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, 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 want 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.
So far in 2023, the portfolio posted a 5% gain: after a positive first half of the year (+9%), it lost 4% in the latest quarter [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 c14% 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 (I cannot really call them benchmarks): the 60/40 portfolio (blue line) and the S&P500 (red line).
Since Inception, including a backtest period
Q3
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
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.
This year’s poor performance of the model portfolio (+5%) compared to the 60/40 (+6.25%) and SPY (+13.5%) is not due to the use of leverage but to the fact that diversifiers’ alpha was negative.
For the new readers around here, and a refresher for everyone else, TAIL merits a slightly different consideration since it is a negative expected value strategy. The Model Portfolio “invests” part of the gains in an insurance that pays during fast crashes and helps the portfolio to “compound better”. I expect TAIL to be a drag to the performance most of the time.
I have the impression that most readers of the blog focus on this:
How the portfolio performs compared to the S&P500. This is understandable, given the index’s spectacular performance since the GFC and the fact that it represents (represented?) the fastest way to achieve financial independence.
While there is a big investing population who would love to focus on this:
You know, from the 60/40 down to the 20/80, super cautious investor. But they are also a category of investors that mainly work with advisors, investors that are (good for them!) busy doing exciting things in their life instead of reading bs about investing. And then there is the 60/40 DIY investor that is bounded by the UCITS universe. So they have no access to any of the ETFs included in the Model Portfolio.
In short, I feel a bit like preaching to the wrong choir all the time 🙂
What I am reading now:
Follow me on Twitter @nprotasoni