Monday, May 06, 2024

ETF Democratization Continues

A whole bunch of fund stuff today.

First from the FT, it looks like there will be a parade of ETFs from hedge fund managers, packaging their respective strategies into ETFs. The article focused on the Tremblant Global ETF which will have the epic symbol of TOGA. The FT also said that Man Group, Gotham Asset Management, Ionic Capital Management and others were going the same route. Part of the drive is for more AUM but of course the fee structure will have to come way, way down for the ETFs to have a shot of being marketable. 

Kind of related, blogger Nomadic Samuel highlighted four funds that have decently long term track records of outperforming the S&P 500. Outperforming the broad market is also the objective of TOGA and I'm guessing the others that might come behind it. When a fund or strategy does have a long term track record of outperformance, it is natural to wonder if it should be bought. 

The first fund he mentioned was Boston Partners Long/Short Equity (BPLSX).

Based on those numbers alone which go back to 1999, yeah, I want to learn more. Here's the year by year though.

Over 25 years, it has only outperformed the S&P 500 11 times. That is not a bad result but might be less than you'd think when looking at the CAGR numbers. I outlined the four years that account for just about all of the long term outperformance. In 2000, BPLSX outperformed by 69%, in 2001 it outperformed by 37%, 22% in 2002 and 46% in 2009. For the last ten years, BPLSX's CAGR is a little more than half of the S&P 500. The fund could absolutely have another monster year in the next bear market but based on the fund's history, the outperformance is not a little bit every year, it comes from the occasional huge year. 

One of the other funds he mentioned was the Fidelity Contra Fund (FCNTX) which Portfoliovisualizer can take back to 1985, 40 years including a partial for 2024. It has outperformed 23 out of the 40 years. In most years FCNTX was close to the S&P 500 either way.

There were a few big years of outperformance for FCNTX in the early 90's but much closer in most years since. It has continued to outperform for the last ten years, but it is worth noting that in 2022 Contra Fund was 1000 basis points worse than the S&P 500. The point is not that either fund is good or bad but more about understanding how a fund works and to gain some insight on what drives returns. 

The other day, an email came in pitching a tax lien fund. It's for accredited investors, there's a huge minimum investment, I believe the fund is gated and I'm sure quite expensive. Without digging in to see if they mark to market (a huge issue with private funds), the returns look great and uncorrelated. The market for weather related derivatives on the CME has grown substantially and that offers the potential for uncorrelated returns too. We've looked at the CBOE S&P 500 Dispersion Index in previous posts as potential investment products offering uncorrelated returns. Stone Ridge has a mutual fund that owns an art portfolio which, again, potentially offers uncorrelated returns.

Stocks are the thing that goes up the most, most of the time. That point is the anchor, for me anyway, in thinking about how to build and maintain a portfolio. Everything else we talk about is about trying to add some sort of effect to the return/volatility profile of the anchor asset of equities. Having small exposures to negatively correlated assets can be very beneficial to managing portfolio volatility but too much allocated to negative correlation becomes a hindrance instead of a helper. 

We talk about volatility in a similar manner, adding assets with very low volatility can also be very beneficial but again, too much and it becomes a hinderance over the course of an entire stock market cycle. 

So in addition to a portfolio sleeve for negatively correlated assets and another sleeve to low volatility, I believe a sleeve to truly uncorrelated assets also makes sense. I have a couple of funds in my ownership universe that I believe are truly uncorrelated. I don't expect them to outperform equities over the long term, the attribute of doing their own thing can be beneficial to the overall portfolio.

I have no interest in the tax lien fund that was emailed to me, and I can't see buying an art mutual fund but the Dispersion Index is interesting on its face, weather derivatives seem interesting too and there are others to spend time learning about. I'd take in information about any of these, including ones that are less interesting on their face, like tax liens and art. 

This post all ties into a point I've been making since I started blogging about ETFs and mutual funds evolving to offer access to more sophisticated strategies and exposures. democratizing what retail sized investors can invest in. The hedge funds I mentioned at the top are the simplest expression of that. Actual hedge funds in an ETF wrapper? That is democratization. That doesn't mean you or anyone should want that particular exposure, that up to each of us to do the work to figure that out but having the choice is unambiguously positive. 

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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