The allocation changed materially this month because I had some excess cash to invest and there are some frictions with asset location as these positions are held in both retirement and non-retirement accounts. Data here.
Overall the current allocation is approximately:
27% US Large Cap
29% ex-US Equity (mix of DM & EM, large and small cap)
18% Laddered Treasury Futures
~104% nominal exposure (tiny amount of leverage)
Technically I am supposed to be adding cash to bring trailing volatility back to 12%. However, the longer I run this strategy the less enamored of the volatility threshold I have become. Perhaps it is my stubborn contrarian tendencies rearing their head. Candidly, I just don’t feel like messing with it to shave off a couple points of trailing volatility. In a significant, sustained risk-off event I would likely add cash to counteract spikes in correlation. But for this to make much of a difference the event would have to be of enormous magnitude. Even during Covid this portfolio’s max drawdown was only about 10%. So for now I am just letting it ride.
Overall performance remains in line with expectations. Again, we are getting US Large Cap returns with 60/40 drawdowns and volatility, in a much better diversified portfolio.
One thing that these performance reports do not capture particularly well is the portfolio’s growth equity tilt. In fact, this is precisely what has kept my ex-US equity exposure from being overly detrimental to performance. I haven’t written about it much in these posts, but for portfolios designed to harvest market betas (of which this is definitely one), I am in strongly in favor of underweighting traditional “value” strategies due to the prevailing global macro environment. Getting deep down into the weeds on this is beyond the scope of this post, but in my view the key headwinds for traditional value strategies are:
- Persistently low trend economic growth
- Ultra-low interest rate policy (provides greater benefit for long-duration assets)
- Muted inflation (at least in the public consciousness)
In a sustained inflationary or (acknowledged) stagflationary economic regime I would likely make a tactical adjustment and reintroduce some traditional value equity exposure back into the portfolio. All this just goes to illustrate that there are infinite variations on the permanent portfolio concept.