Looking Around Corners

This morning's email from Bespoke led off with the following quote from author William S. Burroughs.

“The best way to keep something bad from happening is to see it ahead of time... and you can't see it if you refuse to face the possibility.”

It ties in with a lot of what we talk about here not just for portfolio management but also lifestyle. 

First, portfolio management. I talked about "looking around the corner" for trouble or problems. A simple example is that with tech's weighting in the S&P 500 being so high at 45% (that's actually tech 34%, communications 11%), realizing that history has not been kind to sectors that grow larger than 30% of the index, being underweight tech and/or communications however you think about those two is a way to minimize the impact of something bad happening to the index. 

I'm not saying no tech exposure, that doesn't make sense, but if the software stock panic of this week turns out to be a canary in the tech coal mine, then being underweight should probably spare the portfolio some number of basis points of the full decline of the broad market if that's what happens. 

Try to look around a corner accounts for our perpetual exploration of how to use liquid alternatives to try to smooth out the ride which takes us to a webcast put on by WisdomTree with Shana Sissel from Banrion as the guest. Shana is working with WisdomTree to build model portfolios that rely heavily on alts as well as capital efficiency (leverage) using WisdomTree's core efficient funds like NTSX which leverages up such that a 67% allocation to that fund equals 100% allocated to a 60/40 balanced fund like VBAIX from Vanguard. Brad Krom from WisdomTree who was also on the webcast said that if the leftover 33% can go into something that earns more than T-bills, that you'd be adding alpha versus VBAIX which is a point we've looked at here before. 

The Banrion/WisdomTree portfolio is available at the WisdomTree website if you register. It's probably not ok to share all the names and percentages but we can keep it high level. It allocates 42% to "allocation" which includes NTSX and another core efficient (leveraged) fund, 17% to alts including client/personal holding BTAL, long/short (Shana is big on long/short), crypto, managed futures, a little bit to emerging markets, 10% to simpler fixed income beyond the fixed income exposure in the core efficient funds and the rest in simpler equities but included in that equity sleeve is a little gold from GDE. 

The backtest is short because some of the funds are pretty new but that's ok, Shana didn't start working with WisdomTree since last August or September (I think, apologies if it was more recent than that). Also, the portfolio is not static. She talked about dialing up or dialing down exposures but there was no indication of how frequently she does that.

Here's how I replicated it, it's about half the funds but it admittedly is a loose replication. For one thing, she included long biased long/short but I did not.

Everything there except AQMIX and SHRIX are in my ownership universe.

I wouldn't take too much from the raw performance for being such a short time frame but I think you can get a sense of the volatility added by the crypto and gold as both have gone down a lot in the last few days. 

The gold exposure is nowhere close to the 20-25% that some pundits argue for, it is much closer to the low-single digit starting point I use. It's not like she has a ton in crypto but it's not nothing and I am not a fan of Bitcoin or the others as a diversifier, to me it is all about asymmetric opportunity. Based on how volatile it used to be (the current event maybe approaches that?) and then the compressed volatility of the last few years, I don't believe it can be modeled in as a diversifier. 

Shana said something that is almost word for word what I have said here. She said that BTAL and managed futures are the two most important holdings because of the diversification they provide. I'm not claiming she got that from me, I am saying it is two different people drawing what I think is an obvious conclusion. BTAL and managed futures are the two most important diversifiers. Of course the 77% of the time that markets are going up makes them tough to hold but, also echoing our conversation, since there is no way to know when BTAL and managed futures will go up, you need to size it correctly and hold on. In this current event, BTAL seems to be working the best. The alts that should be going sideways are doing that which is good but gold obviously is part of whatever is going on and managed futures is very long gold and silver so it is getting hit too.

She has a little more BTAL than me and a little less managed futures. 

Back to the quote at the top of the post as relates to lifestyle. We learn as children that it is important to exercise and not eat too much sugar. That advice is more important than we realized when we first heard it. Just as owning 40% in tech is teeing up for an adverse outcome, so too is no exercise and a sugary diet teeing up sickness. Getting exercise and diet in order is a very simple way to keep something bad physically from happening. Really it is about improving your odds of successful health outcomes. 

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.