The Most Important Part of Portfolio Management

Randy Forsyth got on the capital efficiency/risk barbelling bandwagon in this week's column. Obviously I got a big kick out of that. Michael Hartnett from BofA apparently said something to the effect of 70% in T-bills "clipping" more than 5% and 30% in YOLO like the artificial intelligence theme. 

One of the comments, always read the comments, mentioned that this is what Nassim Taleb talked about doing ages ago. I got the idea from Taleb probably 16 or 17 years ago and enjoy writing about it. Taleb talked about 90/10 instead of 70/30 but it is the same concept. 

I wanted to try to model Harnett's idea of 70% T-bills and 30% AI. I did a search of AI ETFs at Vettafi and cherry picked the Clockwise Core Equity and Innovation ETF (TIME). As well as Nvidia and SMC have done lately, the ETFs are more inline with the tech sector, TIME has done a little better but quite a few of the thematic funds have lagged broad tech which surprised me.

In addition to 70/30, I tested how much TIME would equal 100% S&P 500. It turned out that a 39% allocation since the start of 2023 did the trick. With so much allocated to T-bills, it makes sense that the standard deviations of the barbell portfolios is so much lower. The 2022 results, not captured above are also interesting.

We can only get the last 11 months of 2022 but it is still interesting. TIME did far worse than the S&P 500 in 2022 but owning 30% or 39% in TIME, the rest in T-bills was not catastrophic.

The numbers are real but I don't know how realistic it is to think we can pick the best performing fund in a theme. There's a couple of layers there. First is picking the theme. That seems plausible but there really are a lot of funds on the Vettafi list that have done poorly. Great, you got the theme right but the fund chosen didn't capture the effect which is a serious risk to this concept.

This could be built simply allocating to high conviction ideas from several different parts of the market. I could backtest that with my top performers and it would look great and I could backtest it with names that have not done as well and the result would be underwhelming but realistically, if you split 35% between 5 different stocks, the results would be mixed.

The better takeaway is more along the lines of how risk is managed, maybe allocating a little to asymmetry to maybe dial down the volatility elsewhere in the portfolio or using alternatives to manage volatility and risk. It doesn't get said often enough but really, the most important part of portfolio management is mitigating risk.

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