Deconstructing The Dragon

A few weeks ago we looked at the Cockroach Portolio, today we'll look at something called the Dragon Portfolio which comes courtesy of Chris Cole at Artemis Capital. The details of what the portfolio comprises come from Tokenist.com. If I were to pick an animal to describe a portfolio, I might go with rhinoceros. Not much can take down a rhino, plus I think they're cool. Here's the portfolio

 

Dragon is trying to protect against both a deflationary or inflationary outcome. 

One of the assets is volatility. The Tokenist article suggested client and personal holding TAIL but VIXM seems more like "long volatility" than a crash protection product like TAIL plus VIXM has been around much longer but we'll look at it with TAIL too. RYMFX is of course managed futures aka "commodity trend" and GLD is a personal and client holding. Here is the 10+ year result.

 

Portfolio 2 is 100% SPX and Portfolio 3 is 100% VBAIX. What jumps out is it that its worst year was nowhere near as bad as SPY or VBAIX and that the Dragon Portfolio has a negative correlation to stocks. The CAGR is pretty rough though. As assembled in DIY form, it doesn't keep up with inflation. I don't know how Artemis implements the portfolio but the context of all of these posts is to seek out better portfolios with easily accessible products. 

Hard to see above but 2020 was a fantastic year for the Dragon Portfolio as I assembled it, up 27.96%.

 

But there are a lot of negative years including the bear market we going through now. So negatively correlated expect when you need it most? Without 2020, the annualized return might be negative. From 2012-2019, as I assembled it is was down 0.87% annualized. Using TAIL instead of VIXM as the Tokenist article suggested gives a shorter time frame but shows the following. 

 

The biggest effect by adding TAIL for VIXM is that this version of the Dragon Portfolio would have done much worse in 2020, with TAIL it was only up 14.21%, giving up its outperformance using my preference of VIXM for long volatility. 

With an allocation of...

• equities 24%
• long volatility 21%
• gold 19%
  
• bonds 18%
• commodity trend 18% 

...does it remind you of anything? It looks like an idea for how to update or build a better version of the Permanent Portfolio devised 40-ish years ago by Harry Browne which allocated 25% each to stocks, bonds, gold and cash. Comparing the Permanent Portfolio then to Dragon with VIXM and 100% VBAIX for the same period we get this.

 

Portfolio 1 is Dragon and Portfolio 2 is Permanent. I used the SPDR 1-3 T-bill ETF (BIL) as a proxy for cash in the Permanent Portfolio. The CAGR improves for Permanent vs Dragon. If that is the case, I think it might be because Dragon allocates as much as 58% to exposures that at times have a negative correlation to equities. Both VIXM and TAIL are flat out negatively correlated. Gold sometimes is and managed futures is often negatively correlated. 

As we say often, stocks are the thing that goes up the most, most of the time (ex-crypto). While I believe it is important to manage portfolio volatility, you don't want to get too far away from some sort of "normal allocation" to equities unless you're in game over mode. You want the equity market's ergodicity to work for you and I don't think twenty something percent gets that done for people. 

My information about how it is put together comes from a third party so I can't vouch for the accuracy but based on the above screen shot from a video on the Artemis website, it's at least very close. Like I said, I don't know whether Artemis uses exchange traded products. Some sort of institutional product for volatility could look much different (better) than VIXM or TAIL and that difference could easily make all the difference in the world. 

The video talked about 100 year generational wealth. Is that a priority for you? If not then this would not be for you, literally, the objective is not your objective if 100 years is not your priority. It is not my priority. Also the video says they studied the last 100 years to come up with this allocation but I am not sure how they studied long volatility or commodity trend that far back.

Again, I could totally be missing the point but if I or you or anyone doesn't understand a portfolio or investment, they shouldn't use it until they can actually learn and understand the idea.