No One Wants Multi-Asset Funds?

Just a few quick fund hits today.

On Tuesday we took a look at the Simplify Hedged Equity ETF (HEQT). I've mentioned that although many Simplify funds don't appear to work very well, this one does. A reader commented that HEQT is an "implementation" of the JP Morgan Hedged Equity Fund (JHEQX). I'm not sure the details of any sort of affiliation but eyeballing the prospectus and comparing it to our breakdown of HEQT on Tuesday, the reader has to be correct. 

There's a slight performance difference but JHEQX has a much longer track record to help understand what to expect from various conditions. In 2022 it was better than the S&P 500 by 10 percentage points, falling 8% versus 18%. In the 2022 Pandemic Crash JHEQX only fell 5% to March 31 month end versus 20% for the S&P 500. It only has half the standard deviation of the S&P 500. 

The tradeoff is that in the period available to backtest, it compounded at 8.20% versus 12.82%. For some people, 8% with a much smoother ride is a valid answer but that will not be right for everyone. It's important to know what group you fall into. 

The above comparison of JHEQX to Vanguard Balanced Index Fund (VBAIX), a proxy for a 60/40 portfolio, is interesting. JHEQX outperforms slightly with a considerably lower standard deviation. There have been stretches where it has lagged and will be again I imagine but the more important idea is staying with a valid portfolio that meets your needs during the inevitable periods that it will lag. 

Katie Greifeld, host of ETF IQ on Bloomberg has an occasional newsletter that she sends out. The latest one very quickly mentioned very little investor interest in multi-asset funds without naming any names. I fished around for any such funds that I hadn't heard of and found the Leuthold Core ETF (LCR). It's a 5 Star fund of funds in the tactical allocation group. 

Here's the allocation as of 3/31 but it has latitude to range 30-70% equities and fixed income.

The holdings have some interesting things too. Looking at the equity hedge portion, as of Friday it had a 3.63% allocation to the Direxion Daily S&P 500 Bear 1X Shares, so inverse but not leveraged. It also owns the Simplify MBS ETF (MBTA). Like many of the Simplify funds, it uses leverage and interestingly it is a very new fund, less than one year. There are also some noteworthy sector decisions in LCR including zero exposure to utilities or staples presumably because of their interest rate sensitivity and on the fixed income side it is a couple of years shorter in duration than the aggregate index. It also has small exposures to a couple of foreign currency ETFs. I don't know if there's anything that prevents it from owning bitcoin but the fund seems to be go anywhere and anyone who is interested in replicating LCR could probably slide some bitcoin in or go heavy in LCR with a little bitcoin outside of the LCR holding. 

The go anywhere nature of it makes the fund intriguing and the only reason to mention bitcoin is that bitcoin is about as go anywhere as it gets. That the fund is willing to be such a new ETF in MBTA also speaks to its willingness to be innovative. 

It goes back a little over four years and there clearly is some differentiation from VBAIX but the correlation between the two is 0.97. To its credit though, LCR was down less than half of VBAIX' decline in 2022 so not surprisingly it has lagged every other year it has traded. 

ETF Hearsay Tweeted out a filing for the Brookmont Catastrophic Bond ETF which is proposed to have symbol ROAR. These are a form of reinsurance or sometimes called risk transfer and there are a couple of different levels of catastrophe that can be packaged into bonds like this. There are the really bad ones like hurricanes and tornadoes and lesser ones like maybe hail storms or certain kinds of floods. There are a couple of mutual funds with this exposure and this would be the first ETF.

This is an area of the market worth learning about. The way funds invest in these are they have very small positions in a lot of different bonds, really a lot. A secondary reason to own them is that they are uncorrelated to just about everything. They are legitimately an uncorrelated return stream which we've talked about many times lately. A huge question to be answered with this fund will be liquidity associated with ETFs. Cat bonds are said to be very illiquid. There are plenty of ETFs where the underlying is less liquid than the ETF wrapper and I am not aware of any liquidity driven blowups unless Volmageddon was a liquidity event. If I am missing something on this front please let me know but there are concerns about the cat bond market as being unique here in a bad way. 

The prospectus says it will invest at least 80% in cat bonds but just about every prospectus says invest at least 80%. There is a reference to "event linked swaps" and a couple of other things that sound like bespoke products that might be a little more expensive in terms of spreads but they would be more liquid. Maybe 5% in T-bills could help with liquidity or if the swaps are derivatives, the fund would be able to have exposure and plenty of cash for liquidity needs. I will be curious to see if it actually makes it to the market and how they get the exposure. 

A pivot into a personal finance item related to our homeowners insurance. We live in an area that is very difficult to insure. People get canceled all the time. I'm the fire chief here, have a 2500 gallon tank with hose and a pump all for the specific purpose of fire suppression and we got canceled a few years ago but found another insurer. In the last few years our annual premium has gone from $900 to $1800 to $2400 last year and this year it will be $4500. I can try to shop but finding coverage is very difficult and the big number being a 4 or a 5 is consistent with what people here are being charged these days. 

Imagine the scenario of someone who retired in 2019. Based on my numbers their insurance might have been well under $1000 and now it has more than quadrupled. A $4500 bill up from triple digits so quickly is easily game changing. It's about 7% of our known expenses (monthly fixed and annual one-offs like property tax).

We're lucky we can just bite the bullet but at the rate it's been going, it will be more than $10,000 in two years. At some point, people will start to pivot to not having the coverage. If we get to the point where we throw in the towel on this, the bullet we bite might be investing in a metal roof and making a full time job out of raking pine needs and other forest litter away from the house. 

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.