Is All-Weather A Unicorn?

There's a lot of debate and discussion these days about how to make portfolios more all-weatherish, whether or not bonds still work, whether now might actually be a great buying opportunity for bonds as well as there being a bunch of alternative funds aimed at trying to help fill the gap toward all-weatherness.  

Barron's makes the case that 60/40 isn't dead yet (a play on Monty Python). Bond prices have come down a lot so maybe now is a great buying opportunity is the logic there. Certainly, 60/40 is benchmark for portfolio construction regardless of whether prices are attractive now or not. For adding fixed income exposure now that prices have dropped I've added short duration here and there which has the effect of adding yield but not taking on a lot of price volatility if yields have another leg or two higher. With the yield curve flat or inverted, depending on where you look, I don't know why someone would lock in for ten years when they can get more basis points for two or three years. 

A point I've been making through this event is that I think bonds have become a source of unreliable volatility. That's not really an issue with shorter maturities but longer ones yes. Guess wrong and you could be sitting in ten year paper that is down a bunch, with a below market yield waiting for it to mature or even worse for a bond fund, you might find yourself hoping, not waiting but hoping, it returns back the level you bought at. 

If you've been reading my posts for a while you know I was very concerned about this sort of bond market event even if I had no idea as to the timing. This was also part of the equation for my starting to learn about and use alternative strategy funds in client portfolios. This space has of course proliferated with more funds yes, but more sophistication, more opportunity for people who are willing to put in the time to build very robust portfolios. 

Achieving true all-weatherness might be more of a unicorn versus pursuing it which can be done, changes can be made although my preference to move gradually and as I say often, I look at far more of these than I will ever use. That brings us to today and a couple of funds, one new to me and one that just started trading.

The Cambria Value & Momentum ETF (VAMO) has had a great run this year, it's up about 10% in 2022. It mostly buys individual stocks and can short S&P 500 futures as a hedge when circumstances warrant. I saw it mentioned on Twitter in sort of a hey look at this Tweet. Can it be all-weather? My first thought was if it goes long stocks with favorable value metrics and momentum and can hedge by going short, maybe it would look like client and personal holding AGFiQ US Market Neutral Anti Beta (BTAL). Here's a relatively long term chart comparing the two to the S&P 500.

 

Interestingly, VAMO seems to be perfectly, negatively correlated to BTAL while sometimes looking like the S&P 500 and sometimes not. According to Portfoliovisualizer, a 70/30 portfolio with 70% in an S&P 500 fund and 30% in VAMO had a better CAGR than if the 30% had been in BTAL but the BTAL version would have offered noticeably more downside protection. 

This table shows how it would have done as a stand alone, one-fund solution.

 

Maybe VAMO could be used for an investor in some sort of gameover position. The annualized CAGR stayed ahead of reported price inflation and with its 10% gain this year is still doing so. For some folks that will resonate. 

The other fund is the High Inflation and Deflation ETF from Alpha Architect with the epic symbol of HIDE. The default allocation is 50% to intermediate treasuries and 25% each to commodities and real estate typically via REITs. The fund might be fully invested or swap out any or all three if they are in unfavorable trends. There may or may not be inflation or deflation but the fund will hold what many people think of as defensive assets when their trends are favorable. I don't actually think REITs are all that defensive but if the trend is unfavorable, regardless of the reason, it won't be in the space. 

We'll see how it does, the Alpha Architect guys know what they are doing but that doesn't have to mean that the fund will offer protection. I'm not saying it won't but there are a few moving parts and I'd want to see how they all interact for a while. 

I have no interest or intention of buying any fund mentioned in this blog post for clients or buying it personally other than BTAL which we already own.