The War Portfolio

Some interesting stuff today.

First is that London firm Marex issued a structured note that is very Kalsi-like. It will pay a 7% coupon if Nvidia is still the largest company in the world when the note matures after its one year term. If it is not the largest company, then the principle comes back with no sort of interest or return. 

Marex has more of these planned. Polymarket is pricing an 80% probability that Nvidia will still be the largest company a year from now so Marex can hedge based on that market. The article reads like this was more of bespoke placement but there is a very high likelihood that these will proliferate. Other than credit risk of the issuer, an above market return with the reasonable risk being that investors just breakeven is compelling. If this takes off the way I think it can, there will be quite a few issuers. 

Ethan Powell from the Brookmont Catastrophic Bond ETF (ILS) sat for a short interview with Reuters. Powell said that AI will play an increasing role in how issuers price risk. Also, the industry will grow to take in different types of perils beyond the typical weather related perils. 

Cat bonds are a terrific example of a part of the market where the results are consistently fantastic but where the allocation should be kept small or at least small-ish. The space yields 8-12% in a 4% world so that means there is risk there. It's not crazy risk and I think the risks involved are relatively easy to understand but if there is ever some sort of dreadful hurricane season then the bonds will pay to the insurers at the expense of bond holders. It would need to be truly dreadful but not impossible. When we play around with model portfolios, the amount I often put into cat bonds is far more than I use in real life. Likewise with the new product mentioned above. If they ever become retail accessible, keep the allocation small, maybe a little bigger if someone creates an ETF that holds a bunch of them.

Man Financial posted a paper this week called Apocalypse Now? The objective was to war-proof an investment portfolio. It's a wordy article with a good bit of data but the following was as specific as it got, it didn't provide weightings.

However they blend all that together, they backtested this result;

I guess it is a war hedge but it seems more like an all weather portfolio. I took a run at trying to build this using their inputs as follows.

SDS is 2x short the S&P 500.

The result had a higher CAGR and a little more volatility. A little more to BTAL and a little less to SPMO/SPHQ would dial that in if someone wanted. It's obviously very resilient in down markets and it's interesting that it was never the best performer during an up year for broad markets. The growth rate is very 60/40-like yet it holds no bonds. That's a pretty big building block here, the idea that there are many ways to offset normal equity volatility without using bonds. 

BTAL, VIXM and SDS have down years most of the time and BNO is down about 1/3 of the time and very volatile. That's a lot of holdings, four out of nine, that all spend a lot of time going down. It's hard to argue with the bottom line result but that could be tough to look at. 

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. 

Blue Owl Keeps Going Down

Let's continue with some followups to previous posts but also some broad market dynamics too. 

It keeps getting worse for Blue Owl (OWL). The other alt investment firms appear to be in sideways patterns after enduring what thus far have been less severe declines. There is an ETF that tracks these with symbol AAUM which is down 22% YTD.

Obviously the private asset space was showing signs of trouble before the war in Iran started. It's not clear to me that the war is making it worse is making in terms of demand for withdrawals from funds that don't offer daily liquidity. That seems like a market event versus the war being a geopolitical event.

We've looked at these stocks before. They are obvious proxies for the space. We isolated that during the good times and it is apparent during the rough times too. Similar to tech, the group tends to outperform on the way up and go down more on the way down. There's a sort of capital efficient or barbell aspect to it. A small allocation to something with these attributes when sized correctly can provide a return similar to a full allocation to equities but the drawback is periods like now. Forgetting Blue Owl, a 25% drop from a smaller equity allocation might be emotionally difficult to endure when the broad market is down much less. Sized correctly, the dollar impact would be the same but still tough to endure. 

Here are four more portfolios we built for random blog posts that I wanted to circle back to.

The first one is the Cockroach Portfolio that we've looked at many times, this latest version was November of 2025 where the title of the post was I Cracked The Cockroach! Maybe! I can't find a link to the post about the portfolio I labeled Asness Factor Blend but it was in the folder on my computer where I keep all these portfolios we blog about. No dice on the HEQT/Managed Futures post either. Here's the link to the post about the 75/50 portfolio. 

All the portfolios did much better than 60/40 in 2022 which was due to avoiding duration and adding managed futures. I don't feel that I am cherry picking because I actually did that for clients that year. The Asness Factor portfolio is of course quite the standout. I'm not sure why I used the AQR Market Neutral (QMNIX) back then because despite the name it has had some monster up years that may not repeatable. If they are repeatable then I wouldn't think of it as market neutral despite the name.

Redoing that portfolio to use more of a real market neutral/absolute return proxy, the results are still compelling versus VBAIX and more inline with the others. 

The 75/50 portfolio was too conservative, it captured less than 75% of the upside of the S&P 500, more like half and it went down a lot less than half the S&P. It did quite a better than VBAIX but again, that is attributable to avoiding duration and owning managed futures. While I think duration will be a bad place to be going forward, if that sentiment ends up being incorrect then these portfolios will probably look a lot like VBAIX, not outperform. 

ReturnStacked updated its model portfolios and I wanted to review a couple of them, Structural Alpha Growth which is sort of an 80/20 and Structural Alpha Moderate which is like 60/40. What I did for these is build them exactly as the appear on the website. The models are leveraged using their capital efficient funds, the models leverage up 25-30%. The way they do this is if they allocate 10% to RSST in the model, that adds 10% of domestic equities and 10% of managed futures. It's probably not ok to share the holding and weightings as they posted them, you can create a userid and password and access them yourself. 

The unleveraged versions are mathematically true to the originals, just scaled down.

My version of their 80/20;

And 60/40;

It is very rare if ever where I see the leveraged products actually making it better. Part of it might be their willingness to have AGG-like bond exposure but that doesn't account for all of it. 

The concept is clearly valid so maybe the fund category needs to evolve more. I do think the idea of doubling up the volatility which only a couple of funds do at this point (meaning they target volatility not twice the daily return), could be a better path to capital efficiency via exchange traded products. 

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. 

Let Opportunity Find You

Barron's posted another Gen-X isn't ready/is worried about retirement article. The concerns are medical expenses and not knowing how to create an income stream from their portfolio. That second one overlaps with insecurities about having enough money. Part of the dialogue was some survey that said a lot of us, I am older Gen-X, have pension envy like we're not getting pensions but we wish we were. 

Kind of a weird thing lately or maybe a weird sensation but I've been seeing where quite a few guys I know from high school and college are retiring. It's weird because it seems so foreign to me. It probably shouldn't because of how many people from the fire service I know here who have retired at much younger ages than what my friends are doing. One fire buddy at a city department down in the Phoenix area who is 38 now, started when he was 22 and he is absolutely going to retire once he has 20 years in. 

The 38 year old doesn't want to stop working, he would just move onto the next thing with his pension as a financial base. 

The health care cost is something we talk about all time. In our department we have four firefighters who are very active in the department at ages 66-70. All four passed the arduous pack test (3 miles, 45 pound pack, 45 minutes or less). Two of them I know take no prescriptions, one I think does and the fourth, I am not sure. 

Grok says that only 11.4% of Americans 65 and older take no prescription meds. In our department, the number is at least 50%, maybe 75%. Someone who is 65 or older and passing the pack test must be committed to their fitness in order to pass it. There is of course a connection to not needing prescription meds and the lifestyle choices related to exercise that they've made. I realize my sample size is very small but it's what I've got and it corroborates a lot of what I try learn about health, wellness and vigorous exercise. 

If my colleagues aren't taking meds, that means they aren't paying for meds (yes that is a stupidly obvious comment) but it addresses one of the big concerns that my cohort has. 

Older Gen-x still has time to figure out the financial stuff. Someone who is 57 should be able to see how much they have accumulated and assess whether they are behind, right on pace or ahead of where they should be. If they aren't sure, AI can help them figure it out if they don't want to work with an advisor. 

If this 57 year old is way behind, they have plenty of time to play some sort of long game to cultivate an income stream from a post retirement career. Six or seven years for example is a pretty good runway to work on cultivating an income from some enjoyable endeavor, 63 or 64 is a young retiree. 

My own preference is to have as much optionality as possible. Something dramatic would have to happen at this point for me to start getting serious about wildland fire assignments away from home. Other things developed favorably and so there isn't going to be time for the fire stuff but I just had a conversation today about "keeping my task book open" just to have the optionality because I don't know, maybe something drastic will occur. 

I got a couple of assignments to get my feet wet and of course the opportunity came from my very long term commitment to the volunteer fire department. My gig with the Del E Webb Foundation also came from my volunteer fire department involvement. I don't think most people need to volunteer for twenty plus years to have something pay off but the point is converting something you love into an opportunity in case you need it. Maybe I would change that to talk about opportunity finding you but you have to be out there for that to happen. 

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.

Has The Decline Hurt Autocallables?

We've looked several times at the burgeoning autocallable product space. Generally, these are structured products tied to reference security that pay out very high yields like low to mid teens, not the crazy high "yields" of 40-50% from derivative income funds. Accessing them through an ETF is relatively new.

The Calamos fund (CAIE) is the first one we looked at.

Nothing has malfunctioned so that's good. What we're seeing first hand instead of theory from a marketing sheet or from AI is that there is a sensitivity to falling equity prices. 

This next one references Nvidia.

ANV so far has been pretty smooth and you'd add back about 100 basis points in for the distributions paid out so far. However normal or not the market's volatility has been for the last month, ANV doesn't seem to be bothered by it.

Similar story with TLA which references Tesla.

The common stock has been a little less noisy over the last month, we can see a little downside sensitivity but again add 100 basis points back in for the distributions.

I'm still trying to wrap my head around the risks to this structure. They yield about 14% in a 4% world so there is risk. Taking risk you don't understand is something to avoid. 

Our next follow up is the Cambria Endowment Style ETF (ENDW). The fund is almost a year old and started out as a 351 exchange. As the name implies, it is a multi asset strategy. I take from the word endowment that it seeks to be all-weather to some extent but fair enough if that is not correct. 

The CAGR numbers are so high because ENDW launched one day after the Tariff Panic bottom but still, on a relative basis, ENDW has done well thus far. The ENDW fund page doesn't have pie chart info about the asset allocation.

Copilot did the math. ENDW runs with 30-50% leverage. The split between domestic and foreign equity is pretty close to evenly split. Let's play around with it a little to see how it might have worked longer term.

The results aren't much of a surprise. 

It makes sense that the leveraged version outperformed the unleveraged version but with a little more volatility. The only difference to Portfolio 3 is swapping out the ten year treasury exposure which reiterates a point we made yesterday that sometimes what you avoid is just as important as what you include. 

A final comment, I sent a note out to clients after the close on Tuesday noting the extent to which Tuesday's huge move looks like panic buying. I don't know whether stocks will drop tomorrow or the next day or not at all but I wanted to prepare clients for the possibility having seen these sorts of days happen many times before. Overnight futures are flat as I publish this post so maybe it won't give this gain back but I would be emotionally ready for that, repeated for emphasis, to avoid being caught off guard. 

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.

Portfolio Review

This is something I've wanted to do for a while, do a sort of accountability checkin on some of the more interesting portfolios we've played around with in previous blog posts.

Here's the first batch.

Obviously the Insane Portfolio is not a serious thing but it still makes a point about exchanges being a partial proxy for broad indexes....I think that's the case anyway. The portfolio gets a lot of return for having a low weighting to equities which speaks to the idea of barbelling. The volatility looks pretty good too. 

The context for the new variation of the permanent portfolio was a blog post about the Wavefront All Weather Alternative Portfolio which trades in Canada. The weightings are true to the ETF from back then. Since the blog post Wavefront has had a fairly smooth ride to a 2.6% gain versus 12% for the one we concocted. The large weighting to managed futures did a lot of heavy lifting for the portfolio.

The Quadrant Inspired looks like a follow up post that includes a couple of different versions. Comparing it to the Permanent Portfolio Mutual Fund (PRPFX) back to last July, PRPFX shows up 13.2% but is down about 6% from it's high which is not too bad. Quadrant inspired was up 5% since I wrote the post but has had a remarkably smooth ride. It's down less than 1% this month.

The last one for today is this post is from January where we equal weighted based on excess kurtosis and standard deviation. Two and half months isn't much of a sample but we've had a good test this month and it looks decent, down a little over 3% through Friday.

I'll circle back on a few more soon. For now the only that really didn't seem to do as well as the others was an attempt to mimic Bob Elliott's Simple Game Plan. The returns were a little lower and the volatility was a little higher. It was not catastrophic by any means just not great.

The practical takeaway from these exercises is about tweaking portfolios slightly to improve results. Managed futures did well in 2025 but putting 20% into the strategy is way too high for real life no matter how well it backtests. A lot of success from these can be attributed to avoiding bonds with duration which makes an important point. Knowing what to avoid is arguably just as important as knowing what to include. 

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.

Man Financial's Idea For All-Weather

Man Financial did a study about optimizing for Sharpe Ratio, my interpretation anyway. It's a good read and I think the result is very interesting. 

On the left is the asset/strategy allocation and on the the right, they believe it can be successfully levered up. Their context isn't levered up with ETFs or mutual funds, the paper is more for institutional investors but we can still learn from their idea. The levered up version could almost be implemented now but with very little choice currently so I wouldn't consider that. 

For risk managed beta I went with HEQT (more on that below). Managed futures for alternative trend. Volatility l/s wasn't obvious to me, Copilot suggested RISR which we've looked along with a couple of others but it liked RISR the most and we have some familiarity with it here. Client/personal holding MERIX works for equity market neutral and ILS stands for insurance linked securities aka catastrophe bonds so SHRIX for that. 

Compared to plain 60/40.

Well, it appears as though they are onto something here. I asked Copilot to critique the unlevered version in relation to the paper. At first it said that MERIX and SHRIX was a credit cluster that would get hurt in some sort of 2008 redux. It didn't know that SHRIX was ILS, second time I had to tell it that actually. The Merger Fund was up a little in 2008 as was the Swiss Re Cat Bond Index so Copilot backed off that worry. It said 50% in HEQT is still a lot of equity beta. It really isn't though. HEQT's beta is 0.44 so it's like 0.22 of equity beta coming from HEQT. Copilot backed off, essentially saying in protracted declines HEQT's beta could go up but still not like full exposure like from VOO or SPY. It then conceded that 50% in HEQT was the sweet spot which I'm sure Man had already figured out.

Based on the title of the paper, I assume that some sort of all-weather effect is the desired outcome. Copilot thought the portfolio was true to Man's intention and rated the components as follows.

Reminder that Copilot came up with the clever addition of RISR.

In starting to put this together, I asked Copilot which ETFs besides HEQT would fit the description of risk managed beta in the context that Man was using the term. It said HEQT would be the best choice. I asked if I skewed the result by asking the question that way and it said no, so who knows? It also said that Simplify Equity Plus Downside Convexity (SPD) would work but it preferred HEQT. 

I don't know why anyone would want SPD. The results have been bad to be sure but it turns out it is not intended to "work" for slow declines. It is more about very fast declines. It did well during the Tariff Crash last April. Where fast declines tend to snap back quickly, I don't think protecting against fast declines at the exclusion of slow declines is a productive strategy. It's nice to have some offset to fast declines but slow declines are the thing to worry about. For this reason, I wouldn't consider SPD. I use a separate line item for fast decline protection versus the SPD strategy of bundling the protection in with the index in one fund. 

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.

Valid, Not Optimal

A couple of things from Barron's. First an article about buying low and selling high not "working" during this event. There is a focus in the article about whether or not to reduce exposure to stocks doing well to rebalance into stocks that are struggling.

Included in Adam Parker's comments was to "only buy losers when you are confident that a market bottom is close at hand and a big recovery will follow." When you're confident the market has bottomed? That sounds pretty easy, amirite?

You'll find plenty of differing opinions about trimming winners to buy laggards but replace "confident" that the market has bottomed with add more net long exposure after a large decline fulling realizing you might be wrong for a while. Buying after a 20 or 30% decline won't be emotionally easy and yes you could absolutely be early on the way to a 40% decline but buying after large declines will work out far more often than not. 

Another article sought input from advisors about what they do to help clients avoid running out of money. One advisor laid out a strategy that "typically divides clients’ assets into five to six buckets based on time horizon and risk." 

Here are the buckets she uses and how she labels them;

• Cash for 1-2 year liquidity
• Short term stability for 3-5 years
• 60/40 for six-15 years (70/30 works too she said)
• Buffer fund for 15-20 years out
• Dividend stocks for 20-30 years out

What's your first reaction to that? Me too but backtesting her idea has a pretty good result.

Before any critique, here's what I used to try to replicate the advisor's strategy;

We'll get into some detail in a moment but her idea is clearly valid.

The 5 Bucket is not that far behind VBAIX in nominal terms and it has a better risk adjusted return as measured by the Sharpe Ratio. Several of the other portfolio stats are also superior. There was no info about what specifically she uses to build these buckets but there seems to be some overlap between the first two. Maybe she is using individual issues and really is differing the maturities between each of those two buckets. 

I would not expect buffer funds to capture all of the upside. That's not a problem going in as long as you realize that. Copilot says BJAN is the oldest buffer fund so I chose just to get a longer back test. Since it came out it has compounded at 11.56% versus 15.74% for the S&P 500 with about 3/4 of the volatility. Adjusting for growth rate versus volatility BJAN's return has been about the same as the S&P 500. BJAN has compounded 114 basis points better than VBAIX which is interesting but with a more volatility.

The suggestion of using a buffer fund for a long term bucket might be puzzling. I've seen one other advisor suggest this and being blunt, I don't know why this would make sense. Copilot said it really doesn't make sense other than for behavioral reasons like a lower tolerance for equity market volatility. Given how close BJAN is to VBAIX, the entire 60% (40% plus 20%) could be put into one or the other, BJAN or VBAIX, assuming confidence that BJAN could continue to be a close proxy for 60/40 but without interest rate risk. FWIW, the two have a 0.96 correlation to each other. 

The article had no info on how the buckets are weighted so I put 4% in bucket one and 8% in bucket 2 to both correspond to a 4% withdrawal rate. The other weightings are pretty much made up, thinking 40% into the 60/40 bucket would do most of the heavy lifting in terms of growth and sustainability. 

So now, let's see if we can improve the Original 5 Bucket Portfolio with some of the strategies we talk about regularly. 

Everything but SHRIX is in my ownership universe. We're replacing VBAIX with SPMO/SPHQ, ACWX and SHRIX. FLOT instead of SHY. And all-weather replaces the buffer. SCHD plus SPMO/SPHQ sort of brings in the quality/value/momentum idea we looked at the other day. 

Again, I will say it is valid. The slightly better CAGR from our version is nice but I would focus more on the volatility, drawdown numbers and other portfolio stats. Those are probably more sustainable than knowing whether it can continue to outperform. I think avoiding interest rate risk will help it outperform but that could easily turn out to be incorrect. 

I asked Copilot to critique both of them. Its initial reaction was;

I explained the context. It isolated the issues with buckets one and two in the original version, it liked FLOT a little more than SHY for example. BLNDX is way better than BJAN, it said BJAN is not "compounding machine." I would argue it is, just not like equities. My weighting to ACWX is too small to matter but I would push back that as part of a 60/40 bucket it is sized about right. It thought both versions had too much in SCHD but the attempt there was to just be true to the original suggestion about dividend stocks. 

Based on previous interactions it said that my version was "convexity-aware" but that it lacked any "fast convexity" like BTAL. My final query was to note that as I said above, I think they're both valid but not optimal and Copilot agreed with that assessment. 

One final hit. We've looked at a portfolio that was heavy on cash or cash proxies and light on TECL which is a Direxion 3x bullish fund that references to XLK. XLK is down 14% from its high while TECL is down 47%. If TECL tracked exactly for a longer period (that is not what it should be counted on to do) then you might expect it to be down 42%.

This backtest assumes buying TECL at its high.

Until it's rebalanced, if the broad market continues lower then this blend will probably be more defensive for now only having 15% notional long exposure not the 30% that it started with. Knowing when to rebalance would be pretty tough though. 

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.