John Authers' column the other day was titled It's Dangerous To Stay Out Of Stocks. I think that is consistent to the conversations we have about stocks being the thing that goes up the most, most of the time. An investor needing something close to equity market returns for their financial plan to work needs something of a "normal" allocation to equities. Maybe that's 50% or maybe 60% but it's not 20%. Not that 20% is universally wrong, not everyone needs close to equity market returns for their financial plan to work.
For all the blog posts about about how to build alternatives into a portfolio, the idea from my perspective is how to compliment the equity allocation in a manner that is more effective than traditional fixed income exposure which hopefully leads to a better long term, risk adjusted returns.
The process then is to sift through a lot of funds and strategies to learn about and at this point, it should be reasonably clear that this is a fun hobby that just so happens to support my day job. The other day we mentioned that the Simplify Macro Strategy ETF (FIG) has been struggling. Since its inception in June, 2022 it has compounded at -3.16. It appears to be trying to deliver an all-weather sort of result so negatively compounding through a period that includes a year like 2023 where stocks were up a ton creates the impression that something isn't right with how FIG implements a macro strategy.
FIG is not intended to negatively correlate to markets, they want it to be "a modern take on the balanced portfolio, built to help navigate today’s toughest asset allocation challenges." So far, it hasn't done that. More productive than bagging on FIG is to start to ask questions about funds that try to take on macro strategies. It is not easy to do based on how many of the funds have done poorly.
In the post from the other day about FIG we looked at the following replication:
- Vanguard S&P 500 ETF (VOO) 35%
- AQR Managed Futures (AQMIX) 12%
- iShares Interest Rate Hedged US AGG ETF (AGRH) 25%
- Catalyst Millburn Hedge Strategy (MBXIX) 21%
- iShares Gold Trust (IAU) 7%
It compounded positively a little better than Vanguard Balanced Index (VBAIX) which is a proxy for a 60/40 portfolio with a much lower standard deviation. I am not too excited about that back test, it only goes back two years, a little less actually, the point is that macro could have worked during FIGs time line. But I think that it might make more sense to build it yourself if some sort of macro looking portfolio is important to you.
Another macro fund that came a few months after FIG from Fidelity has also been struggling since its inception, down even more than FIG.
There are a couple of macro funds that have done well, the point is to be selective. The prompt for this post was some disillusionment toward FIG on Twitter from a couple of people who had been favorably disposed when it launched. A point I try to reiterate here is to give alternative funds time to prove out. The more complex, I'd argue the more time you might want to give something to prove out.
Macro strategies can be very complicated. If you spend the time looking, I think you'll find more funds struggle than not. The DIY approach is interesting. The time frame for the one bullet pointed above in interesting but again very short. I will try to circle back to it in a few months to see how it is holding up or maybe more correctly to see how it is keeping up.
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4 comments:
Equity returns over 10 years have been -1% per year, and that happened within the last 25 years. We don't get to choose when we're born and have limited decision powers on when we retire, and none at all on what the market returns during our late work life and retirement. If someone needs "equity like returns" for their financial plan to "work", that is a set up for strongly possible disappointment.
I may not be tracking you. When were 10 year returns -1% annualized? Are you referring to the 2000's? Some future ten year rolling period might also be flat or down of course but equities' history is pretty clear.
Our conversation is about trying to build robust portfolios, maybe managed futures can help if/when equities struggle again.
What would you suggest in place of equities?
Correct, 2000-2010, S&P 500 TR was down about 1% compounding.
Don't get me wrong, Roger, I appreciate equity-like returns for a portion of the portfolio, it was that specific wording that got me, and can lead clients to unrealistic expectations. I've taken to wording stocks as a 10-, 15-, and 20-year investing instrument. That helps keep expectations in line and staying in the boat when volatility starts rocking it.
It could be chalked up to semantics, and I expect clients will understand there's only so much that can be done, but saying "equity-like returns for a financial plan to work" is leaving out a lot of the assumptions that need to happen for that to be the case, not least of which is that equity-like returns would be only expected for a portion of the portfolio. In the next 10 years, the data can be woven together to make cases that stocks could be down 2% per year, and they could be up 500% total (again), and everything in between. The next 10 years won't be the average, and may not even be "normal". The goal is to give clients a plan that will get them the best life in as many circumstances as possible.
Semantics might be part of it. It's tough to qualify every point otherwise each post would be 5000 words and unreadable. I try to be consistent in saying equities go up the most, most of the time which leaves room I believe for periods like you are referring to.
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