And this will be the logo. Each red/yellow/green represents one of the strategies the fund will use, 37 in all!
I'm being a smart aleck. I love this picture though, the absurd complexity is a metaphor for so many things, why not a global macro or multi strategy fund?
We've spent a lot of time this summer modeling portfolios that steer clear of interest rate risk as I believe bonds have entered a new volatility regime where their volatility is now unreliable for use as an equity buffer. A lot of what we've focused on have been unrealistic portfolios because they put 20% into one alternative which I think is overly risky. For today's post I built a portfolio that is closer to reality in terms of avoiding strategy risk but also uses some of the concepts we've been writing about throughout this project.
Some of the holding are new but many of the targeted exposures are ones we've been talking about for years. I compare the portfolio to 100% in Vanguard Balanced Index Fund (VBAIX) and I sort of recreate client and personal holding Standpoint Multi-Asset (BLNDX) with a longer time frame in Portfolio 3.
SSO is levered, the 2x leverage "works" most of the time. Using the leverage in this manner is a form of leveraging down because SSO and MENYX (test driving that one for possible client use) uses 40% of the portfolio to equal a 60% allocation to equities. I've owned FLOT for clients for ages as well as a short term TIPS fund from another provider for ages. Those have "normal" fixed income volatility but little to no interest rate risk. I am test driving ASFYX for managed futures and have owned BTAL personally and for clients for more than four years. Client holding VIXM adds volatility as an asset class which is an idea we've been exploring all summer, GBTC is an allocation to asymmetry and of course it may go to zero. The holding period for GBTC has included both huge gains and sickening declines. BIL, and you could use actual T-bills instead, is sort of a return stack. Risk free assets now have yield although the backtest of this portfolio was in a period where T-bills had no yield. Here are the results.
Both portfolios 1 and 3 beat 100% VBAIX and do so with lower standard deviations. The CAGR for Portfolio 1 is far superior to the other two and it's standard deviation is only slightly higher than Portfolio 3. Much of the boost in annualized CAGR comes from huge outperformance of GBTC in 2017 which is important to understand. Portfolio 1 lagged behind 100% VBAIX in 4 of the years studied but not by much and when VBAIX lagged, it lagged by a lot including this year. Portfolio 3 lagged behind VBAIX in 5 of the 6 years studied but the one year it outperformed is this year going up 8.94% so far versus a decline of 14.55% accounting for all of the long term outperformance.
Where Portfolio 3 is a proxy for BLNDX, as much as I think it's a terrific fund, 100% of anything is not a good idea. Portfolio 1's small lags for many of the years in the study period; it was still close in those years but Portfolio 1 allowed for sidestepping interest rate risk. This has been an issue for a long time but of course there was no way to know when it would matter. Turns out 2022 is when it mattered but it could have just as easily been a different year. Rates at all time lows before told you the risk was there but couldn't tell you when to get out so in my opinion, best to just avoid the obvious risk as I have been saying for years in various places.
What do you think about Portfolio 1?
6 comments:
Funny enough, I was JUST looking at SSO as part of a DIY NTSX. It would enable me to maintain some capital efficiency, while breaking the 60/40 mix inherent in NTSX. (I can ratchet down my NTSX percentage and use other equity ETFs to get more small and value exposure, but it would be more straightforward to use SSO plus others). But I gave up on it after reading about the volatility drag/decay with the ultra funds. Have you done any work to determine that is not a killer with SSO?
Second, as for the BLNDX replication, my understanding is that it is 150% leveraged, with equity being 50% and managed futures being 100%. But your replication is 50/50? Also, to replicate a 150% leveraged fund, you'd really need to compare the 67/33 ASFYX/ACWI unleveraged port to a port that was 67% BLNDX/33% cash, right? I've done that and the two ports do compare nicely, except the replication port is way up this year because of ASFYX.
I'm also looking at MBXIX to get some "global macro." Again, levered, which is great for efficiency. And because it's mixed with equity, behaviorally it should be easier to keep during times when global macro is not doing great.
It should also be noted that the ultra funds have very poor dividends
Not sure I see the appeal of MENYX. It perform very close to VBAIX. Compare 100% MENYX to 100% VBAIX, then 80% SPY, 10% ASFYX and 10% BTAL. Std Dev of the latter port is lower than MENYX and the returns are far better. I'd eliminate it.
Run the port again excluding the stellar 2022 performance of ASFYX, and the results are still strong.
Max,
Thanks for the feedback. With SSO, just casual observations of different lengths of time and different years, it is close to double far more often than not. That may or may not be close enough for the end user. MBXIX does well more often than not too but a lot of moving parts I'm trying to move away from. MENYX is lower vol equity, so maybe similar to VBAIX until this year. 60/40 works most of the time but I think it will be less reliable going forward. MENYX delivering what 60/40 has delivered before is appealing. Every convo I've had with Eric/Matt from Standpoint (many) talked about 50/50 but maybe I have missed something.
Hi Roger,
I watched your presentation for the money show and enjoyed the material. Your presentation got me thinking about overall portfolio construction and portfolio diversifier sizing. From a portfolio construction standpoint is the old 60/40 now something like 60/30/10 where the 10 is all diversifiers that help with volatility in both the stock and bond “sleeves” of the portfolio? Seems like in years past diversifiers were mainly used to smooth out the stock side of the portfolio but based on your presentation that may no longer be the case.
When sizing these positions do you think it’s better to size each against the entire portfolio or against the portion of the portfolio the diversifiers is intended to hedge or diversify. For example if BTAL is used to hedge the stocks in the portfolio and the position size is 2% would that be 2% of the $ in stocks or 2% of all portfolio assets (stocks and bonds)? My last question is what would be a typical position sizing? I know you have written about not having a portfolio of diversifiers with some equity. If position size for each portfolio diversifier is 2% of the entire portfolio then owning 5 of them would put the portfolio at 10%.
Thanks
Kevin
Hi Kevin,
Thanks for sitting in on that presentation and for your comment here.
Answering your question directly, I've added some positions as 2% of equity like BTAL. There have been others, like MERFX which is more like 5% of fixed income. One is to help manage equity volatility and the other is a fixed income replacement.
That might not be helpful for someone managing their own portfolio I realize because buying something is a spreadsheet process for me where all client accounts are listed and then I size in for each account participating in the trade.
I don't think there is a wrong answer to your question. For some market event, the way you've built it might turn out to be optimal or not but suboptimal can still work very well. Hope that helps.
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