Replicating The New Zealand Sovereign Wealth Fund?

New Zealand has a sovereign wealth fund with the equivalent of $46 billion in it and the FT says it is doing pretty well. The article doesn't seem to know exactly how it is managed but has a good idea I guess. Basically, the majority is actively managed and the rest is passively managed. The following is the active part.

And then from there, the rest is apparently passive. It can be replicated which I built as follows.

And this is how I tested it

Both Portfolio 1 which I'd say is the truer version and version 2 increased proportionally do a little better than VBAIX but with slightly higher volatility. The both did slightly better than VBAIX in 2022. We regularly use Blackstone (BX) for blogging purposes but if we'd used one of the private equity ETFs, the results of Portfolios 1 and 2 would have been far inferior. 

Meb Faber hosted Andre Rzym and Tarek Abou Zeid from Man HL for a podcast all about catastrophe bonds. I've been saying for a while that this is a space to learn about and the podcast makes some great points. Zeid made a sort of joke that I have made before. I've said you don't need diversification until you need diversification. Zeid said there is no risk in cat bonds until there is risk and there is no volatility in cat bonds until there is volatility. In a recent post I noted one of the mutual funds in the space got hit in late 2022 because of Hurricane Ian. A little more precisely, that fund got hit because of worries that it would get hit. The bonds went down some in price but there weren't any, or very few, triggering events causing the bonds to snap back leading to disproportionately large returns in 2023.

At the end, Ryzm made an off the cuff comment about airplane leasing stocks being interesting on some level. There are several plane leasing companies. I wrote about them a couple of times, ages ago including here at TheStreet.com in 2007. I would describe my take on them back then as mildly interested in learning more but unlikely to pull the trigger because of how capital intensive the businesses are. Back then, these were yield plays but that doesn't seem to be the case anymore. Rzym's context was overlaying a systematic strategy onto these companies but I'm not sure what he meant. Here's the correlation of the stocks I could find in this space.

In terms of being diversifiers, those correlations all seem high to me except for ATSG. 

Owning one doesn't appear to have made things worse in a meaningful way, hard to say any of them were great additions but all three 80/20 portfolios went down a little less than 100% S&P 500 in 2022. 

Rob Isbitts wrote a short article for ETF.com that perplexed me a little bit. The article was generally about investor impatience which makes sense with five or six stocks accounting for almost 2/3 of the S&P 500's gains this year but appears to compare the iShares Core Growth Allocation ETF (AOR) to the S&P 500. AOR is a proxy for a 60/40 portfolio. It has lagged behind VBAIX more often than not lately due to AOR including foreign stocks and foreign bonds in its mix. I can't tell if he is lamenting that AOR has lagged behind the S&P 500 or trying to caution advisors that clients might be sweating it. He does think that 60/40 where the 40 is allocated to the Aggregate Bond Index or long treasuries is over-rated and I am definitely on board with that idea. 

Jason Buck from Mutiny Funds sat for the Excess Returns podcast. He was on to take the other side of stocks for long run noting various pockets of time where certain equity markets have done extremely poorly. Japan for 30 whatever years recently, US markets a several times in the last 100 years, he also cited a period where the Italian equity market was down 74% in the 60's or 70's (I believe he said). Where no one can reliably predict when these sorts of events will happen it makes sense to Buck to always have a lot of defense in place. His Cockroach Fund targets 50% in defense. 

Inspired by the Harry Browne Permanent Portfolio, Cockroach allocates 25% each to stocks and income which are offense as well as 25% each to (mostly) long volatility and trend which are defense. There is also a 20% sleeve to fiat hedging which is a mix of gold and Bitcoin so there is leverage in there somewhere and while fiat hedging sounds defensive to me but I don't know if they think of it that way.

Cockroach has 25% in equities but Jason made a comment toward the end that based on risk weighting, instead of having a 60/40 portfolio, it should be more like 40% in equities. I chuckled because back in June we tried to replicate it and used a 40% weight to equities as follows.

Truly replicating the Cockroach Portfolio is difficult due to lack of access to volatility strategies. Most long volatility funds bleed something awful. We talk about the Alpha Architect Tail Risk ETF as possibly having less bleed but the track record on that one is very short and I am pretty skeptical of that fund for now. 

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