Mostly Voices [0:00]

A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines. If a man does not keep pace with his companions, perhaps it is because he hears a different drummer. A different drummer.

Mostly Mary [0:18]

And now, coming to you from dead center on your dial, welcome to Risk Parity Radio, where we explore alternatives and asset allocations for the do-it-yourself investor. Broadcasting to you now from the comfort of his easy chair, here is your host, Frank Vasquez.

Mostly Uncle Frank [0:37]

Thank you, Mary, and welcome to episode 114 of Risk Parity Radio. Today on Risk Parity Radio, we are going to take a break from email mountain, although we have much climbing left to do there.

Mostly Voices [0:52]

I'll improve on your methods.

Mostly Uncle Frank [0:55]

And going to talk about an analysis of a fund that is ticker symbol B-T-A-L. It's B as in boy. Now this was asked about a number of months ago by one of our listeners and I can't find that reference anymore, but if you were the person that recommended we take a look at it, I would be very happy to thank you if you sent me another message because it's a very interesting fund. Now as we always do here at Risk Parity Radio, we will use David Stein's 10 Questions to Master Successful Investing to go through an analysis of this fund. And we'll just get right into it. The first question is, what is it? And that is a very good question. The official name of this fund is AGF IQ U.S. Market Neutral Anti-Beta Fund. Now that probably doesn't tell you anything about what it is or what it does or not much, but let's just go through that name and I'll tell you what I've learned about the various parts of this and what this thing is. First of all, AGF IQ. AGF is the American Growth Fund, or that was the original name of it. It was the first Canadian fund that began investing in US stocks and this was back in 1957. AGF is still headquartered in Toronto but also has an office in Boston. Now the IQ just stands for Quant investing. So it has some interesting funds that are unusual in the spectrum. Now we need to get to what this talks about, neutral anti-beta fund. Well, in order to understand what anti-beta is, first we need to understand what beta is. What is beta? Beta is a measurement. It measures the relative volatility of the value of a stock compared with that of a market index. Beta is usually calculated using historical market index data. High beta stocks are those that are more volatile than the market index, and low beta stocks are those stocks that are less volatile than the market index. So a stock like Tesla has a current beta of 1.36, which means it's 1.36 times more volatile than the stock market. And if the stock market goes up, Tesla is likely to go up 1.36 times that. When it goes down, it's likely to go down 1.36 times the market. Compare that to something like AT&T, which is a low volatility or a low beta stock as a beta of 0.73. So when the stock market goes up, it's likely only to go up about 73% of what the stock market is doing. And when the stock market goes down, it's likely to go down only 73% of that. And that is basically how you think about beta. Now, what does it mean to have an anti-beta fund or an anti-beta index fund? I'll redo this and then we can talk a little bit more about it. This is from their prospectus and it says, the universe for the target anti-beta index, which is what they're following here, is the top 1,000 eligible securities by market capitalization, including real estate investment trust REITs in the Dow Jones US Index. The universe is the definition they give for that. The securities included in the universe are categorized as belonging to one of 10 sectors. The target anti-beta index identifies approximately the 20% of securities with the lowest betas within each sector as equal weighted long positions and approximately the 20% of securities with the highest betas within each sector as equal weight short positions. Okay, so what does that mean? That means that this fund is buying or taking long positions in a basket of low beta stocks like AT&T. At the same time, it is also taking short positions or selling the other side of that, so it's selling things like Tesla. And it goes through all the 10 sectors of the market and takes a little mini basket of each one of those to sort of equalize the whole thing out so you have equal numbers of stocks or equal weighted groups of stocks in each sector of the index. And so it's balanced as far as these sectors are concerned. Because if you didn't balance it, you would end up with all of these high growth, high tech stocks in the top and then a bunch of consumer staple stocks as your anti-beta strategy. It wouldn't give you something that's really balanced across it. Anyway, so that is what it is in a nutshell. A big nutshell, but a nutshell nevertheless.

Mostly Voices [6:05]

That was weird, wild stuff.

Mostly Uncle Frank [6:10]

I should say also in terms of its form, it is an exchange traded fund that trades on any of the stock exchanges, so it's easy to buy or sell just like any other ETF or stock. But now I suppose we should add in terms of what is it? is what is it for? And what this thing behaves like is one of those volatility indexes, like VXX or VIXY. So it has a negative correlation with the stock market, as we'll be talking more about later. And the purpose of it would be to dampen volatility of a stock portfolio. So this in effect acts as a kind of insurance because when the stock market's going down, this thing goes up. And when the stock market's going up, this thing tends to go down. And it is positively correlated with volatility funds like VIXY or VXX or VIXM. Just a few more statistics on it. So it's got 199 companies that it's long in. It has 199 companies that it's short in. The average beta of the stocks it's long in, that it's buying, is 0.84. The average beta that it's short in is 1.43. All right, let's go on to question two now. Question two is, is it an investment, a speculation, or a gamble? That's a good question here, because I'm not sure you could characterize this as an investment per se. It is buying. and selling stocks in the market. So it is an investment from that perspective. However, over time, it's been around for about 10 years. It actually has had a negative expectation of -3.62% over that period of 10 years. It's performed particularly badly in the past year when the stock market's been going up so much. It's been down 30% in that year, although over three years it's averaged minus 5.14, over four five years it's averaged minus 0.599. So the other questions are, is it a speculation or a gamble? I wouldn't call it a gamble because it's not a lottery ticket. You're not expecting to get something out of it that way. I would say it's probably more of a speculation because if you are buying this thing, you are speculating that the stock market is going to go down. If you are an active trader in this, you would buy it whenever you thought the stock market was going to go down because then this would go up. And then when you thought the stock market was going to go up again, you would sell this and that's how you would make money off of it. So it is a speculative kind of investment. And I think that's probably the best way or the best place to put it in this three definition rubric we have here from David Stein. All right, question three. What is the upside? Well, the upside is you have something that goes up when the stock market's going down. And so that may be beneficial for you if you were actually speculating in it, trying to trade in and out of it. But it's also of use if you're having a stock portfolio that is mostly stocks and you are looking for some kind of insurance essentially against sharp downturns. In terms of its overall performance, it does have a negative performance similarly to those volatility funds that we've talked about in the past. Now, those volatility funds are a lot worse. They decay a lot more. If you look at a comparison, for example, of this fund, BTAL, with the funds VIXY, which are a short-term volatility futures fund or VIXM, which is a medium-term volatility fund. The annualized return for comparison purposes is -1.7% for the BTAL compared with -45% for the VIXY short-term fund and -9.17% for the VI XM fund. So it does do a better job or stays within better parameters in terms of that. All right, question four. What is the downside? Well, the downside is you do not expect this thing to make money over long periods of time, which tells you you would not want to hold a lot of it and it would need to be in proportion to the other things in your portfolio to make it useful. The other drawback that you will see with this fund is a very high expense ratio. The expense ratio is 2.57%, which ordinarily means you would not even consider a fund like this because of that high expense ratio. The reason you might consider this is because it's so unusual. I'm not aware of anything else quite like it. And the fact that although it has that high expense ratio, it does seem to perform better than the alternatives in this space, which are those volatility funds. But that is a big downside to this. You would hope that somebody else interested in getting into this space would be able to create something with a lower expense ratio, but that's not where it is right now. All right, question five. Who is on the other side of the trade? Well, this is an exchange traded fund, so the other side of the trade is anybody out there who's got this to sell. I doubt you'd be able to short this because it would be too tempting and there wouldn't be shares available to short this kind of a fund. Well, there's probably a corresponding fund that's a positive beta fund that you could buy if you wanted to. The other technical aspect of this is who's on the other side of the trade. Obviously, since it owns or is shorting a lot of different stocks that are traded, you know, everybody that's on the other side of those trades is technically on the other side of the trade for this fund, at least for its internal workings. All right, question six. What is the investment vehicle? As we said, this is traded as an exchange traded fund. and you can find it on the exchange at your favorite brokerage. Question 7. What does it take to be successful? Well, I suppose there may be two ways you could be successful with this. If you were a trader and had some crystal ball that told you when the stock market was going to go up or down. My name's Sonia.

Mostly Mary [13:08]

I'm going to be showing you the crystal ball and how to use it. how I use it.

Mostly Uncle Frank [13:11]

You could buy or sell this and make money whenever the stock market went down. But for the rest of us, if we're going to use this at all in a portfolio, we would be using it as some kind of insurance. And so we would want to take an allocation in it that would be proportional to our other holdings, our stock holdings in particular. and use it as a kind of break in the portfolio, as we will talk about in a few minutes here. Other than that, there's no real way to be successful with this. It's not going to be a primary drivers in anybody's long-term holdings. It's a very specialized fund. All right, question eight. Who is getting a cut? The people getting a cut are AGF, of course, got these quant funds and they are getting this large expense ratio of 2.57%. So they're being well compensated for this thing. But it's been around for 10 years, so people are using it. It has 5. 85 million shares outstanding, so it is getting some traction. It's a small market cap, 98 million. There aren't that many people using it, but that's who's getting a cut. All right, number nine, we're getting to more interesting questions here. How does it impact your portfolio? This goes to 11. And how it might impact your portfolio is to dampen both volatility and some of the returns in your portfolio if you were to put this into a stock driven portfolio.

Mostly Voices [14:56]

I did not know that.

Mostly Uncle Frank [15:00]

The question arises then, is this better or worse than alternatives? If you are looking for something that essentially is negatively correlated with the stock market, is correlated with volatility funds, is this going to be good or bad or indifferent or how is it going to actually affect a portfolio? And so we went to Portfolio Visualizer and first took a look at a few different metrics here. We ran a correlation analysis first just to see how correlated or uncorrelated it was with some of the common things we put in our risk parity style portfolios. And I'll be linking to this in the show notes as well as the fact sheet in Prospectus and a couple other things about this fund that you can peruse at your leisure. But taking a look at this correlation matrix We see that this fund, BTAL, has a negative correlation with the stock market represented by VTI at -0.65%, which compares to a volatility fund at -0. 8% and a medium-term volatility fund at 0.71%. So it is highly negatively correlated with the stock market. It's even more negatively correlated with something like small cap value, in which case BTL is more negatively correlated with VIoV, a small cap value fund, than either VIXY or VIXM. It is positively correlated with treasury bonds, as you might imagine, as a positive correlation of 0.59 with TLT. It's unusual that anything has a positive correlation with that, but this does. If you look at gold, it actually has a positive correlation with gold, a smaller one, it's closer to zero, it's 0.27. With REITs, with our representative REET, the correlation is negative 0.33, as you would expect, because REITs are part of the stock market. And then it is positively correlated with these other volatility funds at 0.56 and 0.51. the other thing that's interesting to note on this correlation analysis because it's also got the annualized returns for this period, which is just from August 2014 to July 2021 in this because of the limitation on REET. But anyway, the annualized returns you can see for this fund were negative 1.7% compared with the negative 45% for the VIXY and negative 9.17% for the VIEXM. And so it does have a much better performance characteristics than these volatility funds that are commonly in use. It's also got a lower standard deviation that is more similar to a stock market fund. So the Annualized standard deviation is 14% and that compares with about 14 and 0.6% for the total stock market and 14.5% for something like gold and 12.5% with something like TLT. So it has more of a similar volatility characteristics than these volatility funds. These volatility funds that we've talked about and used have extremely high volatility and 73% for VIXY and 35% for VIXM or multiples in volatility. So this seems like a more friendly or more easy to use fund for the purpose of dampening volatility than the other volatility funds. So I thought it might be useful to insert this into a couple of our sample portfolios just to see what it did. And so we did some more portfolio analyses over at Portfolio Visualizer. In our first one, we took the Golden Butterfly portfolio, which is 20% total stock market, 20% small cap value, 20% long-term treasuries, 20% gold, and 20% short-term treasuries. And we compared that with another portfolio where we took 2% of the gold and 2% of the short-term bond fund and made 4% of it and put it into this BTAL neutral anti-beta fund. And what do we see from the outcome? Well, it's not that much different. What we see is that it does tend to dampen slightly both the returns and the volatility. So in terms of the metrics here, just going over them, the original portfolio, Golden Butterfly, had a compounded annual growth rate of 8.2%. And I should say this is only since October 2011, because that's as long as BTAL has been in existence. That compares with a compounded annual growth rate of 8.03 for the fund with the BTAL in it. And so it's slightly less. But as you go out, you see that's a benefit when this has a lower standard deviation, 6.8 for the original, 6.38 for the modified. Worst year is less, less worse, minus 4% for the original, minus 3.5% for the modified. Maximum drawdown, minus 7.16% for the original, minus 6.77% for the modified. And so overall, this is actually improving the performance of the portfolio, even though the returns are slightly less. And we see that when we look at the Sharpe ratio and the Sortino ratio. The Sharpe ratio for the modified fund is 1.15, which is greater than the original at 1.11. And the Sortino ratio is similarly greater or better for the modified fund with BTAL in it, 2.14. compared with the Sortino ratio of the original at 2.07. And so then we went ahead and did another analysis using this taking our Golden Ratio sample portfolio and modifying that. Now the Golden Ratio sample portfolio is in this version 21% Vanguard Growth ETF, Vanguard Growth Fund, 21% small cap value, 26% long-term treasuries, 16% gold, 10% Vanguard Real Estate Fund, VNQ, and 6% in cash. And this analysis goes back to January 2012. Now in the modified version of this, what we did is we took all the cash out and turned that into BTAL. So all the components are the same, except this modified portfolio has 6% in BTAL instead of the cash. And so what do we see in the results here? They are similar to what we saw with the Golden Butterfly portfolio. The returns are slightly less, but the volatility is more or less, if you will. And so the Sharpe ratio is better for the modified portfolio. In this case, the compounded annual growth rate of the original is 9.92% compared to 9.73% for the modified portfolio. with the BTAL in it. The worst year is -4.6% for the original and -3.8% for the modified. The max drawdown is -8.82% for the original and -8.2% for the modified. And when you look at the Sharpe ratios, they're similar, but the Sharpe ratio of the modified portfolio is 1.17% or 1.17 really, it's not a percent compared with 1.16 for the original and 2.09 for the Sortino ratio for the modified versus 2.05. So you can see how this would impact your portfolio by making it a little less volatile, but also you're going to have a little less on the return side of things. It does seem to have a better profile or impact than some of those other volatility funds, which makes it useful as a substitute for those, particularly since you can tax loss harvest these things. So it could be a useful insertion into some portfolios. Now, you can imagine what those kinds of portfolios would be. And the ones that come to mind are the ones that have leverage in them, because if you have leverage in the portfolio, then you're getting more return out of it. on that side, and you're using the BTL to dampen the volatility on the other side of it. So I went ahead and did another analysis using some of these leveraged funds in our experimental portfolios. And these aren't exactly our experimental portfolios, but I'll tell you what they are, and you can look at them also. I'll be linking to this in the show notes. These are analyses that begin in October 2011, when BTL first became around. and end on July 2021. In our first portfolio comparison, portfolio one is comprised of 26% UPRO, the leveraged stock fund, the leveraged S&P 500 fund, 26% in a long-term treasury bond leveraged fund, TMF, and then we took the rest of it and put it into four funds, 12% in gold, 12% in small cap value, 12% in intermediate term treasuries, and 12% in a preferred shares fund, PFF. And then as a modified version of that, I made a fund that has the same percentages of UPRO and TMF, but this one also has GLD gold, 14% small cap value, 14% in realty income corporation oh at 14% and 6% in BTAL. I suppose I should have been more careful about making it more of the same, but I'll let you do that. I was more fooling around at this point. And then I did a third portfolio that you may find amusing or interesting. This one is 25% in UPRO that leveraged S&P 500 fund and it's got 12 25% in TNA which is a leverage small cap fund, and then it's got 35% in TMF, a long-term treasury bond fund that's leveraged, and then we put 15% in this BTAL that we're talking about here, this market neutral anti-beta fund, and that's the third portfolio in this list. And we also ran this just against the Vanguard 500 index investor for comparison purposes. We put this on a rebalancing, I think it rebalances if something goes 12% out of line, which is usually only going to affect those leveraged funds. But when we looked at these, and this is kind of optimized or over optimized, if you will, for that last portfolio, but the compounded annual growth rate of that first portfolio is 19.72%, then when we modified it slightly and added the BTAL, it goes up to 20.6%. And then in that supercharged third portfolio, the compounded annual growth rate over the past 10 years is 31.63% annually, which is kind of ridiculous.

Mostly Voices [26:50]

You are talking about the nonsensical ravings of a lunatic mind.

Mostly Uncle Frank [26:59]

What's more interesting is when you go over to the worst years, the one without the BTAL actually has the worst worst year at negative 12.7%. The other two are at negative 9.74 and negative 9.77. So you can see how that BTAL does help with those kind of drawdowns. It's not the same though when you get to the max drawdown. The second and third portfolio actually have greater drawdowns at 20 and 23% compared to the max drawdown of the first one at -16.6. But the Sharpe ratios you can also take a look at. The one for the first portfolio is 1.24. compared with 1.19 for the second portfolio and the third one's up there at 1.39 Sharpe ratio and also it's a Sortino ratio of 2.5 which is greater than the other two at 2.06 and 2.19. For comparison purposes the Sharpe ratio of the Vanguard 500 Index Investor for this period was 1.21 and the Sortino ratio was 2.04. So what you can see from this is there may be other experiments that you can run with this thing to get even better results out of various portfolios. What's very difficult to deal with with this particular fund though is that it just doesn't have a very long history. We're talking about the history since 2011, which was basically a stock market going up kind of time. So you wonder what it would have done in past periods like the 2000s or in the 1990s or even in the 1970s. In theory, since it's got that sharp negative correlation with the stock market, it would have done quite well in those periods where the stock market was crashing, regardless of what else was going on because it is comprised of components of the stock market. And unless all the betas are going to change, The performance of this is unlikely to change in other circumstances. And betas do change over time, but they don't change that quickly. And they don't change for 200 things at once. And so that gives you a brief overview of how it might impact your portfolio. This is something that is on the experimental side, I would say, along with the other experimental funds we've been playing with. But it does have some promise. So getting to question 10, should you invest? And the answer kind of is, are you already investing in some kind of volatility fund or are you looking into some kind of volatility strategy? If you are already doing that, then this seems to be a better choice than some of these other volatility funds. And in fact, we have two sample portfolios with volatility funds in them. I'm not going to change them out right now, but this is a good potential substitute. And so next time they rebalance, depending on where those things are, if we could tax loss harvest out of those other funds, which is a common occurrence with volatility funds, they usually lose money. You could use this as a substitute for those in the proportion you want them. and that probably would perform just as well or better than the original volatility fund. That being said, I don't think there's any reason to rush out and buy this right now, particularly if your portfolio is not set up with one of those sorts of strategies. So our answer to question 10 is a qualified maybe. I don't think it means what you think it means. It will be interesting to see whether other fund creators do create other funds like this. I just don't see a whole lot out there that really does the same thing that this is doing, or at least in the same way, which makes it a very interesting fund to have around, even despite its horrendous expense ratios. But now I see our signal is beginning to fade. If you have comments or questions for me, please send them to frank@riskparityradio.com that email is frank@riskparityradio.com or you can go to the website www.riskparityradio.com and fill out the contact form and I'll get your message that way. We'll be picking up this weekend, hopefully on Sunday Sunday Sunday Sunday Sunday, Sunday, Sunday! With our weekly portfolio reviews, and I think I will try to finish off the emails for July. So we are even further behind than usual, and hopefully I'll try to get more caught up next week. If you haven't had a chance to do it, please go to Apple iTunes and Leave me a review, some stars, follow, like, subscribe, whatever you do at your place, and that would be gratefully appreciated. That would be great. Mmmkay? Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio signing off.

Mostly Mary [32:22]

The Risk Parity Radio Show is hosted by Frank Vasquez. The content provided is for entertainment and informational purposes only and does not constitute financial, investment, tax, or legal advice. Please consult with your own advisors before taking any actions based on any information you have heard here, making sure to take into account your own personal circumstances.