Barron's had a quick writeup on tactical funds that can switch between equity and fixed income exposure, either making big changes to their allocations or small tweaks to their allocations. The implication from the article was that the turnover in these is very high. The reason for the article is that "some of these funds are worthy diversifiers for a traditional fixed allocation portfolio."
There were three that stood out as being interesting for blogging purposes because they invest in closed end funds.
- Modern Capital Tactical Income (MCTOX)
- Matisse Discounted Closed End Fund Strategy (MCDEX)
- Saba Closed End Funds (CEFS)
With the old style mutual funds, I just used the symbols from the article, you'd probably use different share class symbols if you actually intended to buy either of them. Ask your brokerage firm what the correct symbol for you would be. While I am assuming no one will want any of these funds, in general, asking the brokerage for the correct symbol is a good idea.
All three are more volatile than the Vanguard Balanced Index Fund (VBAIX) which is a proxy for a 60/40 portfolio. MCTOX just started trading in 2021. It is a very small fund but it has a 5 star rating probably because it was up in 2022. It has a much better CAGR than the other two in the short period available because it was up about 13% in 2022 versus mid-single digit declines for the other two.
I couldn't get a great sense of the investment process from the website but it talked about mispriced securities, value and event driven as contributors to the process. I'm sure talking to them would yield a better sense of what they actually do but we do know, they made at least one very good call in 2022. The process for MCDEX is laid out more plainly. First in screens for funds trading at a discount, then a second step assessing many qualitative factors and then blending CEFs together such that there is at least a little contrarianism embedded. The SABA fund buys funds trading at a discount and hedges interest rate risk.
Statistically, MCTOX looks a little better but the track is short. Generally the portfolio stats and standard deviation are not great for these and the correlation is pretty high. The great year for MCTOX appears to distort it's track record. If it ever repeats that type of year, that would get my attention but given the vagaries of this space, intriguing as I've found it to be over the last 30 years and counting, it is difficult to make a meaningful allocation.
Closed end funds are more complicated than they seem. In addition to understanding the underlying market a fund is tracking, there needs to be an analysis of the premium or discount to NAV and what might come next for the premium or discount. Did I say analysis? I meant guesswork.
Blogger Nomadic Samuel Tweeted an interview with Kevin Maki who allocates 50% to quality stocks and 50% to "momentum and trend." I wanted to play around with the momentum and trend idea as follows.
Portfolio 3 is VBAIX. Unlike trying to figure out MCTOX, the back test is decently long to observe various market environments and enough years where the outperformance of 2022 doesn't skew the entire study. Additionally, if you believe in managed futures as a diversifier then you probably think the 2022 result is repeatable the next time there is a big decline, I certainly believe that to be the case.
For what it's worth, QUAL did a little worse than market cap weighted S&P 500 in 2022 and MTUM was essentially right in line, so the 2022 outperformance was attributable to managed futures.
The bigger takeaway for me is that this sort of blend is yet another example where effective portfolio diversification can be had with out adding the dysfunction of longer duration fixed income.
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.
No comments:
Post a Comment