Model Portfolio Quarterly Update

In April 2022, I introduced on this blog The Italian Leather Sofa Model Portfolio. As a reminder, here is the portfolio composition:

• 60% stocks (via NTSX)
• 40% bonds (via NTSX)
• 20% trend (via DBMF)
• 10% commodities trend (via COM)
• 4% Tail risk (via TAIL)
• -34% cash

The idea behind the portfolio is stolen from here. The link offers the best explanation to what I think is the most common question related to it, i.e. why the portfolio uses leverage (and why in this context leverage decreases risk).

It represents a simplified version of the portfolio I have been building since I moved to Switzerland: here you can find details about the “enhancements” to this model.

Please note that the returns you find in the Model Portfolio series will always reflect the point of view of a USD-based investor. The ETFs are priced in USD and Composer PortfolioVisualizer Arch Portfolio Backtest Testfol.io, the app I use to track the portfolio, does not allow me to change the reference currency. Yes, I changed the tracker once again but hopefully for the last time! At least, this quarter I did it because TestFolio is an improvement compared to Arch.

Besides these ‘technicalities’, the focus of this series is on how to build a great and simple permanent portfolio. There are various solutions an investor can employ if they do not have the USD as their base currency and want to eliminate the FX volatility. As I wrote here about the All Weather Portfolio, I am not bothered by the FX risk, given my investment horizon and the fact that I do not consider myself a CHF-based investor even if I live in Zurich. Plus, I do not have any currency-specific audience that would make this series more helpful if run in EUR, CHF or GBP (if you want a deeper dive into FX risk, I wrote this).

After posting a 3.2% gain in Q2-24, the portfolio reached a new all-time high by growing 3.95% in Q3-24.

The blue line represents the Model Portfolio, while the other two are functional references (I cannot really call them benchmarks): the 60/40 portfolio (yellow line) and the S&P500 (red line).

Since Inception, including a backtest period

Q3

Since inception plus backtest (May, 2019). AOR is the 60/40.

Below you can find details of each ETF performance, including dividends, in the quarter:

Below is the Q3 price graph for each component of the portfolio:

How to read the portfolio performance

I have to admit I fell for the single-line item performance fallacy. NTSX is the ETF with embedded leverage that allows the addition of “free diversifiers” to the portfolio. I, wrongly!, judged the merits (or otherwise) of leverage within NTSX, thinking for example about the implications of an inverted yield curve (NTSX borrows at the short-term rate and invests in bonds that pay the long-term rate…not great when the curve is inverted).

Leverage belongs to the portfolio.

Not only that. COM and DBMF use futures; a small fraction of the sum invested in those ETFs is posted as margin while all the balance erns the T-Bills returns. In other words, if the Bills rate is 5% and DBMF returns 3%, it means DBMF alpha, the real yield of the strategy, was -2% for that year.

After a strong performance in the first half of 2024, DBMF won the sucker gold medal last quarter. July was a counter-trend month, many assets retraced a bit from their highs, cascading into the first days of August, a total wreckage for trend following. And that’s when TAIL came, partially, to the rescue. I wrote a post in mid-August if you want a deep dive into this.

I often write about the importance of having good model-risk diversification in the trend-following space. So far, DBMF has been one of the best performers: better lucky than good, I guess. Lucky for this series: I want to keep the portfolio simple, that’s why you see only 1 ETF covering the trend sleeve. Had I picked KMLM or RSST here, other ETFs I like and use, results would have been worse; at least until we have a longer history that would smooth out short-term performance noise.

COM muddled along: commodities spend most of the year in a downtrend and only recently spiked up, probably pushed by geopolitical tensions increasing everywhere. This is a macro-agnostic portfolio, I leave these considerations to other corners of the internet 🙂

A (partial) good news for NTSX is that the 2vs10 year spread turned positive; if the 3-month vs 10-year follows, we can finally start to get paid for carry again. Or inflation will pick up again, the FED will realise their mistake and we are back at square one.

Since I wrote about alternatives to DBMF, we finally have as well enough data to analyse RSSB, the Return Stacked Stock and Bond ETF. The fund provides more leverage than NTSX, 2x instead of 1.5x, and a global stock exposure. Based on some trials on Testfol.io, these goodies come with a steep cost: a 1% funding charge higher than NTSX.

Is it worth it? Considering that WisdomTree has NTSX, NTSI and NTSE, the only thing going for RSSB is the additional leverage. It is borderline too expensive at a 1% cost, even when compared with IBKR margin loans.

Model Portfolio for European Investors

There are two good news for Europoors (maybe three)…and one for me.

So let’s start with me. This section will hopefully stop whining like “but we cannot invest in the stuff you talk about here!”. Yes, you can. Here I explain to you how.

The first good news is that NTSX and DBMF are available for European investors. To access DBMF, you have to ask your broker for this mutual fund: LU2572481948. It is even better than the ETF because it does not pay any dividends 🙂 I bought it on IBKR, and it works.

The third good news (sorry) is that this month (?) WisdomTree might list a ‘Global’ NTSX, a 90/60 ETF that invests in global stocks and bonds. So moar diversification, less exposure to the US and the USD, fewer thoughts that keep you awake at night “OMG I am invested in the best companies in the World, I might NOT lose money by buying a shitty carmaker in Europe !1!” (I am joking. But if you consider that when I started investing trading 30 years ago I could only access Italian stocks, hearing these complains makes me curse at the clouds like a proper old man).

The second good news is that I found a way to track this portfolio. Finding a tracker for UCITS ETFs that works is hard, finding one for ETFs and Mutual Funds is (almost) impossible. The NTSX joke is even funnier if you consider that PortfolioVisualizer, the best tool ever to track ETFs and Mutual Funds, was created by a lone European developer…who decided to track US-listed instruments because he was working in the US. Guess he didn’t miss European securities 😉 Anyway, Getquin does the trick:

It is not extremely intuitive to use and basic stuff like rebalancing requires more than a click 🙁

I started my simulation on 01/01/24 with 62% in NTSX and 38% in DBMF. I choose the % so that bonds and trend are equally weighted. The 60/40+ idea behind the Model Portfolio was to highlight its potential vs (what I thought was) the most common benchmark. Turns out that here in Europe no one gives a damn about the 60/40. No One. So I took the opportunity to already shift towards a better split. Going forward, I will only rebalance it once a year.

The great thing about Getquin is that it allows one to track the portfolio in EUR, so that’s 100% the return a Europoor would see investing in the same portfolio.

What I am reading now:

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