A previous article explained why I hold the AlphaClone Alternative Alpha ETF (BATS:ALFA) in the passive part of my portfolio, some readers asked me to tell more about this passive part. First, I would like to start by the reasons why I have a passive part in my portfolio. Indeed, if my profile claims that I am a quantitative investor, why should I have passive investments? There are two reasons of equal importance: health and ego. The first one is quite obvious: even if I am lucky and grateful to be in very good shape, I am not immune to diseases and accidents. If I had to stay in a hospital a few weeks or months with most of my assets depending on my weekly trading, I would add a fragile financial situation to a personal challenge. This is the first reason why I designed a portion of my portfolio to take care of itself without intervention during months, even years. The second reason is that there is a danger in believing that we are invincible. In investing (in fact in any business) one must be very careful to keep one's ego below one's skills. Else, there is a high probability to receive an expensive reminder from the market. A good vaccine against the consequences of ego inflation is keeping a part of one's money managed by someone else. That's what I do with dynamically managed funds.
My passive holdings are in 5 categories and 3 currencies:
- A diversified fund in euro (my largest passive position): Carmignac Patrimoine A (CARMPAT:FP). Dynamic allocation in international stocks and bonds makes its value quite independent of the currency.
- Dynamically managed stock funds in dollars with two investing themes: hedge fund duplication and global middle class growth. The first theme is fully invested in ALFA, the largest position in this second category. For the second theme I use quantitative strategy ETFs in recurring consumption sectors: First Trust Consumer Staples AlphaDEX ETF (NYSEARCA:FXG), First Trust Health Care AlphaDEX ETF (NYSEARCA:FXH), PowerShares Dynamic Pharmaceuticals ETF (NYSEARCA:PJP) and a hedge by PowerShares S&P 500 Downside Hedged ETF (NYSEARCA:PHDG). I will come back later on this combination.
- Bullion funds. I consider precious metals more like an insurance than an investment. I have chosen Central Fund of Canada for the discount (CEF, in US dollar), and physical metal funds in Platinum and Palladium by Zürcher Kantonal Bank for the safety (ZPAL:SW, ZPLA:SW, in Swiss Franc). The underlying is metal, here the currency is pointless.
- Cash (mainly USD and CHF) to satisfy emergency needs and possibly to overload value strategies in a deep correction.
- A much smaller speculative category betting on the recovery of uranium miners, with a unique position in an industry passive index: Global X Uranium ETF (NYSEARCA:URA). My thesis is based on the consistency of energy policy in BRICS (especially China), where a lot of money has been invested in new nuclear plants planned to start in the next 5 years. However, betting on government consistency is risky. The major risk is an accident freezing all projects.
I would like to add some details about the dynamic ETFs category. I have already described ALFA and its timed hedge in my previous article. The idea underlying my recurring consumption ETFs is the same as for my Seeking Alpha premium service Global Household Index: a long-term alpha expected from predictable demographic trends, and an «alpha over the alpha» expected from quantitative models (FXG,FXH and PJP have models based on valuation, growth, momentum). The underlying index of PHDG underperforms the S&P 500 by design in bull markets, and seems to behave more or less like a short SPY (or long SH) in market downturns: it did in 2008 and 2011. PHDG is supposed to hedge the pack of recurring consumption ETFs in equal weight and create a market-neutral effect in case of a large correction. Theoretically this position is not passive and should be rebalanced. However, I think rebalancing is useless before a 15% distortion, and the risk incurred by a larger imbalance is reasonable. A bull market should create a progressive distortion in favor of the consumption ETFs, so a lower efficiency in hedging unrealized gains (but the initial investment should stay fully hedged). In a bear market the consequence should be over-weighting PHDG, which may be a drag in performance for the subsequent recovery, but not a major risk.
A robust investing framework is not just holding good assets: purging debts, learning a foreign language, building a multi-flag business model, can help make your situation more robust and tax efficient. Finally, the best asset against turmoils is your physical and intellectual strength, and the best investments are in yourself: nutrition, sport and skills. They are also a lot of fun.
Disclosure: The author is long ALFA, CEF, PHDG, FXG, FXH, PJP, URA.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The author is also long CARMPAT:FP, ZPAL:SW, ZPLA:SW