Fast, Slow Or Both?

Bloomberg did deepish dive on Norges Bank Investment Management, the sovereign wealth fund of Norway. The fund started 30 years with the origin of the money coming from taxes on energy. Norway has a lot in the North Sea. The fund has about $ 2 trillion making it the largest SWF in the world. 

Its portfolio is 70% global equities ex-Norway, 27% fixed income and then a couple of odds an ends. Being that diverse, it might be a proxy for a total world portfolio which is a topic Goldman Sachs referenced recently and that has received a lot of attention since including this one from Morningstar.

The actual "global portfolio" as Goldman sees it looks much different. 

• 49% Global Equities
• 37% Global Bonds
• 6% Gold
• 5% Private Markets
• 2% Real Estate
• 1% Crypto

Here's a simple way to replicate it.

Using Blackstone (BX) might add a favorable skew to the results but we've been using BX this way for blogging purposes for a very long time so I think it is fair in that regard. 

BLNDX and BTAL are client and personal holdings. I am surprised how closely the global portfolio  tracks to VBAIX. Portfolio 3 puts a different spin on the allocation with funds we regularly look at here. If we add 1% Bitcoin to Portfolio 3, it improves the result but only slightly, like barely noticeable. Obviously, there's a good bit of alts use in Portfolio 3. 

The results seem to repeat in these alt studies but the results are skewed by 2022. Using alts will not give the best result every year, the idea is to smooth out the ride or as Ryan Kirlin from Alpha Architect said in a web event they hosted on Thursday, alts help "chop off the left tail." In simple terms, looking at a bell curve, the infrequent, negative outliers are referred to as being left tail. 2008, the 2020 Pandemic Crash and 2022 are examples of left tail events. "Chopping off the left tail" reduces the impact on your portfolio or as we say, avoids the full brunt of large declines. Using alts is one way to do that.

Speaking of alts, WisdomTree has really done a lot in the space and looking to do more. They have quite a few funds in the space and are expanding their model portfolio offering with a partnership with Banrion. Here's a podcast with a little more info but TBH, don't waste your time. It's 49 minutes where almost nothing is said.

There was a reminder that WisdomTree is (probably) the first provider to offer capital efficient ETFs (return stacking before "return stacking" existed). Their capital efficient funds blend simple betas, not beta and alpha (alternatives) and they seem to track exactly what they intend. The biggest one is NTSX which leverages up such that a 67% weighting in NTSX equals 100% in VBAIX so there's 33% leftover for alts or more equity exposure (risky) or just way to incrementally add a little yield on top of 60/40.

The podcast talked about using a forthcoming Banrion/WisdomTree alt model along with a position in NTSX. There was some talk of BTAL and managed futures and WisdomTree already has an alt model that is heavy in managed futures, some BTAL and a couple of other things. The models are behind an advisor-only login so it might not be ok to give all the details

The alt model is not really a substitute for a "normal" growth portfolio. Putting 67% in NTSX and the rest in their alt model does outperform VBAIX but didn't help much in 2022, it was 125 basis points better than VBAIX that year. If 2022 was an anomaly, and going forward bonds do not go down with equities like in 2022 then Portfolio 2 might do a little better. NTSX allocates to AGG-like exposure so if/when AGG gets hit, NTSX might also get hit.

Blending simple betas for a capital efficient fund seems to work better based on NTSX but maybe not based on the now closed NFDIX which targeted 75% equities/75% bonds, it did poorly and then closed.

We've looked at a few ways to incorporate some of the capital efficient concept in, you can search for "leverage down" in the archive for more.

I mentioned the Alpha Architect web event up above. It was to promote a couple of their alt funds. One that responds to fast declines and one that responds to slow declines. Using jargon that we've used before courtesy of Meketa, we've broken this idea into first responders like tail risk, inverse funds and BTAL and second responders like managed futures and gold can fit into either depending on the circumstance. 

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.