A few years ago I made several mentions in blog posts to something called the 75/50 portfolio which was devised by John Serrapere which he wrote about at ETF.com. The premise is simple to understand, the portfolio was constructed to capture 75% of the market's upside with only 50% of the downside. Achieving that outcome would result in meaningful long term outperformance. This link provides all the information. This table captures a small window of what successful implementation looks like.
Here's what the portfolio looked like when John wrote the above linked article.
Good, bad or otherwise, it clearly has a lot of moving parts and a lot was put into it. I used to work with John, in a manner of speaking. When I worked on the Schwab Institutional equity desk in the mid-90's he was one of our clients. As I recall, he did a lot of trading with S&P 500 options. Then John popped up on my radar writing prolifically for ETF.com until 2010. I am not sure why he stopped, so I will just say I hope he is alive and well.
What appealed to me so much about 75/50 is that it articulated and quantified what I try to do for client accounts, not so much exactly 75% and 50% but more conceptually. I try to let client accounts go along for the ride on the way up and take steps to avoid the full brunt of large market declines.
Part of how I try to avoid the full brunt is with the AGFiQ Market Neutral Anti-Beta Fund (BTAL) which goes long low beta and short high beta. You can check out the fund's home page to learn more but there is a lot of mental heavy lifting behind the strategy, I have bought into the concept and have been please since adding it 15 months ago.
On Thursday morning I had the opportunity to talk to AGF, the BTAL company, presumably about BTAL. I was interested in hearing how other advisors use the fund which lead to a discussion about research that AGF has done (I think it is an ongoing study but either way) on how to use BTAL with regular long equity exposure to replicate the return and volatility of the typical 60/40 asset allocation. The reason someone would want to explore this is over concern that that previous 30-35 years of 60/40 results cannot be replicated. Interest rates don't have to go up but they cannot drop from the mid-teens down to 2%, or less, again. Talk to them to fill in the details but somewhere around 75% in regular, long equity exposure and 25% in BTAL seems to be a sweet spot they found for synthesizing 60/40.
Something in the conversation reminded me of Serrapere's 75/50 and it turns out that AGF has an ETF that targets something similar. The AGFiQ Dynamic Hedged US Equity ETF (USHG) allocates about 80% to sector ETFs such that this part of the portfolio replicates the S&P 500 and the remainder is allocated to BTAL. As of July 31st, 19.61% was allocated to BTAL, a little over 15% to tech, a little under 13% to financials and so on. The strategy underlying the fund has been available in a different wrapper for a while and has worked well enough for AGF to have launched USHG back in late May. As an ETF, here's how it has done;
Three months is obviously a poor sample size but its performance has lived up to the billing; up a little less, down a little less, so a smoother ride to a similar result as the S&P 500 (the pink line is the SPX, no idea why Yahoo doesn't include it in the legend). So the strategy creates a favorable impression but a problem I can foresee with USHG is "why don't I just put 80% directly in cheap equity ETFs and 20% directly into BTAL, why do I need USHG?" I am not diminishing the fund or the strategy, just pointing out that USHG could end up competing with a homemade SPY/BTAL blend.
Another crucial point of understanding is that no strategy can always be the best. In BTAL's early days, it struggled as the bull market was much earlier cycle. Now, later cycle where maybe the market has rotated to favor some lower beta names/sectors and the S&P 500 has churned around with a lot of volatility in a narrow trading range for about a year and half, BTAL has thrived. For now BTAL is a great hold in my opinion but nothing is a permanent hold and I am intrigued by USHG but I just found out about it today. It could turn out to be a panacea, but we'll see.