Monday Quick Hits

Some quick hits today.

Morningstar had a writeup on an interesting idea from Stone Ridge, who we mentioned the other day talking about reinsurance funds. They have a series funds that embed an annuity (sort of) into a mutual fund wrapper. The first iteration is simply an interesting idea. Guaranteed income has it benefits but of course the annuity package is very expensive whereas the first batch of these funds are merely not cheap.

The key thing to reiterate is that this idea will evolve. Basically, you buy the fund that corresponds with the year you were born. Morningstar said that for now they run from 1948-1963. You can sell the fund if you want up until you turn 80, after that you are locked in until you are 100. If you die at 90 your estate would surrender the investment. When year 100 rolls around, the fund is liquidated and anyone still alive splits the proceeds (I am guessing there are fees on the back end but not sure). Morningstar said this was a version of a tontine.

The payout on this first batch is a little over 5% so not as big as regular annuities. The funds for now just invest in treasuries and TIPS. There are two classes for each year, inflation protected (a little more expensive) and not inflation protected. The fee is in the neighborhood of 1%. That is not cheap for treasuries and TIPS but nowhere near the cost of the typical annuity. Vanguard is the one cheap annuity I am aware but I do not know the costs.

That this can be bundled into a mutual fund wrapper is a good first step to creating something more useful. I will be more interested if they can figure out how to have an equity portfolio under the hood, indexed for cost efficiency works, or maybe a balanced portfolio. This should allow for higher payouts. If an equity or balanced portfolio in these could generate 8% or so, someone with $1 million looking at just $40,000 of portfolio income could put a small amount, maybe $200,000, into one of these funds and take their portfolio income up to $48,000. I'm intrigued and will follow the idea to see if it evolves the way I think it will. 

ETF.com shared a paper from MSCI about building model portfolios. There are countless ways to create model portfolios, I mean the actual process, the input, not so much the outputs, the number of outputs are probably infinite. The process described seems very complicated. As described, it tries to figure out how to blend domestic equity, ESG, themes, factors, industries and regions. 

The paper is worth reading but I would diverge from what I think they are trying to do in terms of over-optimizing the portfolio. I think of a spectrum with optimization, over-optimization really, at one end and something more akin to all-weather at the other end. Beyond all-weather you could put the Cockroach Portfolio that we've looked at a few times and beyond that the Dragon Portfolio that we wrote about once. 

Too much optimization creates fragility. I think simple portfolios, modeled or otherwise, can be built to have some all-weatherish qualities without being weighed down by 30-40% in gold. 

I've been talking about CYA more on Twitter than here but this fund seems like it has failed. Monday was the ex-date for a 1 for 20 reverse split which took the fund up to 80 cents and as you can see it fell a ton again.

 

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