Portfolio Quadrants

A couple of quick things today. 

First Meb Faber and Michael Gayed had a podcast that covered endowment style and permanent portfolio among other things. I believe there is a lot of overlap between the two. It seems like many endowments along with other types of sophisticated pools of capital are Permanent Portfolio inspired as Jason Buck said a couple of months ago. 

In the podcast they talked about adding managed futures as a fifth quadrant (quadrant can be the correct word in this case, but it can also be called a quintant as in five quintants). And with the third portfolio, I swapped out long bonds for catastrophe bonds and benchmarked to a 60/40 portfolio.

Just adding managed futures as done in Portfolio 2 brings down the CAGR by 48 basis points but has a very beneficial effect on standard deviation and the Calmar Ratio and small but favorable impacts on standard deviation and kurtosis. The results from Portfolio 3 are far superior for the simple decision of removing bonds with duration. 

There was a quick mention of the coming Cambria Endowment Style ETF. It's not going to be what I was expecting. Apparently the recently launched "private equity" ETFs are trying to replicate the exposure by leveraging up volatile large cap beta. The Endowment Style ETF sounds like it will do something similar. We'll see in April when it is due to start trading. 

Pivoting to a little bit more about ETF models. I found commodity model and an all-alt model a as follows. 

I ran them by themselves and then with 60% in the S&P 500, adjusting each model proportionally to fit into 40% of the portfolio which is how I think they'd be better used and finally benchmarked to a traditional 60/40 portfolio in the 5th one. 

The CAGR numbers for the two models make it clear why they wouldn't work for too many people as stand alone portfolios. But weaving them in with equities certainly improves the growth rates versus putting 40% in bonds but the volatility numbers are mixed bag. In 2022 the two models plus VOO were down mid to high single digits versus 16.87% for VBAIX.

Above you can see that removing all those single commodity funds and just having 40% in USCI had a high return average, yes a little more volatility but in 2022, 60% VOO/40% USCI was up 88 basis points. If you actually consider using a model, it might be worth exploring whether you can get a better result with something much simpler or even the same result with something much simpler. 

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