Digging In With A Complex Model

I spent a lot of time Monday evening going down the Blackrock rabbit hole starting with their thoughts about adding Bitcoin to a portfolio which they say they're starting to do in their models. I've been in the same place on Bitcoin for many years now which is that there is definitely asymmetric potential so I hold it but it could turn out to be just magic internet money that disappears one day. I started with a very small position in late 2018 with the intention of letting it grow into a lifechanging piece of money or letting it fail and I still own it. 

The tradeoff for the asymmetry is pretty wild volatility which came on with bad intentions in the last few days. 

Some pretty big moves there. As I said the other day, if you're sweating this you probably have too much. 

Because Blackrock is adding in some Bitcoin to their models, I don't think they've done it across the board yet, I thought I would revisit a couple of them. It's probably not ok to list out all the names and weightings but I think we can paint a pretty good picture. One other point to keep in mind is that the portfolios are not static so whatever weighting they might have now in some sort of value oriented ETF has not been the same the whole time and I imagine funds come and go out of the models fairly regularly. 

The first model to mention is the Blackrock Diversified Alts which only has five holdings, four mutual funds plus 7% in a gold ETF. This model overlaps a lot with the next model.

The Blackrock Opportunistic Alts Portfolio is more interesting. It has 77.5% in alternatives like EBSIX and COMT which we've used for blogging purposes along with market neutral and multi-strat. It has 5% in short term tips and the remainder in "sector equities" but the funds are narrower technology themes not so much sectors.

The Blackrock Target Allocation 60/40 is closest to what we have fun with here. It has 47% in domestic equities split between market cap weighted, growth/value and factor funds. There's 13.5% in foreign equity, it can make sector bets which right now is 2.5% in tech, the 33% in fixed income is mostly allocated to IUSB which is a broad based index fund, it has 2% in gold and 2% in cash.

I backtested all three against the Vanguard Balanced Index Fund (VBAIX).

The backtest duration is limited to the newness of a couple of the funds. Diversified Alts and Opportunistic Alts are intended to differentiate from 60/40 and I'd say they do that. The next time equities take off, I don't think they would keep up but Opportunistic Alts was way ahead of 60/40 in 2023 and slightly ahead in 2024. The effect of all those alts, a little in short term debt and the thematics could be like the barbell approach we talk about here quite frequently.

Using Opportunistic Alts' asset class weightings I backested the following against VBAIX.

The Merger Fund is a client and personal holding.

Expecting tech or semiconductors to outperform longer term has been a good bet, more reliable than getting narrower themes correct. The tradeoff is that tech and semiconductors should be expected to go down more than the broad market too. Anyone positioning like this is hoping that the alts offset a good portion of the decline in that part of the cycle. The two barbells kept up over the longer term but there were several years where no progress was made as VBAIX was mostly going up. 

The Blackrock Target Allocation 60/40 has 19 holdings, there is some overlap like owning an S&P 500 fund and an S&P 100 Index fund. The returns aren't identical but man, I don't know about that. The result of the model has clearly been better than VBAIX but as we've seen in countless posts, there are much simpler alternatives. I really am hard pressed to know why someone needs and S&P 500 fund and S&P 100 fund. 

I used the above to compare to Blackrock Target Allocation 60/40 with its 19 holdings. BTAL is a client and personal holding.

The Simpler 60/40 is certainly holds its own against Blackrock's model and VBAIX but it wasn't better every year. No strategy or model can always be best. Their model is clearly valid, the results are good and they are managing it for you. If someone is managing a model that has as many moving parts as Blackrock Target Allocation 60/40 and it's going well, no need to do something differently in my opinion but if you're your own portfolio manager, you don't need to mimic a 19 fund model. 

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