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A Risk Parity Based Alternative To Balanced Funds

Summary

I analyze a portfolio of core ETFs which is updated quarterly using risk parity.

The historical performance of the portfolio is substantially better than that of some popular balanced funds.

The historical performance of the portfolio is substantially better than that of many risk parity funds.

The portfolio of core ETFs: VTI, QQQ, IJH, IJR, EFA and TLT, together with the strategy of re-balancing it every quarter using risk parity offers a simple and attractive alternative to balanced mutual funds whose promise of good risk adjusted performance with decent returns is rarely met.

The following figure and the subsequent  table compare the rolling buy and hold returns and the various performance metrics of this portfolio with those of three well known balanced funds from Vanguard and Fidelity.


Volatility

(Annualized, %)

Max DD (%)
Sharpe
Sortino
CAGR (%)
Portfolio
8.6
15.2
1.1
1.9
10.75
VWINX
5.6
18.8
1.0
1.7
7.1
VWELX
9.1
32.6
0.85
1.4
8.8
FBALX
10.4
40.5
0.76
1.2
8.8

Clearly, except for the very low volatility of VWINX, which is accompanied by the lowest CAGR, the performance metrics of the portfolio are considerably superior.

Since the portfolio is based on allocation on the basis of risk parity, it is worthwhile to compare its performance with risk parity funds as well. The buy and hold returns plot for the portfolio and for the risk parity funds SRPAX, PDRFX, MMAFX, ABRZX, CRAAX and AQRIX (see  http://seekingalpha.com/article/3497276-are-risk-parity-funds-mad-bad-and-dangerous-to-know ) in the figure below suggest a  performance advantage even greater than the advantage  with respect to the balanced funds.

Since the years of inception for various risk parity funds vary, the performance metrics for the quarterly updated portfolio for the same period are shown in the following table in parentheses.


First Year

Vol (%)

MaxDD (%)
Sharpe
Sortino
CAGR
SRPAX
2013
14.7 (7.6) 18.4 (7.4)
.2 (1.3)
.3  (2.4)
1.9 (10.3)
PDRFX
2012
6.8 (7.2)
12.7 (7.4)
.6 (1.3)
1 (2.4)
3.9 (9.9)
MMAFX
2003
10.9 (8.6)
47.6 (15.2)
.5 (1.1)
.7 (1.9)
5.8 (10.7)
ABRZX
2010
6.3 (6.9)
8.6 (7.4)
1 (1.6)
1.8 (2.9)
6.9 (11.5)
CRAAX
2013
7.4 (7.6)
11.8 (7.4)
.4 (1.3)
.6 (2.4)
2.9 (10.3)
AQRIX
2011
8.7 (6.9)
13.3 (7.4)
.6 (1.6)
1 (2.8)
5.1 (11.1)

We will be following this portfolio to see if its substantial out-performance will persist in the future.

YTD (2017 Q1-Q2) the portfolio has returned 8.3%.

For Q3-2017, for purchase at close on 7/3/2017, the allocations are:

VTI 16%

QQQ 11%

IJH 12%

IJR 11%

EFA 14%

TLT 36%

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in QQQ VTI IJR IJH EFA TLT over the next 72 hours.