Picking Apart A Very Sophisticated Portfolio

When I was working on yesterday's post I stumbled back into the Return Stacked 60/40 Absolute Return Index which is a portfolio funds blended together with a lot of embedded leverage in pursuit of capital efficiency. It's a very sophisticated portfolio. The high level objective as follows:

The Index is designed to preserve exposure to core stock and bond allocations, while bolstering expected risk-adjusted returns with non-correlated return streams like trend following, global macro, and tail-hedging strategies.

Here's what it is in the portfolio and the notional exposures.

 

The portfolio is benchmarked to the Vanguard Balanced Index Fund (VBINX). They have data back to November of 2020 and since then, it outperformed in 2020 (partial year), 2021, 2022 and is lagging this year.  

Although we've written about this portfolio/index quite a few times and looked at several of the funds in the portfolio, one we haven't looked at is NFDIX. It is a capitally efficient mix of stocks and bonds. It's not quite as plain vanilla as mixing the S&P 500 and the Agg, there's more to it and the targeted notional allocations appear to be 75% to each asset using equity ETFs and bond futures. NFDIX has struggled since its inception and Yahoo shows it has having one star from Morningstar. Portfoliovisualizer has its CAGR at 3.44% going back to 2016 and comparing it to a 100% allocation to NTSX since NTSX' inception shows a CAGR of 2.32% versus 12.42 for NTSX. Comparing 100% NFDIX to 100% NTSX isn't an exact apples to apples, both would offer 150% notional exposure but NTSX would have more in equities and less in bonds but the CAGR disparity is huge. 

Harsh comments coming, I don't think RDMIX offers any sort of reliable return profile. It has lagged at times and outperforms at times with no discernible effect. I'm not sure it plays a role in a diversified portfolio. SPYC owns index puts and calls on top of S&P 500 exposure. The puts didn't help last year and the calls aren't helping this year. SPYC did outperform in 2021 by 50 basis points. 

Let's try to make some changes to the Return Stacked 60/40 Absolute Return Index to make it a little simpler but try to keep as true as we can to the original premise. I'm going to get rid of NFDIX, RDMIX and SPYC and just increase the allocation to NTSX to 55.5%. The benchmark is 60/40 remember so 55.5% gets us close. I'm going to swap TYA out for Cambria Tail Risk ETF (TAIL) as a way to add volatility as an asset class and leave the others as allocated and we'll see how it compares to the original Return Stacked Index and if it can add value versus a plain 60/40.

It doesn't go back very far so the sample size is not great but the revised Return Stacked portfolio does show much better performance over VBAIX above in red, and not just in 2022 when managed futures was white hot, with a slightly lower standard deviation.

 

If I am counting correctly, I think the notional exposures to the revised Return Stack are 60.7% in equities, 33.3% in fixed, 30% in managed futures, 15% in global macro which is a pretty nebulous thing and I'm not sure what to do with TAIL because on the way down for equities it is a proxy for volatility as an asset class but in other markets its underlying treasury portfolio is the bigger driver of returns. So I get the total notional of the revised portfolio to be 142.5% versus 162.34%.

The revised outperformed the original in 2021 by 236 basis points, lagged by 106 basis points in 2022 this year through 8/31, the revised fund is better by 161 basis points. Trying to apples to apples for volatility only allows for looking at 2022 and 2023. The original has a standard deviation of 9.63% versus 11.70% for the revised so the original wins there and the CAGR is pretty much a push with a 5 basis point nod to the revised version. I would not draw any conclusion about any sort of portfolio based on 20 months of data but it is still interesting.

I think the original Return Stack Index is very complicated, far more so than I am looking for. The revised version I came up with for this post is also more complicated than I would want to go with. In previous posts about this index we've built much simpler portfolios that fair better. I can see where just a little bit of leverage to leverage down can make sense but the 160% cited or 140 in my version is more than I'm going to want to do in a real world portfolio. 

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