There's a lot of neat things about 19+ years of blogging, I started in Sept 2004, including circling back around to ideas that we started talking about a longggggg time ago. The first version of Random Roger is essentially gone due to a mishap migrating that content over to AdvisorShares when I had that side gig but many of those blog posts are still up at Seeking Alpha.
With that preamble, I started thinking about the 75/50 portfolio that I first started writing about during the Financial Crisis. It was created as far as I know, by John Serrapere. He wrote several articles about it for IndexUniverse which was the precursor to ETF.com but unfortunately, John's content is no longer up on the site anywhere. I sort of know John, when I worked at Schwab Institutional in the 90's he called in to the desk regularly, not that he would necessarily remember me.
I've mentioned 75/50 a couple of times in passing but the big idea was to create a portfolio that captures 75% of the upside of the equity market with only 50% of the downside. It is very difficult to do but anyone able to pull that off would obviously have a smoother ride and if you play with the numbers, you'd see that you'd come out ahead over the long term. Obviously, if the stock market has an up year most of the time, which it does, then you'd be lagging, most of the time which would be a real exercise in patience and a challenge for maintaining investment discipline.
Today's post will look at whether creating a 75/50 portfolio might be a little easier thanks to the manner in which strategies available in ETFs/mutual funds evolved as there is much more sophistication now available. I did a search for Serrapere's articles because in at least one of them he went into detail about what he used to build the portfolio. It was an active portfolio though with changes made as necessary. Amusingly, about the only content I found was stuff I'd written including this at Seeking Alpha from October, 2009. Fortunately, I took the time to past in the portfolio holdings back then and the respective weightings as follows.
- AMJ 3.5%
- ARBFX 3.7%
- DBA 4.9%
- EWZ 3.2%
- GAF 3.2%
- GDX 12.9%
- GIM 12.8%
- GLD 12.8%
- JRS 3.9% (short position)
- MERFX 3.7%
- MOO 3.0%
- PXJ 3.3%
- TBT 24.7% (thought of as a short/hedge position)
- TDF 3.1%
- TIP 7.1%
- VXX 7.4% (thought of as a short/hedge position)
- VXZ 7.5% (thought of as a short/hedge position)
- XLE 3.9%
There's a lot there, really lot. Looking at this list, I wondered if he was the influence that led me to the Merger Fund (MERFX). I bought it for clients in 2010 or 2011 and still hold it, so maybe.
The concept of smoothing out the ride is hugely important to how I manage portfolios. I don't think it is quite right to say that 75/50 influenced how I do things but maybe more codified or validated my approach from back then and might have allowed me to refine my approach.
Where John's approach veers from mine is how complex his portfolio was in 2009. Simplicity has always been a priority for me, and in the last couple of years I've taken to describing the portfolio as simplicity hedged with a little complexity. Not being able to read John's thoughts from 2009 (the link I included in my 2009 post is dead), the portfolio strikes me as some sort of global macro blend.
The contrast to what I perceive what John did to what I do is my portfolio is more about simpler, long equity market exposure blended with much smaller allocations to diversifiers based on their correlation to equities. Where some of the diversifiers I use might go a little ways down the hedge fund path, John's version of the 75/50 portfolio went much further down hedge fund path. As more of an asset allocator and investor in equity market themes, global macro like John did probably isn't in my wheelhouse but understanding how a well executed strategy in a fund wrapper could help manage volatility, help smooth out the ride, might be in my wheelhouse. It occurred to me that with the way funds have evolved in their sophistication, maybe a 75/50 can be created now in a much simpler fashion than back in 2009.
Here are a couple of examples I was able to put together that appear to get closer to 75/50, even better in some instances using just two or three funds. They're simple for being just a couple of funds but the funds themselves vary in complexity.
Other than Vanguard S&P 500 ETF (VOO) for equity exposure, I'm going to leave symbols out of it and just disclose strategy and attributes. So above, Portfolio 1 is 100% VOO, Portfolio 2 is 42% VOO, 32% in a very complex multi-strategy fund and 26% in a absolute return fund with almost no volatility. Portfolio 3 is 75% VOO and 25% in a fund with a negative correlation to VOO, its beta is negative and usually ranges from -0.50 to -0.70. Portfolio 2 doesn't quite get there on the 75, Portfolio 3 does. The standard deviation of both is much less than 100% VOO and in 2022 both were down much less than 100% VOO which was down 18.19%, Portfolio 2 down 10.53% and Portfolio 3 down 8.52%. In 2018 though, VOO was down 4.5%, Portfolio 2 down 5.52% and Portfolio 3 was down 0.40%. Portfolio 2 falls a little short of the mark but gets most of the way there and as far as 2018 goes, the goal from my perspective is about protecting against down a lot, not down a little.
Portfolio 1 above is again 100% VOO. Portfolio 2 30% equities, 30% managed futures and 40% in different complex multi-strategy fund. Portfolio 3 is 30% equities, 30% managed futures and 40% in an even more complex global macro fund. Both outperformed VOO but that is because they both went up in 2022, the standard deviations are less than half and again, in the only down year available to sample they were up so the clearly make it on the 75 and the 50 but again, there's only three years to study.
One last one above to look at. Portfolio 1 is 100% VOO and Portfolio 2 is 30% equities, 30% managed futures and 40% in a multi-strategy fund that is completely different than any other one I've see that is both complex in what they do but the fund is more transparent so it is easier to understand what it is doing.
A few problems with these of course. First is that these are pretty new. And while arguably, we've gone through a full bull/bear cycle betting heavy on such a short time frame is difficult which is why I left symbols out of it. But, where part of the conversation is that funds are evolving to offer more sophistication, these strategies weren't readily available to retail sized accounts 15 years ago. Another problem is in the last sentence of the previous paragraph, understand what they are doing or even understand what they own. Even if you look at the holdings, it is unlikely you'll actually be able to figure out what is going on, I usually cannot tell by looking. Not knowing/understanding what you own is really not a great idea. Also, these funds are expensive in nominal terms. When an alt turns out to be a phenomenal hold, then I think the fee can be justified but if things go badly and it's expensive, that's problematic.
Most of the alts I used in these studies are mutual funds not ETFs. Mutual funds have a lot of drawbacks but the most sophisticated strategies for now don't seem to make their way to ETFs or when they do, the ETF wrapper implementation is different. For many years I've been saying that it is not logical that one wrapper, like ETFs, can be the single best wrapper for all exposures and so it is for now with mutual funds in this realm versus ETFs. It's a good bet that changes over time but it might take a long time. If you have choice, qualified accounts (IRAs and Roths) are better for mutual funds than taxable accounts.
I'm not willing to take the risk of building a portfolio this way but the 75/50 strategy has influenced how do things since before I knew about it. That it might now be easier to achieve is a big, favorable step forward in my opinion. It would really take a lot to move me from simplicity hedged with a little complexity to two or three big scoops (mutual funds) of complexity.
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.
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