Alt Palooza

Late Saturday afternoon, I essentially got to the end of the internet (stealing someone else's joke there) so while I was waiting for it to fill back up, I did what I often do, pulled an insane portfolio idea out of the air and played around with it on testfol.io and Finominal. 

Here's the original Alt Palooza we're playing with.

I also built a risk weighted version using Finominal that tilted the portfolio heavily to APHPX and FLXIX. I've mentioned that Finominal has a tab where it will offer a simplified portfolio but it's usually nowhere close to the original. The simplified suggestion was to put it all in to iShares MSCI World (URTH). Whatever this portfolio is, it is nothing like URTH. Today I clicked on the Fee Reduction tab which is much more interesting. It suggested a fund replacement for each of the five funds above as follows;

Then clicking through on a comparison there is a bunch of things with varying degrees of utility. The next two at the portfolio level are interesting to me. Finominal thinks that no risk is coming from the fixed income sleeve despite 39% of the fund being in fixed income. It's not really fixed income but I think it is more of an indication of neutralizing the current interest rate risk and volatility in traditional fixed income markets. More simply, I think the portfolio gets the attributes that people want from fixed income which is steady returns with lower volatility. 

 

The risk page on Finominal also breaks down the sector risks which in this comparison is non-existent. A sector analysis could be helpful with any portfolio study if there is a market calamity that starts and is related to the excess currently inherent in the tech and tech-adjacent parts of the market with AI spending. 

The backtest is short because of the age of a few of the funds so no real bear market for us to assess but there was some crisis alpha during the Tariff Panic from 2025. I think the cheaper version suggested by Finominal is inferior but that mix does accomplish some of what we're trying to achieve. Now that I've found that tool, I will refer to it when we do these studies.   

QLEIX as the largest holding and despite being equity oriented was actually up 19% in 2022 which is great but I think it would be a mistake to expect that kind of result in any future bear market. QLEIX has some instances of serious differentiation versus the S&P 500. In 2022 that was a good thing but in 2020, not so much, the fund was down almost 14% versus a gain of 18% for the index. 

I asked Copilot how the Alt Palooza might have done in 2022 and how it might to do in future bear markets. 

Taking that assessment at face value is not the right way to use the table. A table like this might be able to point out a vulnerability that may not be obvious at first glance. On the way to making this table, Copilot got a few things wrong that I had to correct. 

Circling back to the results from testfol.io, the risk weighting version is interesting. The volatility is barely detectable but the portfolio has almost the same CAGR as 60/40. In the context of 75/50 ( a portfolio that achieves 75% of the upside and half the downside) the Alt Palooza backtests like a 95/25. Cool!

I think the heavier weighting to FLXIX and APHPX which account for a combined 72% of the portfolio make the risk weighted version more vulnerable to some sort of systemic/credit event as noted in the table. Copilot, what do you think? "The Finominal 'risk‑weighted' version would almost certainly do worse than your original version in a credit event." 

This observation with the risk weighted version is a small scale example of trying to understand why something might have done well and then trying to understand what could go wrong or otherwise threaten the portfolio. 

It's an interesting portfolio but all of these funds are complex. Keeping tabs on them and the overall portfolio would be for more difficult than using just a little bit of complexity to make an otherwise simple portfolio more robust. Simplicity hedged with a little bit of complexity, not the other way around. 

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.