A New Quadrant Portfolio

Matt Tuttle from Tuttle Capital/T-Rex was profiled talking about a Permanent Portfolio-inspired update to the 60/40 portfolio that Tuttle says is 60-70 years old implying it needs to update to navigate modern realities of a different world and vastly broader fund/strategy choices.

The four, equally weighted quadrants from Matt are stocks, "beyond bonds" which includes pre-merger SPACs and property & casualty insurers, debasement trades like gold and Bitcoin and finally tail risk which Matt defined at managed futures and short term government bonds like T-bills. 

For stocks, I just used SPY, Copilot said merger arb is the best proxy for pre-merger SPACs, Chubb (CB) for P&C, for debasement I put 20% in gold and 5% in silver and for tail risk I put 12.5% in managed futures and 12.5% in T-bills. I did not use Bitcoin for debasement to leave out any potentially unrepeatable result.

The return of the Tuttle Quadrants is close to the Permanent Portfolio (PRPFX) with less volatility and the backtest obviously looks quite a bit better than 60/40.

Matt has written a couple of times about P&C companies in this context, his theory seems like it more relates to the operating business and risk transfer than how the stocks actually behave because using the Invesco KBW Property & Casualty Insurance ETF (KBWP) as a proxy, the space looks nothing like fixed income but you may draw a different conclusion. I also do not know whether pre-merger SPACs actually look like merger arbitrage, Copilot offered that, so grain of salt that idea.

The first lookback allows for a long period of study by using the Merger Fund. This next one swaps out the Merger Fund and adds a SPAC ETF that has symbol SPCK and gives us almost six years. The second look back is reasonably consistent with the first one. 

Anyone so interested can replicate the concept pretty easily but I wouldn't make any forward looking assumptions about returns. As if often the case, I think the volatility numbers can stand up and if bonds with duration continue to do poorly then this mix has a pretty good shot of continuing to outperform. To the extent P&C companies are or are not bonds proxies, both Chubb and KBWP are negatively correlated to IEF and TLT. 

It might not be visible on the chart though but there is a lot of differentiation of returns between the Tuttle Quadrant and the others. In the first back test, Tuttle quadrant was best performer in eight out of 27 full and partial years and 6 times it was the worst with four of those six coming since 2019. The updated version using SPCK fared a little better on that score though.

One takeaway is that like me, I don't think Matt is a fan of bonds with duration which leads us to this.

I would venture to say that the 30 day SEC yield is closer to the yield that investors will get. The portion highlighted by Ben is if all the bonds are held to maturity. I've never owned AGG but I don't think that is what AGG does but please leave a comment if I am wrong about that. 

If you have fixed income, what are you trying to do? Some want to offset equity volatility, some want yield and some want a combo of both. Whatever someone is hoping to get out of AGG or BND for that matter, there are ways to get it with less volatility and more yield. 

BOXX replicates T-bills but pays no interest so it is tax efficient. The price accretes at the rate of whatever T-bills are yielding. ACBAX is the investor class shares of the Pioneer Cat Bond Fund. It's the class A shares but self-directed investors should be able to buy it without the load at Fidelity or Schwab but ask them first. 

The 75/25 combo is structured for total return with a little yield. If the T-bill ETF BIL is swapped in for BOXX then the total return CAGR was 6.36%, the yield was 5.64% versus 3.87% for AGG and the volatility dropped a tick to 1.76%. 

There is no need to take on AGG's volatility and interest rate risk to get 5.XX%.

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.