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 use leverage (and why in this context leverage decrease risk).
It represents the core portfolio I would invest in if I could access those ETFs (and if I was not so prone to slice and dice the equity and bond allocations to try several sub-strategies like factors). I moved to Switzerland at the beginning of the month, and I was hoping to use this update to celebrate the fact that I can finally implement the TILS Model Portfolio in real life. Unfortunately, I am still struggling to have InteractiveBrokers update my profile AAAAAAAAAAAAAARGH. As if I do not have enough struggling with financial regulators in my professional life….
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, the app that tracks the portfolio, does not allow to change the reference currency. 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 in case they do not have the USD as their base currency and wants to eliminate the FX volatility. As I wrote here about the All Weather Portfolio, I am personally 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.
In 2022, the portfolio lost 13.3% and in the first quarter of 2023 it recovered another 4% after a positive Q4-22 [as a reminder, Composer allows users to share their symphonies models, send me an email/write in the comments if you want the link]. The performance is still c16% below the all-time high registered at the end of 2021.
The yellow line represents the Model Portfolio, while the other two are functional references (cannot really call them benchmarks): the 60/40 portfolio (blue line) and the S&P500 (red line).
Since Inception, including a backtest period
Q1
Since inception plus backtest (8th of May, 2019)
Below you can find details of each ETF performance, including dividends, in the quarter:
Below is the YTD price graph for each component of the portfolio:
It was a positive quarter for stocks and the 60/40: inflation in the US is moderating as anticipated by many market participants, so no surprise here, and the US economy is still growing with no recession (yet?). The Silicon Valley Bank and Credit Suisse “defaults” did not spread. NTSX (a 1.5x levered 60/40 portfolio) performed as expected.
TAIL was again a loser, as it is your car insurance premium in a quarter where you cause no accident. Nothing surprising here either. The good news is that the VIX is finally trending down (it is at 17 as I write): this means my insurance (TAIL) is going to cost a bit less in the future. I recently listened to a couple of podcasts where ‘pros’ were explaining how the lousy performance of tail strategies in 2022 is pushing asset managers to avoid this type of insurance going forward; not that I wish another crash like in March-2020 but their actions make my portfolio choice even more compelling (at least if you agree with the view that the market goes where it causes the biggest damage).
The biggest drag to last quarter’s performance was DBMF: in March, trend-following strategies suffered one of their worst monthly losses since the dot-com bust (as explained here). This is because the upward trend in rates suddenly reversed in the wake of the SVB crisis. Call it financial environment, call it sentiment, it is moving from an inflation-scare to a recession-scare; whatever the reason, the trend that persisted for all 2022 is no more. Trend will work again when everyone is set in “full recession” mode, we are just not there yet…or to whatever the next prevailing trend will be.
Again, nothing surprising here. I added DBMF to the portfolio to be a diversifier: as long as it zig when the 60/40 zag and it maintains a positive expected return, I am fine. Maybe a bad omen is that Tuttle, the issuer behind quirky ETFs such as $SJIM (the Short Jim Cramer ETF) and $SPCX (the SPAC ETF), filed for a 2x DBMF ETF ($MFUT). If they think retail investors are now eager to get leverage exposure to trend following when like yesterday they did not even know the strategy existed, we are probably close to the beginning of an awful period for the strategy :(. FYI, Tuttle has nothing to do with the company that manages DBMF.
COM, the commodity trend ETF, finally posted a positive quarter after being flat for six months. All of this while the ‘standard’ CRB index lost 3.7% in the same period. I cannot really complain about their risk management strategy 🙂
I am paying c5%/year to get exposure to COM+TAIL+DBMF, the cost of leverage embedded in NTSX, so…not a great quarter in this sense. But I wanted to highlight this fact more for transparency, I definitely do not expect “the diversifiers” to perform each and every quarter. Funny, enough, $DBEH and $HFND, two ETFs I mentioned in January as possible additions in the same sleeve as DBMF, had a flat to positive performance last quarter. This is the risk of using a single fund in a space with no real beta.
I still believe in Cem Karsan’s idea: inflation will continue to flow and ebb in the coming years (maybe a decade), so hopefully my portfolio diversifiers will manage to pull a lot of weight in that environment.
What I am reading now:
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