Exchange Traded Endowment Portfolios Not Ready For Prime Time?


WisdomTree offers a lot of interesting funds and a while back starting building model portfolios which to the firm's credit are not limited to just its funds. Included in their portfolios is an endowment model that they wrote about earlier this week. The article looked at the moderately aggressive (MA) version versus a series of different looks ranging from conservative to aggressive. MA allocates 50% to equities, 30% to fixed income and 20% to liquid alternatives. Here are the names and weighting in the portfolio;

According to WisdomTree's fact sheet for the portfolio (behind the login so not sure it's ok to share) the one year return was a loss of 7.95% based on the market price for the ETFs versus a decline of 12.2% for the S&P 500 Index and a loss of 2.41% for the portfolio's benchmark (50% MSCI AC World Index - 30% Bloomberg Barclays U.S. Aggregate Bond Index - 20% FTSE 3 Month Treasury Bill Index). Clearly, the mix offered some protection against 100% equities but not against its benchmark. For just the first quarter, the portfolio was down 14.73% versus 10.09% for the benchmark. The fixed income allocation wasn't the problem as 2/3 of it is in AGGY which outperformed the Agg by 380 basis points for the year. All numbers per Yahoo Finance.

There are some performance issues in the equity tranche. Small cap has been a tough place to live and DGRS and DLS both trailed the S&P 500 by 1800-1900 basis points for the 12 months ending March 31. At a combined 20% of the equity allocation, that hurts. XSOE and SPDW both lagged meaningfully but not as much a small cap, so at 30% of the equity allocation that also hurts. NTSX was flat, so great outperformance but arguably that isn't an equity proxy, it leverages up to capture 90% equities and 60% fixed income and EPS was inline with the S&P 500. I realize the model benchmarks its equities to the MSCI All Country World Index, so while that is unfair most US based investors think more in SPX terms than MSCI ACWI terms.

Some of their alts holdings took in the shins, I would argue they need to rethink their definition of alts. IGF and EMLP are equity proxies and while where at it so are REITs, at least they are equity proxies on the way down. EMLP was down almost 30% while IGF was down about 22%. I owned IGF for clients many years ago as a proxy for industrials and it only did ok, not great. I've written about PUTW many times. I want it to work (I realize that is a silly comment) but it just doesn't. Selling puts is a bullish strategy, and the fund was down 16% in the year ended 3/31. I've written endlessly about our luck owning BTAL and GLD and of course those did well. I've written a couple of posts about SWAN, my initial take was wrong and I own a few shares trying to figure out if I would every buy it for clients.

I think the weightings to alts, in the 2-4% range make sense. Back before the financial crisis there were plenty of articles arguing for 20-25% in MLPs and REITs which as I said at the time and still believe, is a terrible idea, they have never been as "safe" as people thought. Likewise putting that much into gold. My thought here has always been that equities are the best performing asset long term and gold has a low to negative correlation to equities most of the time so owning that much of something with a negative correlation to the best performing asset class seems illogical. A lot has be to be wrong with the world for gold to be a top performer, a lot wrong with the world like the Coronapocalypse.

I think there is something to this sort of allocation in terms of the percentages. I think the equity tranche is a little over-diversified, not in terms of the number of names but it covers so many equity segments that just haven't been working. When you include individual stocks or very narrow ETFs then no matter how bad it gets, you reasonably could have a couple of those holdings do very well which can help lift the portfolio but the MA portfolio didn't get that benefit. If you had a sector fund for healthcare or consumer discretionary then you got a little help, even more from a biotech ETF.

The fixed income tranche seemed to do the best. Realistically, any fund with some yield got hit during the worst of it and retraced a decent amount while funds that are proxies for safety did well. I think you need to be diversified between the two and that's easy to achieve with ETFs.

In addition to the alts I mentioned above that I use for clients I've also mentioned in dozens of posts, most clients own MERFX, TAIL and SH. I think with alts, it is important to add and remove as market conditions dictate but I know many advisors disagree. If you own effective alts (ones that reasonably buffer the downside) then you need to accept that on the way up you will think you have too much in alts and on the way down you will think you don't have enough. Again, if you've chosen effectively. I would argue, sorry guys, that WisdomTree could have chosen more effectively, especially considering their portfolios are not constrained to only using their products.

One last point is that I don't think the term endowment fits here. Endowment funds typically have access to private equity funds and other illiquid pools of capital that retail sized accounts cannot access. Endowments also have infinite time horizons. While I'd like to think that the type of portfolio construction we're talking about is sophisticated, it is more of a alternative risk allocation that seeks to manage volatility while acknowledging that safe yields from the bond market have become very hard to find.