A coworker of mine retiring this summer stopped me to ask if I had any thoughts on the market the other day. He knows I write for Seeking Alpha regularly, so this is fairly common. We spoke at length about his concerns, and I was very interested to hear that they were different from what I had expected.
His largest concern was not income, which is typically the major point of contention for retirees. Instead, he was worried that all the fantastic options yielding 5% right now like CDs and T-Bills would leave him with income but no growth.
Growth comes with a price—in the form of volatility. In his retirement, my coworker doesn’t want to deal with substantial drops in his account, but still wants to participate in the market.
This is a very valid concern and one many retirees may fail to consider as they transition away from their portfolio’s returns being primarily appreciation driven to being income driven. It is important to have both, as the future of inflation and rates are uncertain and unknowable.
I was inspired by that conversation to write a column on the portfolio suggestions I gave my coworker.
Note: As a registered investment adviser, it is critical for me to disclose that none of the advice offered in my writing is meant to be taken as personalized financial advice. I write for general audiences and have not taken your personal situation into account when writing this column.
Without further ado…
|Standpoint Multi-Asset Fund
|iShares MSCI Global Min Vol Factor ETF
iShares iBoxx $ IG Corporate Bond ETF
|Simplify Volatility Premium Income ETF
|Cohen & Steers Closed-End Opp. Fund
|Invesco Closed-End Funds ETF
|Saba Closed-End Funds ETF
*Courtesy Seeking Alpha**Yields calculated using the FWD metric instead of TTM.
These investments were chosen with a “core-satellite” approach. The core of the portfolio is the Standpoint Multi-Asset Fund BLNDX/REMIX, which I will go into more depth in momentarily. Surrounding that core are miscellaneous complimentary holdings meant to “gas up” the portfolio and provide excess returns.
The benefit of constructing a portfolio this way is that it would allow us to exit and enter new positions in the “satellites” without harming our core strategy. It also allows us to spread out across several sectors, strategies, and asset classes to add a layer of diversification to the portfolio.
For my benchmark, I’m going to use the mutual fund VBIAX as it is a 60/40 mix of stocks and bonds, which we will call the “Balanced Portfolio.” I also use an 80/20 allocation, which I use AOA to benchmark. I call this the “Aggressive Portfolio.”
We are only able to look back two years, since SVOL launched in June 2021.
This backtest assumes DRIP at the time of distribution, quarterly rebalancing, and no deposits or withdrawals.
What I’m most pleased about is how the Retiree Portfolio was able to maintain a lower standard deviation (our typical measure of “risk”) and outperform in total return. Its worst year is in the single digits instead of 16% like the other two portfolios, and its max drawdown is almost half of the 60/40’s.
So, how much does it yield?
Remember that the backtest starts in June 2021, so the 2021 metric is only accounting for half of that year.
The title was no lie, and is actually undershooting the portfolio a bit. Last year, it would’ve yielded almost 7%! Moving forward, for 2024, we can expect anywhere between 5-7%.
Here is where the “Core-Satellite” style really shines, as we look at annual return decomposition. Note that the bars below represent the return of the assets in that given year. Keep an eye on BLNDX in dark blue. That is why it is our “core.”
Tour of the Funds
This fund is designed to be a single holding “all weather” solution that performs positively in all environments. They are able to invest across a multitude of assets and sectors, can go long or short any asset, and are concerned most with navigating volatility and drawdowns. They primarily benchmark themselves to a global equities index.
The portfolio managers have done very well against this index as of the end of last year.
BLNDX/REMIX deserves a place in any portfolio wanting growth with less risk. It can serve as a replacement for diversified equities or a managed futures/alternative fund.
Note that BLNDX/REMIX are composed of 50% equities and 50% alternatives, which could include cash, bonds, currencies, and any number of things from the list in Figure 7.
For the purposes of this portfolio, we can hold 40% of our capital in this fund and know it will serve as a solid anchor. When you look at the chart in Figure 8, notice how it performed in March 2020 and the trough of 2022. This fund has proven its reliability. This analysis of BLNDX/REMIX does not do it justice, but I am limited on space. If this fund is new to you, and you would like to learn more, I recommend this article from my colleague Macrotips Trading, “BLNDX/REMIX: Intriguing Performance but High Key Person Risk.” The article is from Sept. 2022, but it is very informative on the fundamentals of the funds’ strategy and philosophy, which hasn’t significantly changed since then.
Note: I have no affiliation with Macrotips Trading.
iShares MSCI Global Min Vol Factor ETF ACWV — 10%
Because our core holding is not entirely equities, I wanted to layer more on. I don’t want pure beta, as it carries too much risk.
Capital preservation is more important than capital appreciation for retirees, typically, so I want to lean defensive with our additional equities.
ACWV is a global index of equities weighted by volatility. This factor mandate has historically resulted in significant outperformance for its risk compared to other common factors.
Not only that, but it’s outperformed in gross returns too. This addition will add “smart beta” to our portfolio, hopefully enhancing long term returns but keeping volatility to a minimum.
iShares iBoxx $ IG Corporate Bond ETF LQD — 10%
No retiree portfolio would be complete without an allocation to investment grade corporate bonds. With a forward yield of 4% and potential upside, which I wrote about recently in my column on how I’m trading with the Fed’s dovish pivot, it feels like a no-brainer inclusion for the portfolio’s stability in both price and income.
LQD has only gotten cheaper since that article was published in mid-December, coming down from $110 to $108.My thesis hasn’t changed since that article, and I can give the cliff notes here:
- The Fed is pivoting toward rate cuts, signalling that we are topping out on rate hikes and are now at the “terminal rate.”
- Corporate bonds were battered by rate hikes, so we can now take advantage of that drawdown. At its peak in 2020, we saw the fund at $138!
- Leading indicators of a “default cycle” such as commercial loan defaults and debt delinquency do not show the same level of risk the market has priced in.
LQD has a 20% allocation in my own income portfolio, which I wrote about here.
Simplify Volatility Premium Income ETF SVOL — 10%
I’ve written extensively about SVOL and have recently reinstated my buy rating on the fund. I recommend reading that if you want more depth than I go into here.
SVOL’s basic premise is that it holds T-Bills and other bond positions and sells short the VIX index, which is a measure of volatility in SPX options. The fund is typically short anywhere between 0.2x-0.3x and has an incredible TTM yield of 16%!
Since its inception, it has bested the S&P 500. This is still one of the more impressive feats that few income funds can boast.
I am extremely bullish on this strategy and believe that the fund managers have found a winning strategy. It does come with risks inherent in shorting volatility, but is hedged to avoid complete meltdowns. SVOL is one of my largest income-oriented personal holdings, and I recommend it to all investors for at least a portion of their portfolios. I also recommend this fund as a replacement to covered-call funds, as SVOL gives access to equity premium without the same idiosyncratic and systemic risks inherent to owning stock indices.
That being said, it’s important to also read the bear case. Again, I will point you to my colleague Macrotips Trading and their article, “SVOL: Downgrade To Sell on Strategy Drift.”
Note: I have no affiliation with Macrotips Trading.
My regular readers will be familiar with some closed-end funds since I cover them alongside my ETF and portfolio articles. For myself, I prefer to pick and choose individual CEFs for my portfolio.
That is not feasible for someone wanting a “set it and forget it” style portfolio that only needs quarterly rebalancing.
To solve this issue, I have included three separate “fund-of-funds,” which are closed-end funds and ETFs that hold closed-end funds. It adds a layer of diversification and allows the “picking and choosing” process to be handled by professional managers.
Typically, the fund-of-funds style CEFs and ETFs come with “key person” risk, which is that we have to trust that the manager of the fund-of-funds is a good investor. To mitigate this, I’ve split the total 30% allocation to CEFs across three separate funds with vastly different holdings. This spreads out our risk and allows us to have access to the aggregate CEF asset class with remarkable diversity for only three holdings.
The three funds in question are FOF, PCEF, and CEFS.
If you’re not familiar with CEFs and you’re in disbelief of the expense ratios, do note that CEFs often employ leverage which incurs its own cost, known as “carry,” which is often passed on as an expense ratio. Also note that active management demands a premium above passive management, as is the case with other funds in this portfolio like ACWV and its 0.20% ER.
So long as excess return over the benchmark can compensate for the expense ratio, we’re typically good in my book.
Cohen & Steers Closed-End Opportunity Fund FOF – 10%
My favorite thing about FOF is that it has a mandate to buy CEFs at a discount and take advantage of price discrepancies. This is the “opportunities” mentioned in the name of the fund. Due to this, half of FOF’s top 10 holdings are currently priced at less than 90% of their respective NAVs.
These are also spread across several sectors. Note that FOF does come with a significant allocation to equity funds.
FOF has paid an incredibly steady dividend, staying around $0.087 for the last five years. While there is little growth, it is reliable, which is very important when considering income necessary for expenses.
Invesco Closed-End Funds ETF PCEF – 10%
PCEF is our weakest contender from a total return perspective in our backtests because it has a heavier allocation to corporate bonds. Bond beta was hammered in 2022 and PCEF’s leveraged exposure to fixed rate debt did not serve it well in the past. This makes its holdings more attractive moving forward.
PCEF has a more varied dividend history, which does pose a risk to future income. This is why having a variety of managers picking funds is important.
I still like PCEF for now, as it holds a variety of different funds not included in either FOF or CEFS, including several funds that employ options overlays.
In the future, I may consider repositioning this 10% into a BDC or MLP index since this offers overlap with our LQD position.
Saba Closed-End Funds ETF CEFS – 10%
To round out our CEF exposure, we have a fund-of-funds from Saba that has a very different sector make-up than the other funds and carries a ton of leverage not-already-baked-into its holdings by using bond futures as part of their strategy.
I really like the current strategy of overweighting US Treasury bond futures, as it is a bet on duration with less risk, similar to the strategies employed by Simplify’s TUA and TYA, which I hold in my own income portfolio. You can read about them (and by proxy, this strategy of holding bond futures) in an article I wrote about my income portfolio.
CEFS has had a very consistent dividend, with extra capital gains and excess RoC being paid out annually in the last few years. I like to see consistency in these funds, like FOF, where shareholders can expect the same distribution every month and plan expenses with that in mind.
This portfolio is aimed at the moderately conservative investor who believes that capital preservation is more important than appreciation, but wants to ensure a high current income from their portfolio.
The core position, BLNDX, is geared toward positive absolute returns and has never had a losing year since inception. Surrounding this are six diversified strategies that expose the portfolio to different asset classes from bonds to volatility to CEFs. The resulting portfolio carries less risk than the traditional 60/40 while offering higher returns due to the use of CEF leverage and factor investing.
For those wanting to reducing the portfolio’s risk further, one could reasonable cut PCEF for an additional 10% allocation to BLNDX.
Please leave a comment if you have found the info useful and would like me to update this portfolio in a future article, likely next quarter.
Thanks for reading.