I'm a big believer in reiterating/repeating rules of thumb. It helps in many ways including avoiding poor investment decisions. Included in this series of reiterations is to minimize the use of complicated products and to size any holding appropriately.
With complexity that is unnecessary, I'm going to again reference the ReturnStacked ETFs.
Quick editorial note, Yahoo 2.0 isn't quite ready but they appear to be going with it anyway. The blue line is the ReturnStacked Bonds & Managed Futures ETF (RSBT), the pink line is the iShares Aggregate Bond ETF (AGG) and the green line is iMGP DBi Managed Futures ETF (DBMF). We don't usually look at DBMF but I did today because RSBT uses a replication strategy for managed futures as does DBMF.
A couple of points about this chart. It goes back to RSBT's inception. RSBT provides exposure to 100% AGG-like bond exposure and 100% managed futures replication. There's obviously no DIY combo of AGG and DBMF that would work out to a 13% decline. Yesterday, I mentioned that managed futures has been going through a rough patch. If DBMF has been an outlier to the upside during this rough patch and someone built a combo of AGG and a different managed futures fund, they'd probably want that small lift in AGG to benefit their account. Going heavy into RSBT, as these were once marketed, would deny that lift, small as it is, you'd rather be up 1.4% than down 13%.
Part of my skepticism has been that the blend would deliver something different than, in this case, bonds with managed futures "on top." Looking closer on Portfoliovisualizer which doesn't capture the October decline:
These were built in the context that I think ReturnStacked is talking about now. Taking 100% of just the fixed income sleeve, Portfolio 1 is an implementation that makes sense in that it has 100% bond exposure with 20% managed futures "on top" using their fund and it lags. It seems like it always lags. I pick on these funds, yes, but man I don't see it. The track record isn't long, I understand that but it's not getting better.
I was going to say that the picture is a little better with Return Stacked Stocks & Managed Futures (RSST) but maybe not. Again, apologies for the chart, RSST is the blue line, the pink line is the Vanguard S&P 500 (VOO) and the green line is still DBMF.
If you're willing to be as volatile as the S&P 500 then you should probably get the return of the S&P 500. RSST has a standard deviation that is 127 basis points higher than VOO and you can see that it has lagged. If you agree with me that managed futures tends to have a negative correlation to equities then the above price result makes sense. This differs from what client and personal holding Standpoint Multi Asset (BLNDX) is trying to do. RSST is stocks with managed futures on top and the result is more volatile with lower returns. BLNDX targets an all weather result and a lower standard deviation. All weather is not seeking equity beta plus....which is what RSST is trying to do. The expectations being set for each one are different. You can decide for yourself how well each one is delivering on its expectations.
Checking in on the catastrophe bond mutual funds as Milton continues toward Tampa and its Category rating vacillates between 4 and 5.
Yesterday, I said that mutual fund pricing on Yahoo is quirky sometimes. The price for EMPIX is stale and incorrect. Both Morningstar and MarketWatch have EMPIX up $0.10 to $10.21 on Tuesday. Yesterday, SHRIX was down 3.13% and somehow CBYYX was flat. EMPIX is a personal holding that I am test driving for possible use for clients.
Bloomberg had an article about cat bond investors bracing for "huge losses." This will be a good learning opportunity for me but the losses for cat bond holders may not be "huge." The thresholds where the bonds trigger are very high. Additionally, the way the mutual funds are constructed, they spread the risk around to disparate events. We'll see, maybe they will be huge but if not, the above explains why. The is a good opportunity to talk about position sizing. Here's a quote from the Bloomberg article.
Tanja Wrosch, head of cat-bond portfolio management at Twelve Capital AG, says if Milton hits Tampa head-on as a major hurricane, catastrophe-bond losses “will be more significant than from Ian.” The Swiss asset manager has a $5 billion portfolio, including $3.8 billion of catastrophe bonds.
Three quarters of Twelve Capital AG's assets are in catastrophe bonds? I looked up the firm, they specialize in ILS. That stands for insurance linked securities and it is an important one to remember because you'll see that acronym used all the time when you read about the space or study the funds. I looked up that firm and they specialize in ILS so being that heavy make sense. If you are running a huge pool of capital and want ILS exposure, you'd invest with them expecting ILS for that allocation.
At first read though, I thought yikes. I am in on cat bonds being an uncorrelated return stream, it has no correlation to primary assets or alternatives so that is useful. I haven't sorted out whether I think the risk to events like the Helene/Milton combo makes them a good hold or not. This is new enough for me, that I am learning what the risk really is. It's easy to read about this and get sold on the idea of a huge allocation, like return stacking. Like just about anything that is alternative, any exposure I might ever put on for clients to ILS would be mid-single digits at most. Both are very appealing intellectually one works in my opinion even if I don't end up using it for clients and one does not.
Finally, the FT wrote about the apathy toward Ethereum ETFs. They listed in late July and immediately fell off a cliff (with the price of Ethereum of course). Since that decline it has traded volatilely but sideways. The flows into the ETFs has dried up with that price movement. I own a little of one of the ETFs for the potential asymmetry. I owned the original Grayscale trust for a while and then swapped into one of the ETFs. I have no idea if it will go to a bazillion or zero but whatever the outcome, the bigger lesson is being able to live with occasional boredom with some holdings or even the entire portfolio. There's a cliche about not shorting a dull market and while I'm not sure that applies, making changes just because you're bored is a bad idea.
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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