Josh Brown was quoted at Politico saying “We’re in a very different world where stock market reactions are not at all aligned with what more experienced people would think should happen. It’s baffling, and it’s actually one of the most interesting things I’ve ever seen in my time in the investment markets.”
The connection here is that things can change. This will be annoying but that doesn't mean things must change but just that they can change. The difference is a mindset of being on the lookout for change without finding things that aren't actually there. I appreciate the two handed economist nature of the comment but hopefully it makes sense.
Being able to create a portfolio that has the attributes of what bonds used to offer is a change that obviously I think is important which is why we spend so much time on the topic and of course plenty of other advisors, product providers and many others in the ecosystem are doing similar work....I think.
Here's an interesting read from Bloomberg about a company that will allow people to design their own indexes. It's not radically new, maybe it's a little different from some other ideas but someone who can create a more useful index for themselves might be better off. I don't necessarily mean getting better nominal returns but more able to create something they can live with through rough times so they reduce the odds of making bad behavioral mistakes.
The other day we had a little fun about turning your IRA into a global macro hedge fund. I don't actually think that is too realistic to create other than just buying a mutual fund with the word macro in the name of the fund or in the objective as stated in the prospectus but we look at countless ways to build portfolios that are macro light....very light.
I wanted to circle back in that regard to Saba Capital Income & Opportunities Fund (BRW) which we looked at a few weeks ago and might be macro-ish. You can look for yourself but the construction of it is interesting if nothing else. I had a hard time finding correlation info for BRW related to Saba taking over for Voya in managing the fund but looking casually, it appears that at times BRW does correlate to equities and times it doesn't, kind of doing its own thing. If I am seeing that correctly then maybe it really macro-ish. And if it is macro-ish then the look throughs are simpler to understand than the typical macro mutual fund.
BRW has a "yield" in the low double digits but much of that can be ROC. According to Claude.ai, 70% of BRW's April distribution was ROC. Here's data compared with AOR which is a proxy for a 60/40 portfolio from iShares.
Price only, BRW could not escape 2022, it did not provide crisis alpha. From 2023 on, it's been mostly able to keep up with the distributions which for a closed end fund is pretty good. BRW owns Bitcoin so it is possible that the growth in Bitcoin is what has allowed the market price to be stable against such a huge payout, sort of like a barbell approach to portfolio construction which we talk about here every so often.
Some people think maintaining the distribution with ROC is a negative and while I certainly understand the argument but for someone with some sort of strategy of taking income, tax free income seems like a positive. Keep in mind that this ROC distributions lowers cost basis which would drift into the realm of higher capital gains tax but that rate should be lower than the tax rate on dividends.
More than building a full macro strategy, we're probably more adding a little macro in with BRW if you'll grant me that BRW is a macro strategy. SPMO is plain vanilla equities, BLNDX is 50% equities so we're getting close to a normal allocation equities. CBOE is equity exposure too but also has one foot in the first responder defensive camp along with BTAL. Gold and managed futures are diversifiers, the portfolio gets yield from SHRIX and BRW while SHRIX along with ARBIX are low volatility holdings.
The return numbers for all are price only for anyone interested in taking the income out. The overall yield is close to 4% with a good chunk of that coming from BRW and SHRIX. With dividends reinvested, Version 1 compounds at 12.75%, Version 2 at 14.11%. PRPFX at 7.21% and AOR at 4.01%.
Versions 1 and 2 had some crisis alpha in 2022 with returns of -4.01% and -5.31% respectively versus a drop of 17.38% for AOR, all of those price only. The reason to use AOR instead of VBAIX is VBAIX gets distorted every now and then from larger capital gains distributions.
Back to the top and the Bloomberg article about 60/40, in kind of a reverse Karl Popper, there are countless ways to build a competitive portfolio that avoids duration. Part of the success of all of these studies we do comes from intentionally avoiding duration. Even if you believe the various things we regularly include in these offer no value, the takeaway can be to just avoid duration and the now unpredictable volatility that goes with it.
Because I couldn't work it in elsewhere, BLNDX, BTAL and CBOE are client/personal holdings.
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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