Raining On All-Weather?

During the last week I got emails about a couple of new ETFs that offer alt strategies. One seems to apply trend following to multiple assets including a large weighting to equities and the other looks to provide an absolute return strategy that kicks off an income stream. For now, I haven't had a chance to dive in and the funds are so new that it is tough to even get a driveby impression but I will circle back around and if they're interesting I will write about either or both later.

They got me to thinking about what a generally bad year, 2023, that a lot of alternative strategies or other forms of diversifiers are having. 

The iMGP DBi Managed Futures Strategy (DBMF) was a star performer for much of 2022. When the S&P 500 was at its lows last year, DBMF did a great job offering some counter balance with a gain as you can see in excess of 30%. Then starting in mid October, equities started to creep a little higher and DBMF came off somewhat faster. This year DBMF is down about 6% per Yahoo. 

Client and personal holding AGFiQ US Market Neutral Anti Beta (BTAL) was up 19% last year but this year it is down 15%. Neither of those funds are intended to be all-weather, as alts, they are pretty narrow and intended to go up when stocks go down. 

We wrote a few posts last year about the Rational ReSolve Adaptive Asset Allocation Fund (RDMIX) which is intended to be an all weather strategy. That fund did gangbusters in the first half of 2022 rallying about 10% as the S&P 500 was down almost 15%. It then rolled over to close the year down just over 3% on a total return basis. This year RDMIX is down about 1%.

The Permanent Portfolio (PRPFX) which purports to be all weather (even if just in design, not sure if they say that in their literature) put in some interesting numbers over the last couple of years. In 2022 it was down 5.5% and this year it is up almost 7%,in line with the equal weighted S&P 500. Since the start of 2022 then, Yahoo has PRPFX up a fraction of 1% with a standard deviation from Portfoliovisualizer of 10.49% while the S&P 500 is down 4.5% with a standard deviation of 16.77%. That seems all weatherish, more so than RDMIX.

Let's also throw in client and personal holding Standpoint Multi-Asset Fund (BLNDX/REMIX) which frequently talks about seeking an all weather result. 

That chart nets out noticeable outperformance for BLNDX for the year and half we're talking about with a standard deviation of 9.8% but year to date BLDNX is only up 4%.

As some of these alts and all weather funds were shooting the lights out there was plenty of chatter about having very large allocations to these strategies and others and I blogged countless times saying that is probably not a great idea. Equities are the thing that goes up the most, most of the time. The further an investor gets away from something close to a normal allocation to equities the more likely they are to get left behind. 

Dividend stocks as a factor, did very well last year. There was plenty of dialogue about just owning dividend stocks. The Schwab US Dividend Equity ETF (SCHD) was only down 3% last year which is a great result. This year it is down just shy of another 3%. 

 

There was a lot of recency bias in return stack/capital efficiency Twitter suggesting huge weighting to things like managed futures. We explored that plenty here and I've never been a fan. 20% is far more than I realistically would want in any single alternative strategy. I don't think we ever looked at 50% dividends/50% managed futures last year (switched to LOTIX for a longer study period) but this is the sort of stuff others were discussing.

  

50/50 dividends/managed futures lagged for a very long time including dropping 9.5% in 2018 when VBAIX dropped 2.8%, not very all weatherish. 50/50 dividends/managed futures finally pulled ahead after 2022. How many people could lag that long without throwing in the towel? 50/50 dividends/managed futures is probably valid but it is not optimal. You're kind of waiting for the next calamity and even then, like 2018, there is no guarantee that this sort of all weather will work. 

When we talk about trying to manage or offset equity volatility, I will repeat, diversify your diversifiers because chances are they won't all work in every single event. Managed futures is great but it did badly in 2018, a down year for plain vanilla 60/40. If it did that once it can do it again. 

I definitely want some exposure to strategies that should go up when stocks drop like managed futures and BTAL which I've used for quite a while and recently I added long volatility (long vol is another that was up a lot last year and down this year). I also want exposure though to strategies that should be horizontal lines that tilt upward no matter what is going on. The two funds I rely on most for this attribute were each up low single digits last year and this year one is down less than 1% while the other is up about 3%. When I talk about a fund/strategy meeting its expectation, that's exactly what I have in mind. 

For my money there is room for both types of alts, up a lot in a down market and horizontal line, all in much smaller doses with multiple tools for each attribute.

For equity exposure, for someone who needs equity market growth for their numbers to work, I believe you gotta have something close to a normal allocation to equities (repeated for emphasis). The context I am talking about is an equity based portfolio hedged with some alt exposure, not a collection of alts hedged with a little equity exposure. If you're really just trying for something like inflation plus 200 basis points or something that, then yeah, this may not pertain to you. There are funds that target CPI plus X%, or at least there used to be, that might make for an interesting blog post too.  

Last year and this year strung together provide a great example of why you want exposure to various types of exposures and attributes. If you are well diversified, you had some things that went up last year and probably more that went down because of how badly the broad markets did. If you made no changes then this year you should have more things that are up because markets are up but still some that are down. If everything went up together in 2021 then odds are high that they all went down together in 2022. 

If you're really interested in trying to weatherize your portfolio, you might be better off building it yourself with narrower exposures than using one fund that tries to do it all.

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.