Bruce Dickinson Says "I Gotta Have More Trend!"

Morningstar took a deep dive on alternatives, really deep. 

There was one line that jumped off the page at me; as stocks and bonds soared throughout the 2010s, the average systematic trend fund lost 0.6%. A 20% allocation to the average systematic trend fund in a 60/40 portfolio would have resulted in an annual drag of about 1.45 percentage points.

A 20% allocation to systematic trend, aka trend following aka managed futures, was only a 1.45% drag? That seems like a big weighting and a small drag. Turns out the math checks out using Vanguard Balanced Index Fund (VBAIX) which is a proxy for a 60/40 equities/fixed income portfolio and the Guggenheim Managed Futures Strategy Fund (RYMFX). This is the fund I mention all the time that I owned for clients through the financial crisis that used to have the Rydex name. 

Per Yahoo Finance, VBAIX has a ten year annualized return of 9.54% and RYMFX had a ten year annualized return of 1.99%. I get an 80/20 blend VBAIX/RYMFX with a ten year annualized return of 8.03%. YTD VBAIX is down 18% while RYMFX is up 16%. Putting 20% into RYMFX at the start of the year would have the VBAIX/RYMFX blend down 11.2% versus 18% for 100% VBAIX. Over the ten years you still would have been better off 100% VBAIX but the large allocation to RYMFX is helping a lot this year. 

A 20% allocation to RYMFX would have helped in the first three months of 2020 albeit with less of an impact. VBAIX was down 11.45% (bonds didn't break during that one) while RYMFX was up 1.21%. An 80/20 VBAIX/RYMFX blend would have been down 9%. It did even less during the Christmas Crash of 2018 when VBAIX dropped 12.6% but RYMFX dropped 5.5%. In that scenario the VBAIX/RYMFX 80/20 dropped 11.8%

I have conflicting thoughts. Giving up 1.5% per year for a smoother ride wouldn't bother me personally but fair game for anyone for whom that would be troublesome. Using client holding BTAL the same way, a 20% allocation blended with 80% in VBAIX would be down 11% this year (about the same as RYMFX), would have been down 5.8% in the first three months of 2020 and down 7.9% in that same 2018 event. BTAL would have offered much more of a buffer during those drawdowns. So 20% in BTAL then, not RYMFX?

BTAL's 10 year annualized return is a loss of 0.99% so the drag for 20% in BTAL over that time would be more like 200 basis points per year versus 150. Again, no wrong answer if that is unacceptable. 

Another wrinkle to 20% into one alt strategy is that no single strategy should be expected to work every single time. In 2018, RYMFX didn't "work" but that clearly did not invalidate the fund or the strategy. I've always talked about putting small amounts into several alts for that very reason. I kind of cherry picked the three declines to look at, choosing the last three. IMO, BTAL is a great fund but I do not expect it to work every time, that is unrealistic. 

I think it was Jason Buck from Mutiny Funds who said "diversify your diversifiers." That's what I've been doing all these years and I suppose all of these posts about this lately is my exploration to see if I can find better diversifiers than the ones I currently use or add in one or maybe two to improve the overall effect a little bit. Plus, this is a lot of fun to learn about. 

The Bruce Dickinson reference in the title is of course a reference to the Cowbell Sketch on Saturday Night Live 22 years ago.