Cullen Roche was a guest on Meb Faber's podcast this week. I've known both of them for many years, both are very smart obviously and the podcast was fascinating. Part of the fascination was how differently they appear to come at portfolio construction. Meb is a big believer in alts, specifically a huge believer in trend following/managed futures whereas I cannot recall Cullen ever talking about alts and certainly his ETFs are comprised of very plain vanilla assets. Both approaches are of course valid, the difference in approaches really is noteworthy.
There was a shocking nugget that came up that I will get to in a moment but Cullen recently made a change to his ETF offering, essentially shutting down DSCF and replacing it with three different ETFs, each one that targets a specific duration. DDV targets a five year duration, DDX as ten year duration and DDXX at 20 year duration.
DDV allocates 87% to bonds and 13% to equities. DDX allocates 34.5% to equities and 65.5% to bonds and DDXX allocates 100% to equities. He is blending together assets with different durations to achieve the intended the target duration number in the name of each fund. Part of the understanding here is that equities are a long duration asset. In the podcast he worked through an explanation that lands on equities' duration being 15-20 years. An advisor wanting to use these funds probably needs to really dig into this idea before buying.
Since we've looked at something similar lately with drawdown strategies and the LDDR ETF, let's look at DDX the ten year product. To be clear, these don't deplete or have a termination date.
Very plain vanilla like I said. In 2022, VGIT was down 10.5% versus down 13% for AGG. Backtesting DDX we get the following;
I started the backtest when the bond market became less reliable to give a better sense of the volatility. To DDX' credit, it has the same volatility as the portfolio that is very heavy in client holding FLOT. If interest rates take another meaningful leg up, not even as much as in 2022, VGIT would get hit which would be rough on DDX. VGLT would go down the most of course but the weighting in DDX is pretty low. On a price basis, VGIT is down 15.5% from its 2021 high and on a total return basis, VGIT is down 1.19% cumulatively.
I'm not trying to predict anything, I am just pointing out that bonds are now in a different regime than they once were and so they are less reliable. If I was comfortable with intermediate and further out treasuries, I'd use individual issues. VGIT has no par value to return to. Waiting for a bond that is down a ton to get back to par is not a great place to be in but it's better than being in a fund that has no par value to get back to. TLT may never get back to its high for example.
The shocking part came just past the 37 minute mark when Cullen said "my own career has been a series of me jumping from portfolio strategy to portfolio strategy trying different things and I say this has resulted in a lot of portfolio divorces."
Maybe I am taking that the wrong way but I was very surprised to hear him say that. A practitioner's process is going to evolve of course as they learn more. I hope I know more today than I did in 2015 and more ten years ago than I knew 20 years ago and on into the future.
Then there was a lot of discussion on the equity as long duration idea which speaks to the importance of taking a long term approach to equities. Getting twitchy (my phrase, not from the podcast) based on short term catalysts is wildly counterproductive for the vast majority of investors and Cullen and Meb did a great job exploring the idea.
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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