Over the last couple of weeks I've sat in on a few industry related webinars including what I would call more of a direct sales presentation. I don't usually do a lot of this sort of thing but if nothing else these could help me take the temperature of what is going on in the RIA space outside my normal routine. If I was lucky, I'd learn some things which I am very interested in doing.
One presentation about about incorporating more individual stocks into client portfolios which I've included since day 1. The industry seems to have moved away from stock picking to far more ETF-only model portfolios. At high level, it has never made sense to me that one wrapper could be the best way to capture every segment of the market. I haven't used this term in a while here but I am very much wrapper agnostic when it comes to individual issues, ETFs and mutual funds. Yes, ETFs are better than mutual funds most of the time for apples to apples exposures but there are a lot of strategies that don't lend themselves very well to ETFs.
The presentation was from a company that employs growth at a reasonable price (GARP) and if I wanted, I could outsource some portion of client accounts to them to manage. I don't want to do that but could I learn something about portfolio construction? The short answer for this one was no. There was a lot of "and we can help you close the business" which is not an opportunity to learn.
Another one was the one on one (two guys actually) sales presentation for an AI platform. Understanding what AI can do is high on my interest list. Is there an application that will allow me to move forward wit my approach to portfolio construction? The product focused mostly in individual stocks. Basically it could go out to the web to find, filter and interpret all kinds of information and then make suggestions in reaction to news for a given company, the industry it is in, a little top down information for changing portfolio weightings or swapping out names. Based on such and such, reduce your exposure to Intel or swap Intel for AMD (neither stock is in my ownership universe) for example.
The focus for now was far shorter term than how manage, it was unergodic
It was clear that this can absolutely evolve into something I would add in to my process. Most of the portfolio work, not talking research, I do is spreadsheet related. AI will at some point take all the spreadsheet work off my plate and do it for me. Maybe there are other platforms that will already do what I am talking about. I write all the time about BTAL and the Merger Fund (MERIX) as two alternatives I use. AI will be able to quickly find potential substitutes, back test them into the portfolio and probably project forward a set of expectations of whether MERIX is the right hold for a horizontal line that tilts upward or maybe I should switch to convertible arbitrage or something similar.
Lastly, I sat in on a presentation from Fidelity about investing in alternatives, liquid and otherwise. This was for advisors and while it wasn't so basic as to be a first introduction it was pretty basic. It's not clear what they were selling if anything but since Fidelity has a huge RIA business maybe it was just about education which I am in favor of but if that was the case, I would have appreciated a lot more meat on the bone.
Listed in the presentation materials were three Fidelity mutual funds that target different strategies.
- Fidelity Hedged Equity (FEQJX)
- Fidelity Risk Parity (FAPYX)
- Fidelity Macro Opportunities (FAQEX)
My initial reaction is to think it positive that a heavy weight like Fidelity is trying to get into the space, hopefully the funds can add value. They are new, so for now, they are pretty tough to evaluate to the point of any conclusions.
FEQJX only goes back to late 2022. In its short time it has a CAGR of 18.37 versus 30.12% for the Vanguard S&P 500 ETF (VOO) with a standard deviation that is 328 bp less than VOO. It will typically allocate 80% to stocks which seems low and there is an implication that the other 20% will going into put options to hedge. If that is right, then it sounds very hedged. There's no great way to evaluate an 18 month track record where the stock market has gone almost straight up. Going forward there are a couple of things to look for. Might it give a result along the lines of 75/50 (75% of the upside with only 50% of the downside)? Or with enough track record could it be spliced into the equity allocation to create a lower volatility portfolio without giving up too much upside?
I built the following risk parity comparison for FAPYX.
I've never been a fan of the version of risk parity that simply leverages up on fixed income no matter what. The reason I built the risk parity portfolios at 70/30 is to see if we can increase the equity exposure versus 60/40 while lowering the volatility. We've been able to achieve this with other alternatives in past blog posts but not with this type of risk parity.
As of its last reporting, FAPYX allocated just under 60% to equities, 80% to fixed income and 55% to futures and swaps which is kind of vague but does include gold. Risk parity is a very small fund space and it seems hard to do well in a fund wrapper. AQR seems to have figured it out better than most other fund providers if that interests you.
Trying to look through to what macro funds are doing is usually very difficult because of the leverage obtained using derivatives and that is the case with FAQEX. JDJIX is the John Hancock Diversified Macro Fund. I don't know that fund, I just pulled it from a list of top alt funds that Standpoint publishes.
FAQEX is also leveraged. It allocates 19% to equities, 125% to fixed income and then close to another 100% in various derivatives so it too is sort of a risk parity fund. The contribution to a portfolio from JDJIX versus FAQEX is stark, about 400 basis points of outperformance with a somewhat lower standard deviation. FAQEX, the way I added it results in a proxy for 60/40 with no real advantage. Maybe FAQEX will evolve to add more value than it has so far.
I've said this more than a few times but a big part of the learning, researching process is going through things that don't immediately offer utility or maybe never will. I don't know how many times we've talked about the RPAR ETF, it is interesting to me to study but has zero appeal for using in client portfolios.
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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