Proxy Palooza

For years, I've been talking about understanding what a fund is actually trying to deliver, what expectations are being set and what the fund might be a proxy for. Getting this wrong could result in having way more volatility in the portfolio than was expected or being left behind in a big move higher. 

A good example is long/short funds. They buy some stocks based on some sort of criteria and then sell short other stocks based on maybe the same criteria or something different.The chart shows three different long/short funds all with very different results compared to the S&P 500. They might all be long/short but the strategies are all very different, intended to do much different things. 

CSM is the ProShares Large Cap Core Plus, ARB is the AltShares Merger Arbitrage ETF and client/personal holding BTAL is the AGFiQ US Market Neutral Anti-Beta ETF.

CSM uses a 10 factor quantitative model to rank the largest 500 US companies. It goes long the highest scoring companies and shorts the lowest scoring in a ratio of 130/30 that nets out to 100% exposure. The managers hope the fund will out perform, the expectation is they are trying to beat the market. So it is a proxy for regular equity exposure. Without having looked, I imagine that at times it outperforms the S&P 500 and other times it lags but it will be close one way or the other.

ARB will buy takeover targets and sell short the acquiring companies. Merger arbitrage sets an expectation of having very low volatility, more of a market neutral or absolute return sort of result. I think these funds, there's a bunch of them, are proxies for what investors believe they are getting when they buy plain vanilla bond funds.The result captured in the chart is exactly what I would hope for in buying a merger arbitrage fund. Buying ARB when you think you're getting CSM will result in getting left way behind when the stock market rallies. 

BTAL buys low volatility stocks and sells short high volatility stocks. It sets the expectation of not looking too much like the stock market and it is a proxy for being a hedging tool. It went down coming into 2022 as stocks went up a lot but this year it is up 18% per Yahoo Finance. BTAL can actually go up in the right sequence of events when the market is rising, it did this for a little over two years into early 2020. Here again, if the stock market rallies up hard, I would expect BTAL to get left way behind. 

All of that is a preamble to an article in Barrons about the Transamerica Multi-Asset Income Fund (TSHIX). This article is the first time I'd ever heard of the fund and based on the table of contents to this week's issue and the first two sentences, I thought it was a high yield bond fund. The Morningstar page for the fund says it is an Allocation 30-50% Equity Fund but the Barron's article says 50-70% Equity.  

Just looking at the name of the fund it may not be obvious what the fund managers are trying to do. You see the name, oh it's an income fund, it must be some sort of bond proxy or maybe high yield. Here's how it has done.

 

At times it tracks equities kind of closely, looking a little more like low volatility equities at other times. LGLV is the SPDR US Large Cap Low Volatility Index ETF. YTD TSHIX is down 12.7%, LGLV is down 11.9% and the S&P 500 shows down 17.9% all per Yahoo Finance. The trailing 12 month yield per Morningstar is 3.68% so maybe that will go up with the rise in yields, not sure but what expectation do you think someone should have for this fund, what will it be a proxy for? 

This fund is just an example of process, it is not one I will be pursuing for possible use in client portfolios. So at a casual glance only, it appears like some sort of low volatility equity type of proxy. Assume that's accurate for a moment, you might be disappointed then if you thought, because it is an income fund, it would do what a plain vanilla bond fund would do during an equity market downturn. I realize on this go around, plain vanilla bond funds have very much disappointed investors. 

For five years, Yahoo has the S&P 500 up 60% versus up 16% for TSHIX. That is pretty far behind the equity market, and in that time the Aggregate Bond ETF (AGG) is down 8% so this fund might be in a no-mans land. Someone trying to build a lower volatility portfolio might like that sort of in-between return. Generally, I prefer normal market exposure paired with much lower volatility or negative correlation diversifiers. Merger Arb funds for example will look nothing like TSHIX over longer periods. There's nothing obviously wrong with TSHIX, it just doesn't have the attributes I would look for in a normal investment portfolio, normal as compared to a client needing more of a game-over allocation.