The Up & Down Wall Street column in Barron's looked at how Friday's PCE report validated the FOMC's decision to cut by 50 basis points this month. The conversation drifted into a look at value stocks' performance which teed up Cliff Asness to make the case for value. Cliff is obviously bigger than the typical thought leader but there is an element of why say in 100 words what you can say in 1000 words to his writing style.
In limited space he made an argument for why to invest in value now. Nick Colas from DataTrek contributed a great retort saying “we must trade the market we have, not some academic ideal.” It's a great forest for the trees observation. If you have a diversified portfolio then you have some value stocks in there already. From the top down, value has lagged for an extended period but it hasn't been catastrophic.
If you look at the holdings of any large cap value fund, you'll see plenty of names that have done well, better than the S&P 500, in line with growth. At some point value will collectively outperform again and if you don't want to be in the business of guessing when that might happen, then for anyone who owns individual stocks, you should probably own at least few names already, If you own SPY or a similar fund then you already do have value stock exposure.
Corey Hoffstein sat for a long podcast with The Algo Advantage that is worth listening to. It went it great detail about managed futures replication versus implementing the full strategy as well as different fund structures. There's an interesting dynamic with this because ETFs are clearly the more attractive wrapper for investors, it's not even close, but Corey made full managed futures implementation in an ETF sound like a bad idea based on several technical factors related to things like ETF market makers being able provide creates for new assets and no limit to how big an ETF can get. Mutual funds can close of course but if a managed futures ETF grows to several billion then it might have a difficult time trading in some smaller markets making it unable to do what it says it will do. I don't know if any managed futures trading program trades Pakistani rupees as an example, but if they do, at too big a scale, it might have to stop trading that market was the thought process.
It was very technical but worth the time. The reason to mention it is that it sounded like ReturnStacked hopes their next fund will combine bonds and merger arbitrage. I write about these a lot because I am both fascinated and skeptical. With a nod to Colas who articulated it very well, these might just be too academic.
Managed futures has generally struggled lately just kind of grinding around which as I said almost all the way through the 2010's is what you might expect a strategy that is usually negatively correlated to equities to do. Stocks up a lot, a thing that is negatively correlated to the thing that is up a lot has a good chance of being down. That doesn't invalidate managed futures but you might not want managed futures weighing down your equity exposure as it arguably has done under the hood of RSST. The fund is marketed as a core equity holding with managed futures "on top." If they think that is what it has actually delivered, not arguing with them, then I guess that is not how I want to access either segment.
RSST has outperformed client/personal holding Standpoint Multiasset (BLNDX) but with a higher correlation to the equity market and a much higher standard deviation than BLNDX. I think they have much different attributes.
The picture with the managed futures/bond blend (RSBT) is even worse. RSBT has AGG-like bond exposure and while I want no part of that type of exposure, anyone willing to accept it inside of RSBT had AGG's gain wiped out. Looking back to when RSBT started trading in March, 2023. Portfoliovisualizer has its total return at -5.03% versus +5.52% for AGG.
I've been skeptical of Returnstacked's ability to pull these blends off. RDMIX which is related has been no great shakes and Corey's old 75% Stocks/75% Bonds leveraged mutual fund did very badly before it closed. There are fund providers who do pull this off including AQR. The ReturnStacked guys run intellectual circles around me so maybe I'll be proven wrong about these funds but we've looked at them repeatedly as they've launched and the results just haven't been very good.
I checked in on the YieldMax Short Tesla Option Income ETF (CRSH). The fund is synthetically short Tesla common stock and sells puts against the short position, covered puts.
The chart compares CRSH to Tesla common stock and TSLY which is the covered call version of CRSH. CRSH has paid out $3.59 in dividends so far, it hasn't been around too long. The dividends would add 15.8% back into the 37% price decline. Holding on to a fund like CRSH is a tough way to make a living. The odds of this going down 90% on a price basis and then reverse splitting are pretty high. TSLY already did this back in February after just 15 months of trading. If you have to own any of these very high yielders, I would suggest reinvesting the dividends, not spending them.
The theme to these three ideas today is to be cautious with academic and complex investment strategies. Plain vanilla equity exposure is about as simple as it gets. Managed futures isn't necessarily simple but a small weighting to a managed futures mutual fund, for anyone who believes in that exposure, is simpler way to access the space than going in via a multiasset fund. And think long and hard about leveraging up to build a portfolio.
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.
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