Yieldy But Less Alty

A reader left the following question on an older post.

Any thought on a a 50/50 portfolio of BLNDX and QRPIX? AI seems to think it would be quite complementary.

My answer;

I bet it would work, it sort of backtests well but look at 2020. QRPIX was down a lot and BLNDX was down very slightly while 60/40 was up a lot. I've noticed that AQR funds every so often have a very bad outlying year and then will have the occasional very good outlying year.

The way it backtests, year by year there is a lot of differentiation versus 60/40. That's something you really need to get comfortable with so you don't give up in 2020 only to have a great year like 2022 come along right after.

Do yo consider QRPIX to be macro? I'd probably split the macro (or whatever you think of it as being ) into several funds in case QRPIX has particularly poor run. Same with BLNDX. It's a great fund but I'd build the managed futures/equity sleeve with multiple funds too.

The chart I looked at to give my answer.

There are a couple of years in there where sitting on the 50/50 combo would have been hard to do. Before posting the results below, think about what you might do in early 2021. Then, if 2023 was a reversion to the mean for 2022, how difficult would it have been to hold onto that notion as it lagged far behind VBAIX that year? 

The full 6.5 year result looks great, but at some point, real differentiation becomes too difficult to endure. Going forward, there's no way to know whether that combo will outperform, but barring some sort of catastrophe with one of the funds, the idea can probably work. Work is not the same thing as outperform. 

Speaking of complex funds and catastrophes, yesterday we mentioned the QIS ETF from Simplify that has more than cut in half, possibly due in large part to having built its strategy around going long volatility. 

Sort of related, Corey Hoffstein noticed that Simplify removed the subadvisor from its managed futures fund CTA. A few weeks ago, Mike Green, who was one of the brains behind many of the funds, left to start his own firm. Per Corey's Twitter thread, Harley Bass, who was the other part of the brain trust, is also gone, as is Paisley Nardini, who'd become the face of the firm in various places. 

Some of Simplify's funds do well, but some of them, like CYA (now closed) and QIS, don't. Simplify US Equity Plus Downside Convexity (SPD) is another one that we've looked at a few times and appears to not work well. It's essentially the S&P 500 with a put option overlay to protect against drawdowns. SPD's first real test was 2022. For that year, SPD was down 700 basis points more than SPY.

You can see inside the green box that SPD went down in lockstep with SPY and then kept going down after SPY bottomed. 

Here's a dire, even if not original, bearish take for domestic equities from Paul Tudor Jones. 

Valuation matters, but these arguments have no predictive value to tell us when it will matter. My usual take on these things is to not try to predict anything. Instead, I focus on being ready if it happens. Based on stock market history, it seems reasonable to think that between now and maybe 2050, there could be another lost decade for US equities. 

In a lost decade for domestic equities, things like managed futures can do well, commodities can do well, macro strategies can do well, dividend streams can continue and foreign equities can do well. A few weeks ago we looked at constructing yieldy portfolios with the following example.

That backtested well, but it is a complicated ensemble. I wanted to try to tweak it to be a little simpler and a little less alty.

Less Alty is closer to a normal equity/fixed income portfolio, favoring equities, but all of the equity funds are lower beta than the S&P 500. Blended together proportionately, the four equity holdings have a beta of 0.52. MDST is a new name for the blog; it is a derivative income fund that owns MLPs, but it has a short track record. 

The yields are 9% and 7% respectively without using any crazy high yielders.

Less Alty is interesting but probably less robust in a lost decade. It might be better for someone looking for more yield without taking on the same volatility as VBAIX and less concerned about the probability of a potential lost decade....a lost decade that of course might never come.