Mimicking Allocation, Not Constituency

Following up on yesterday's post, I thought of a way articulate the way in which we deconstruct sophisticated portfolios like the Permanent Portfolio, the Cockroach Portfolio or in the case of yesterday's post, the Trinity Portfolio. Click through to yesterday's post if you want more context.

The idea is to study the allocation, not the constituents. Look through at the various Trinity links from yesterday, you'll see the ETF and the SMAs have a lot of holdings. The Cambria Trinity ETF (TRTY) shows 27 different ETF holdings plus two cash proxies. That seems like a lot of ETFs for a fund of funds. In the real world, the portfolio I manage for clients includes a lot of individual stocks and 27 is in the neighborhood of how many names I hold on the equity side of the ledger. 

That sort of portfolio constituency seems very complex to me. What do you think Trinity, or one you might be more interested in, is trying to do? I think Trinity is trying to smooth our the ride versus a typical 60/40 portfolio but still get some upside participation.

Ok, it smooths out the ride but I think there are way to get a similar volatility profile but with a little more upcapture, using Trinity's allocation weightings. 

Let's look at Trinity 3 since we did not look at that one yesterday. According to the Trinity performance data, from Nov 2016-March-2024, Trinity 3 compounded at 5.08% with a standard deviation of 8.61% and a max drawdown of 15.59%. Here are two much simpler versions of Trinity 3, one with AGG for the fixed income proxy and one with floating rate as the income proxy as follows. 

As we talked about yesterday, it looks like trend is comprised of some sort of actively managed split between managed futures and momentum equities. I used ACWI instead of and S&P 500 fund because I believe that makes for a fairer comparison to Trinity 3.

Portfolio 3 is simply the Vanguard Balanced Index Fund (VBAIX) which is a proxy for 60/40. Portfolios 1 and 2 have a lot less equity exposure than VBAIX and a chunk of that is in foreign which has lagged domestic. Neither version of Trinity we made is likely to keep up performance-wise but it is a lot closer for the same period as the more complicated, actual Trinity 3. Both the AGG version and the TFLO version actually end up with a lower standard deviation than Trinity 3. The Trinity performance page shows the max drawdown for Trinity 3 at 15.59% but I am not sure if that was in 2022 or not. The AGG version was down 2.90% in 2022 and the TFLO version was up 2.05% that year. FWIW, the Trinity ETF was down 3.32%. 

I think there is something to the Trinity allocation but not the constituency or what I perceive as complexity. The tradeoff though is that in some years, like 2023, the AGG version and the TFLO version could get left way behind, they were up about half as much is VBAIX last year. 

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