Let's dig in some more on Permanent Portfolio quadrant style. We took a shorter look on February 25 but with the market's deterioration since, it's a good time to revisit as well as continue this week's theme of learning from the current stress test.
Below compares the Cambria Trinity ETF (TRTY) which is quadrant-ish and does some interesting things allocation-wise. AQR Multi-Asset (AQRIX) used to be called Risk Parity and it also does some quadranty stuff. PRPFX is the inspiration for all of these so of course we're including that one. Next is the allocation for the United States Sovereign Wealth Fund ETF that I made up a few days ago and next to that is my most recent attempt from November to recreate the Cockroach Portfolio which is managed by Mutiny Funds.
First the longer term result as far back as it can go.
For the same period, the Vanguard Balanced Index Fund (VBAIX) had a growth rate of 8.37% and volatility was 10.87%. The max drawdowns of the backtested portfolios bottomed out in late 2022 as follows
To the extent quadrant style might intersect with all-weather, you can decide for yourself whether any of them were all weather enough. There's no wrong conclusion to draw, do you think they are all-weather enough? AQRIX obviously was hit the hardest in 2022 which makes sense from the standpoint of it being a risk parity strategy but the Risk Parity ETF (RPAR) was down 29% at that same point. RPAR is indexed and I think that fund's result shows that risk parity doesn't lend itself to an indexed approach.
TRTY is a tough hold. It's growth rate since inception is 3.58% going back to September, 2018 but a lot of that comes from a 15% lift in 2021 (numbers per testfol.io). If the volatility was very low then the tradeoff might be more attractive. It had a big drawdown in the 2020 Pandemic Crash which, ok, something like that sure but it had a surprisingly big drawdown in 2022 as you can see at 13%.
PRPFX has a higher growth rate with less volatility than VBAIX over a very long time horizon. That is very likely, the quadrant style on full display, with gold and cash proxies allowing it to have much smaller drawdowns in most, not all, adverse market events.
The United States Sovereign Wealth Fund ETF that I made up is primarily designed to be counter cyclical, that is to have very little equity beta and a low standard deviation which it does. If I actually made this an ETF (I'm open to the idea if anyone from a white label is reading this), it would be a diversifier, maybe in the realm of absolute return although the CAGR and standard deviation might be a little higher than most funds in that category. I would say, that if the United States Sovereign Wealth Fund ETF that I made up is best performer in a portfolio, then maybe things in the world aren't going so well.
And finally, the Cockroach Portfolio replication. That is a very specialized type of result. I think it is important to be willing to have your portfolio really differentiate at times and this one seems to differentiate all the time. I took out TRTY and AQRIX and added VOO and VBAIX to show how differentiated Cockroach, or at least my attempt to replicate it, has been.
The lower growth rate with lower volatility can absolutely be appropriate for some investors. If someone is legitimately ahead of the game or maybe has income streams beyond their portfolio and Social Security then a CPIplus sort of return, which might be a good way to think about the Cockroach replication, is valid.
Back to the top and what we are learning, if anything, from the current stress test.
- VOO down 4.32% YTD through yesterday
- VBAIX down 1.92% YTD
- TRTY down 5 basis points
- AQRIX up 2.01%
- United States Sovereign Wealth Fund ETF that I made up +2.31%
- Cockroach Replication up 4.34%.
I'm obviously going to conclude that alternatives in suitably small doses and some degree of differentiation are crucial for longer term investing success. Differentiation is good when you want it, challenging when you don't.
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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