Saying Goodbye To An Old Friend

Last week, I said goodbye to a very old friend. A friend that has been by my side for 17 or 18 years, helping out more often than not. I expect I will miss this friend some but maybe not a lot. No, no one died thankfully. I sold the SPDR Gold Trust (GLD).

GLD started trading on November 18th, 2004. I thought I first bought it a day or two after it started trading but in researching old blog posts for this one, it is possible I actually bought it in November, 2005. Either way, I've been holding it for 17 or 18 years. I did have a fairly lucky, partial sale in 2011. If you click through to read that link, there's a pretty funny element of that sale that I didn't include in the post. We'd been in Yellowstone National Park. We got home fairly late at night and before bed, I flipped on CNBC Europe and saw that gold was at $1900. "Time to sell some." I woke up the next morning and sold, pretty sure I did that in the pre-market. I've been holding the rest of the position ever since.

Fans of gold talk about it being money, an inflation hedge and maybe some other attributes. For me, holding gold has always been about its tendency to have a negative/low correlation to equities. When stocks go down gold tends to go up and it does so often enough for me that I held on. 

This year of course gold held up better than stocks and bonds but is still down. Although I don't necessarily think it is a reliable inflation hedge, it's noteworthy that with our first serious inflation problem in decades, gold has gone down.  

Where I view gold as a defensive tool, the thinking here was if gold isn't working so well in such a serious event, should a switch be made to something that is more reliably defensive in a down market like we're having now and if the next few years turn out to be a bumpy road to nowhere. A lot of people are calling for a flat decade. I think that if ten years from now we look back and see average annual returns that are sub par it will come from volatile ups and downs that don't lead to much progress which is much different than flat. 

A benign 2.5% per year is not the worst case so not something to protect against. The thing to protect against is a volatile, bordering on nauseating 2.5% per year, that is the thing to protect against in my opinion and I think swapping out gold for a small increase in managed futures gives a better chance against a decade of 15-25% swings in both directions....again leading to a "flat" period. 

Our position in Standpoint Multi-Asset (BLNDX/REMIX) provides a little managed futures exposure but the result is more along the lines of doing well in most environments, up 6% in 2022, as opposed to potentially going up a lot in a terrible environment which has been the case with most managed futures funds this year.

Where a small slice was permanently allocated to gold to reduce the portfolio's correlation to the market, gold is being replaced with a small slice to managed futures for the same purpose. Where managed futures has done so well this year and been written about so much by so many pundits, if you've been researching this on your own, you've seen suggestions of 10, 20 maybe even a larger percentage allocated into managed futures. I've done back testing with large percentages but been clear to say it is just a strategy that could "not work" during some random event. With this swap we've done, the new fund plus BLNDX is nowhere near 10% to managed futures. Diversify your diversifiers. 

As we've explored managed futures over the last few months, the fund I used for blog post studies was the Guggenheim Managed Futures Fund (RYMFX) which when I used it during the financial crisis was part of the Rydex fund family. I sold RYMFX in Q3 2011. A few times over the last ten years I've referred to this fund noting that it was doing what it was supposed to do, there was nothing wrong with it, it did poorly because equities were doing so well. In the 10 years ending Dec 31, 2021 Yahoo Finance has RYMFX down 25%. That might be off slightly due to how Yahoo accounts for dividends sometimes.

Holding on to managed futures can be challenging but so too can gold. GLD did only slightly better than flat over the last ten years. Similar to what I've said about gold, if managed futures is your top performer, things in the world probably aren't going too well. But can we do a little better than RYMFX in the managed futures space? I think the answer is yes.

I replaced the GLD position with Alpha Simplex Managed Futures Strategy Fund (ASFYX). 

 

The chart does not include 2022. This year, RYMFX is up 21.96% while ASFYX is up 49.1%. It's one of the better performing funds in the space. Simply buying the outperformer is just a matter of chasing heat unless you can figure out why it outperformed and I believe I know the answer. Managed futures is also referred to as trend following. In most instances the timing of the trend being followed is something like 10 months or 200 days. ASFYX does that but there is also a part of the fund that responds to faster/shorter signals. Sometimes the world moves faster than 10 months which can be an enhancement and in fact from 2012 on, ASFYX has outperformed RYMFX in eight of those eleven years and one of the 3 years it lagged was just by 16 basis points. 

Another tailwind going forward for managed futures funds more broadly is the cash held to collateralize the futures positions is now earning 3-4% as interest rates have gone up. 99.5% of ASFYX is in cash. That's normal, it is a futures based fund. The leverage means it takes very little cash outlay to get the appropriate notional value for the size of the fund from futures. 

The final point to make on this is how long term all of this has been. Not just holding GLD for so long but also continuing to develop my understanding of managed futures even though I was out of the space for so long.