Mark Rzepczynski took up the issue of blending alternatives into a 60/40 portfolio. Basically, 60/40 can get it done but alternatives can improve long term results.
I'm not sure what JP Morgan's data suggests but based on all of the blog posts we've done as well my experience using alts in client accounts, if there is a better long term result (risk adjusted or otherwise) it is because the right types of alts, used correctly should smooth out the ride and reduce drawdowns. Putting 30% in alts is very unlikely to result in a portfolio going up 25% in a year that the S&P 500 is up 20%.
Christine Benz wrote an article titled The Case For A Good Enough Portfolio that is related to Rzepczynski post. My spin on this point is having your portfolio do what you need it to do.
That is about the last portfolio I would want, 80% VBAIX and 20% in cash. I regularly say that with an adequate savings rate, VBAIX can get the job done, I just think it is far from optimal. The nominal CAGR for that 80/20 portfolio was 6.79%. The 20% in T-bills represents a very conservative view about how to manage sequence of return risk. 95% in VBAIX, 5% in cash compounded about 90 basis points better both inflation adjusted and nominal.
As much as I dislike that portfolio, someone retiring with that portfolio at about the worst time possible (check that inception date!) is in good shape assuming a "normal" 4-ish% withdrawal rate. Through the various panics, this person wouldn't have had to worry. The portfolio was ahead of inflation with several years' worth of distributions immune to any of the big declines that occurred. So imagine a portfolio that you actually like that succeeds in smoothing out the ride. You don't have to imagine if you care to spend time looking at previous blog post studies, you can decide for yourself whether alts are additive in the manner that Rzepczynski detailed and with which I agree.
A reader mentioned that the GMO Dynamic Allocation ETF (GMOD) seems to be very similar to the GMO Benchmark Free Allocation Fund (GBMBX) that we looked at the other day. GMOD is brand new. There is certainly some overlap in the concept and some of the exposures like a tilt to Japan and more than a tilt to value but GMOD doesn't appear to use alternatives.
Below are the holdings and weightings on the GMOD page as of Tuesday morning with one difference. I put in RSHO instead of their DRES which has only been trading a couple of weeks but they are similar enough and using RSHO let's us get a one year back test.
GBMBX seems to differentiate a little more at different points on the way to essentially the same growth rate as VBAIX and Fidelity Risk Parity (FAPYX) for the one year available to study. The GMOD replication had a lower growth rate and it's volatility landed in the middle of the four. GMOD Replication, GBMBX and FAPYX all fared better in the April panic.
Trying to tie in both the good enough portfolio and GBMBX, I was skeptical of GBMBX, look at its since inception CAGR compared to the 80/20, the result as a core holding isn't great. That's a low CAGR for 12 years for a core holding, viewed as an alt in small weighting might be a different story though.
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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