Vanguard maintains what it calls its time varying asset allocation portfolio, it's a model ETF portfolio. The news from last month is that the model is allocating 70% to bonds versus their 60/40 benchmark.
Looking forward, Vanguard expects equities to underperform due to what they view as a "low equity risk premium." They could turn out to be correct about equities not doing as well as they usually do. If you click on the link, it will say they ten year expectations for bond returns are 5.5% versus 5.2% for equities.
Portfolio 1 uses mostly Vanguard funds except for AGG to replicate their idea. Portfolio 2 is fixed income proxies that we talk about all the time and Portfolio 3 is the same as Portfolio 2 but replaces their equity suggestions with the S&P 500.
The numbers on what they are suggesting going forward have been pretty brutal but they could be right. There are really some enormous bets in their portfolio though. Value and small cap have lagged so badly for so long that picking them now as the time they will do well or at least better than large cap is really just a guess. There are theories about small cap lagging related to the prevalence of IPOs starting out as large cap stocks, bypassing the small and mid cap indexes which in the past were a source of a good amount of those indexes' growth. Small cap indexes no longer get the benefit of those stocks.
Small caps used to lead early cycle and that hasn't happened the way it used to. There used to be fairly predictable points in the economic cycle, related in part to yield curve dynamics, where value tended to outperform growth and again, that's not working in the same manner.
With that fixed income allocation, Vanguard is counting on rates going down some to hit that 5.5% growth assumption. Again, they might turn out to be correct but relying on getting that kind of call on interest rates correct is a tough way to make a living.
We pretty much go over this a couple of times a week about there being plenty of ways to sub in other the attributes of what I think people want from fixed income without the volatility and the need to be right about interest rates that goes with the funds Vanguard has chosen. Of course the funds we talk about here have their own risks as indicated by the past results but the impact of something going seriously wrong with one of them can be mitigated by proper sizing of exposures that are vulnerable to different things.
If someone really wanted to implement Vanguard's 30/70 portfolio, they could include some short dated individual issues (avoids interest rate risk) and add in a couple more funds to get the weightings to less than the 10% I simplistically put together. And while I am not sure I would rely on value and small cap equities, I would blend in some foreign exposure with the S&P 500.
Simplify filed for an ETF that will leverage up to own 100% US equities and 100% managed futures in a similar (identical?) manner as ReturnStacked US Stocks US Stocks & Managed Futures ETF (RSST).
No one has suggested 100% into RSST but this comparison supports the point of why I have been so skeptical. The other four comparisons are short CASHX so there is something of an embedded financing cost as we looked at the other day even if it is not precise.
Doing the same combo with KMLM did worse than RSST and I should note that client and personal holding BLNDX has had a very rough go for a while.
If you read content from ReturnStacked, it's great stuff if you don't, they often talk about 20% allocations to managed futures. This paper dated June 25th looks at building a portfolio with 30% managed futures of course stacking the exposure on top of 60/40. Presumably the way to do this is with 30% in a plain vanilla equity index fund, 40% in a plan vanilla bond fund and 30% in RSST.
Portfolio 1 is taken from the paper with 30% VOO, 40% AGG and 30% RSST so it is 60/40 with 30% managed futures added on top. The other four are 60% VOO, 40% AGG, 30% the managed futures fund named in the title of the portfolio and -30% in CASHX which again should account for most of the financing cost.
BLNDX, rough as it has been for a while, is a low single digit weighting. When it is working which has been far more often than not, a little goes a long way. Great backtests notwithstanding, 20%, let alone 30%, in managed futures doesn't make a lick of sense to me.
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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