little. That is where I'd want to dial up the yield. Not blow up the portfolio, just dial up the yield a little bit. 

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. 

TBG Loves BX

A reader left a comment on yesterday's post about navigating a lost decade for stocks using the TBG Dividend Growth ETF (TBG). Yesterday was part 2, here's part 1. The portfolio we looked at in part two as follows; 

In part one we just put 25% in SCHD but yesterday we updated it to include IQLT and AIQ. IQLT in foreign quality stocks (owning foreign if domestic does poorly makes sense) and AIQ is a nod to a paper from Goldman Sachs that said not to completely abandon innovation (the AI theme).

The idea of using SCHD (and then adding IQLT) was simply to avoid market cap weighting which by definition would do relatively poorly in a lost decade for stocks and focus on more dividend, quality or valueish factors. The buyback ETF PKW and Cambria's shareholder yield funds might have a seat at that table too. 

So what is TBG? It is an actively managed, concentrated portfolio of stock picks and SCHD tracks an index and is much cheaper.

TBG's stats range from just slightly better than SCHD, like the CAGR, to noticeably better like it's Sharpe Ratio. This is a little surprising given that hot potato Blackstone is the largest holding in TBG and has been since the fund's inception. Parsing Gemini's explanation, TBG might be trying to optimize its portfolio by having holdings that offset the volatility contributed by BX. BX is currently in a pretty big drawdown so TBG has lagged SCHD in 2026 so far by about 900 basis points. Portfoliolabs has a pretty good comparison of the two funds.

Grok says 8-15 (yeah that's vague) of TBG's 36 holdings are in growth indexes versus 5-20 out of SCHD's 103 holdings. In trying to answer the reader's question, TBG appears to be growthier than SCHD so that fact could work against it in our lost decade premise slightly. Interestingly, BX has a 2.55% weighting in SCHD. It does have some yield to go along with its volatility. 

TBG's track record is short but despite what the chart shows, there is a good bit of differentiation from year to year between it and SCHD.

TBG went down a little less than SCHD in the Tariff Panic of 2025 but it went down a little more than SCHD when we attacked Iran. Over the long term, TBG could certainly turn out to be the better mousetrap but my hunch is that its growthiness would be a bit of a headwind if there ends up being a lost decade for equities. 

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. 

Beta & Carry

Goldman Sachs posted a research paper that makes for a good follow up to our recent conversation about a potential lost decade for domestic equities. 

There are a couple of high level points from the paper to mention. First is that higher inflation is bad for 60/40. They said that higher interest rates which are associated with higher inflation make equities less attractive. That's a point about tradeoffs and is a widely accepted truism of markets. And if yields keep going up, that of course is bad for bonds with duration. 

I would push back partially on higher rates being bad for stocks though. Rates moving higher, everything else being equal, yes would be bad for stocks but if we get into a period where rates stay generally higher than we've seen, I think equities would adjust to that and eventually work higher. In this context, I don't mean rates going into the mid-teens like 45 years ago, just higher than they've been, 6-7% maybe instead of 4-5%. 

The basic conclusion is to underweight equities without bailing on innovation, specifically they mean AI. They say there is a poor backdrop for equities now but completely avoiding innovation is too risky. 

Most of their scenarios point to below average growth for equities except Goldilocks inflation plus an AI boom. The diamonds are the suggest equity weightings in the various scenarios they identified.

The follow up is to build on the yieldy portfolio we looked at the other day which did ignore innovation. We'll try to build some innovation back in with GlobalX Artificial & Technology ETF (AIQ). Goldman talked about foreign equity exposure too so I also added iShares International Quality ETF (IQLT), a new one for blogging purposes, as follows.

The version from the other day just put 25% into SCHD. Goldman included risk parity in their study but their results don't favor it so I included a version weighted for risk parity from Finominal too. 

 The inflation adjusted numbers were;

Looking backward, the ideas we're exploring have nowhere near 60% in domestic equities so a long run where domestic equities did very well, portfolios that were much lower in domestic equities aren't going to keep up but the results can still be plenty valid. Eight years is a decently long time to see how these different types of holdings mix in with each other. If there is a lost decade coming for US equities, having more yield and some all-weatherish attributes makes sense to me. The yield for the portfolio is just over 6% which is high but not frighteningly so, the drawdowns were reliably shallower and Portfolio 1 was up very slightly in 2022. 

A huge challenge to this entire concept is being able to discern between regime change versus a just a bad year. The key is realizing there's no reliable way to do this. I was able to sidestep quite a bit of the financial crisis (my posts at Seeking Alpha from back then corroborate this) by simply recognizing that bad things happen when sectors grow to 30% of the S&P 500. I was able to sidestep the meltdown in bonds with duration by asking the very simple question of whether yield adequately compensated the risk. 

The things I think are problematic for domestic equities now include erratic bond behavior, clear and obvious excesses in the capital markets related to tech, price inflation and there are others. There are always risk factors so now is no different in that context but I think the threat level has elevated. If somehow we do have a stretch where domestic equities do poorly, yes I think you need some foreign equity and I already do. I think the portfolio would need some yieldiness and it already has some. I think the portfolio would need some absolute return and it already does and I think it would need some crash protection which it already has.

That is all predicated on not believing I can predict anything. Believing or realizing risks have elevated is not the same thing as making a prediction. If something bad happens, the question then will be did I have enough of those things and here, right now, there is no way to know. The process in this post is unrealistic for me because I can't see reducing clients' equity exposure from 50-60% down to 20-25%. If things present themselves in an obvious way (it could happen), then reducing some exposure in favor of a little more yieldiness and a little more defense is in the realm of being practical. 

I'm trying to come up with a clever tag line for this idea; Yieldy Beta? Beta & Carry...I don't know, we'll come up with something. 

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. 

EFT Go Boom

The Opportunistic Trader ETF (WZRD) is down 97% year to date at Friday's close.

This is not a fund we've ever looked at here but Gemini thinks that the fund got hurt buying ODTE options and that those trades went wrong. ODTE stands for zero days to expiration. Assuming it's as simple as Gemini reported, going long volatility in that manner is a tough way to make a living.

VistaShares closed the Bitbonds 5 Year Enhanced Weekly Distribution ETF (BTYB). The fund allocated 80% to five year treasury notes and 20% to selling Bitcoin calls in an attempt to double the yield of the five year. When I looked, it seemed like it was doing what it was supposed to. The concept seemed solid to me as a sort of barbelling to magnify the yield. It did not trade like a hot potato so I am surprised it closed so quickly.

Something that I am getting a kick out of, there's finally going to be an ETF comprised of publicly traded exchanges, the Van Eck Global Exchanges ETF (TIKR). I first brought this up many years ago on the first iteration of the blog. The following is a list of the probable constituents. 

I've owned a publicly traded exchange for clients almost since they first started to go public quite a few years ago. From the bottom up, I believe they are cash flow machines and from the top down, it's an easy way to add non-bank financial exposure. 

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.