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 Testfol.io, the app I use to track the portfolio, does not allow me 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 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 losing 2.25% gain in Q4-24, the portfolio declined another 2.04% in Q1-25:

Since Inception, including a backtest period

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

Q1

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

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

Below is the Q1 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.

It feels a little dissonant, writing about Q1 as if it’s a neat bookend, knowing what spilled out just a few days later. Still, for our purposes, the calamity might be less prologue and more epilogue.

Zooming in, Q4 of 2024 was a no-fly zone for diversifiers—nothing worked. Q1 gave us a bit of reprieve. COM and TAIL finally showed signs of life. Not celebration-worthy, but at least it broke the feedback loop of disappointment we’d been stuck in.

But the gravitational center of this story—or maybe its most persistent drag—has been DBMF. Since Q2 of last year, it’s been an exercise in endurance. The fund stumbled in August’s churn and hasn’t stood straight since. This isn’t unexpected. A strategy built to surf long-term trends is going to choke when the wave folds in on itself. Markets reminded me of her lately:

Let’s just say Trump hasn’t exactly been the patron saint of trend followers. Before the first tariff shot in April lit up the charts, there was a quieter tremor in early March—easy to forget now, but the tape remembers:

https://twitter.com/choffstein/status/1897675802759635240

The Model Portfolio is built on the idea of diversification…and diversification in ‘responders’:

When it comes to liquid alternatives and drawdowns this is an excellent framework from Meketa that nails it. First, second and third responders. The last few days it has been a first responder's dream! pic.twitter.com/2nJclPYtbX

— Rodrigo Gordillo (@RodGordilloP) April 4, 2025

Looks like we have to take our medicine before CTAs’ magic kicks in:

“I do not see a lot of diversification in sources here tho….”. Corey, Rodrigo and SG have indeed a lot of skin in this game. Even if the last months, even days!, might have felt like years, we are looking at a 9-month period: anything can happen in such a short horizon.

A longer backtest, where I employ DBMF as the only diversifier (due to the lack of data for the other products), reveals that the Model Portfolio overperformance compared to the 60/40 is not constant (and why it should be…):

There’s no guarantee DBMF will behave the way the TestFol.io boys think it should. Their synthetic proxy tells a nice story, but stories are cheap and reality doesn’t care. Maybe the trend-following genie already slipped out of the bottle, wandered off, and won’t be coming back. Maybe the best days are behind us, flickering back there in the backtest.

But if I had to squint for a silver lining, it’s this: I don’t see any surge of affection from the usual suspects—retail or institutional. No TikToks singing the praises of managed futures. No CIO memos evangelizing convexity. And that’s maybe a good thing. Strategies with 50-year track records don’t die of neglect. They die from being loved to death.

So we live. We wait. We watch.

For what it’s worth, in IRL I’ve started trimming TAIL (and BTAL too), taking advantage of the spike to rotate into stuff that’s been marked down. That’s their job, after all—to be sold when everyone else is buying stress. This isn’t some tidy rebalancing exercise. If I had perfect foresight, I’d have zero TAIL at the top. Obviously I don’t. But if I can milk a high single-digit CAGR out of something with negative EV, I’ll take that and call it alpha. Or luck. Or just survival.

Europoors

In the meantime, let’s have a look at what is going on in the former poor land:

DBMF finally launched their ETF in Europe. Italian brokers decided nonetheless that their clients are better off not having access to it…

What I am reading now:

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