A Two Fund Portfolio To Meet All Your Needs?

Earlier this week I used portfoliovisualizer to analyze a portfolio that allocated 50% to SPDR S&P 500 (SPY), 30% to Standpoint Multi-Asset Fund (BLNDX) and 20% to Cambria Tail (TAIL). BLNDX and TAIL are personal and client holdings. I compared that portfolio to 100% SPY and to 100% Vanguard Balanced Index Fund (VBAIX) which is a proxy for a 60/40 portfolio.

The big idea is to find liquid alternatives that could substitute in for traditional fixed income to buffer equity market volatility if bonds will be less effective as a buffer as I suspect will be the case. The SPY/BTAL/TAIL combo looking back offered a slightly higher CAGR than VBAIX with a lower standard deviation as follows.

 

The short time frame is a fair observation as being a knock on the idea but BLNDX has passed every test put in front of it in its short life in my opinion.

A professional acquaintance sent a prompt to look at client/personal holding AGFiQ US Market Neutral Anti Beta (BTAL) in a similar light. BTAL has been around much longer, so more chances to either succeed or fail. Here's 75% SPY, 25% BTAL as Portfolio 1, 100% SPY is Portfolio 2 and Portfolio 3 is 100% VBAIX.

 

Again, better CAGR, lower standard deviation and its worst year, this year, nowhere near as bad as VBAIX. So better return, less volatility in a portfolio that is even simpler that the portfolio we looked at the other day for having only two funds.  

Here's the correlation history for BTAL to SPY.

 

With the current correlation at -0.71, today's portfolio could be thought of as having a net long equity exposure of 57.25%, a hair less than VBAIX' target. I would also note that although BTAL has a negative correlation to stocks and most of the time studied was fantastic for the stock market, the relatively large BTAL exposure was not a problem when considered versus VBAIX. A portfolio like this is not going to keep up with 100% equities. I included 100% SPY in these studies to see how far we're diversifying away from 100% equities. 

BTAL goes long low volatility stocks and short high volatility stocks. This portfolio relies on that dynamic to keep on working. It's probably a good bet that BTAL's process will continue to work most of the time but you can never assume infallibility with any strategy. There could be some sort of adverse stock market event where BTAL, or any strategy fund, doesn't "work."

Back to a possible real world application of this idea, there are quite a few funds that could be expected to behave as BTAL does more often than not (remember, no infallibility) and if you thought 25% to this sleeve made sense for you, you could put 4 or 5% into several of them to diversify strategy risk. I can't see ever going 25% into a single alt but the work here is showing me that I can probably gravitate to using one or two few funds at 4-5% weight versus 2-3% weightings.