Checking Out Of Beta

There's been a lot of content lately about equities being too expensive and the potential index manipulation coming to market cap weighted indexes as they try to shoehorn SpaceX, Anthropic and OpenAI in. There are of course many pundits besides me chirping up about the visibility for more pain in bonds if price inflation remains elevated or even continues to work higher. 

All that might be enough to make someone want to check out from the typical equity beta/bond beta construct entirely and do something completely different. I don't know about completely, but maybe very different will do. 

Part of the inspiration comes from updating the 75/50 portfolio. The basic idea is a portfolio that captures 75% of the upside with only 50% of the downside. It's not easy to pull off but if you play with the numbers, you'll see it works. Although it is not easy to pull off (repeated for emphasis) the way that ETFs and mutual funds are evolving, it is becoming a little more attainable. 

The versions include funds that we don't use too often for blog purposes but they allow for a little longer backtesting. The mix has no bond duration and other than the small slice to Direxion 3X Tech (TECL), the holdings mostly do their own thing when compared to equity beta. TECL of course is equity beta but it's more about adding positive convexity. TECL would account for a disproportionate amount of the growth but be a very small drag, due to its weighting, when equities go down a lot.

GPAIX and MBXIX are in the realm of multi-asset, multi-strategy funds. They aren't totally uncorrelated to equities or VBAIX but they do often deviate from them by quite a bit. Gold has the potential to hedge a few different things and we talk about SHRIX and client/personal holding Merger Fund all the time. 

The growth rates are an easy observation. The version with just gold doesn't quite capture 75% of the upside while the other two do better than 75%. All three offered a little less downside in the fast declines, in the 2020 Covid Crash they were down a lot less though and they were very effective in the much slower 2022 decline. 

If you want to keep up with equities, this is not the idea for you. In the same nine year period, the S&P 500 compounded at just over 15%. 

The fund universe has expanded dramatically since the backtest's start date so anyone actually interested in trying to build this sort of portfolio for themselves would have more funds to choose from and would be able to diversify a little better. Instead of just one managed futures fund, that portion could be split into two different funds. We've explored the dispersion in managed futures performance many times and having a couple of different funds would probably give a better result.

The 50% in GPAIX and MBXIX could probably be split between four or five funds not just two. Merger arb is great but 15% is more than I would want in real life and if I was willing to allocate 15% to catastrophe bonds, I would probably split that between two funds. 

Getting 60/40-like returns over intermediate and longer periods with a lot less volatility is an outcome that I think many people would be pleased with but it requires being uncomfortable in random short term periods when the sort of portfolio we built today lags by a lot, 2019 and 2023 would have been rough in this context. 

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.