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...PIMCO Total Return can be seen as a superior diversified fixed income vehicle, rather than a pure-play on the market-timing powers of one man (Bill Gross). The fees of the institutional share class and ETF versions of Total Return are arguably low enough to make the diversification benefit itself worthwhile.
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The ability to employ leverage is critical feature of risk-parity strategies. Indeed, leverage may be the reason why risk-parity should work. In an ideal world, where anyone can borrow at the risk-free rate with zero risk, Modern Portfolio Theory says that investors should invest in the best risk-adjusted portfolio and, if unsatisfied with the portfolio’s expected return, lever it up.
Portfolio the author constructed using 4 funds and cash does not look really like a risk parity portfolio. The author did not offer any basis for the percentage allocation to justify this portfolio as a risk parity portfolio other than naming it as such.
My research on this that 3, 5 yr volatility of ACWV is about ~72% of ACWI (the index, not the etf) and matches the volatility of PCRIX and IAU to a certain degree. Whereas volatility of PTTRX (as proxy to BOND) is about 1/5th of the index.
This is not the way a proper risk balanced fund is constructed. I call this BS! You can call this an allocation/balanced portfolio with some alternative asset class exposure (gold, commodities).
There is no justification of how this portfolio did either. No performance numbers. Nothing...
I did not look too closely at the portfolio, but I like that the article calls attention to need for looking beyond the traditional 60/40 fixed strategy and references some pretty good offerings.
I guess Sam Lee (who's a pretty sharp guy if you've read his ETF articles) was putting that together as a rough attempt to (sort of) approximate risk parity ... it really is just an enhanced balanced fund ... just parceling out half the stock from the ol' 60-40 to commodities & cash.
For actual risk parity, the schtick is to jack up the bond exposure through leverage; bond exposure should be somewhere near double the stock exposure. ABRIX, for example, is leveraged at 38% of the port, with stock 39%, bond 75%, & "other" 24%, according to M*.
The spot for an RP fund for me would be if (when?) I had (have?) a very simple, long-term, unmanaged-by-me portfolio based on a small number of allocation & related funds.
I do agree that if I could own only one bond fund, it'd be BOND at this point.
Reply to @AndyJ: Yes, I agree. It is sort of Enhanced Balanced fund with exposure to International equities, commodities, gold etc. But, he is blurring the waters by calling it a Risk parity fund.
Then there is no backtesting of this portfolio vs a benchmark balanced portfolio. I suspect even if he is using a low volatility version of stocks, he is adding much more volatile commodities and gold into the mix. So, I do not expect this portfolio will do much differently than a standard 60/40 portfolio in terms of volatility.
Also while BOND might be better for long term returns, it probably has higher correlation with stocks than a AGG so inclusion will also increase the volatility a bit. PTTRX (proxy for BOND) is ~40% more volatile. Because of this, you will include less of BOND in a true risk parity portfolio removing the gain advantage.
Comments
My research on this that 3, 5 yr volatility of ACWV is about ~72% of ACWI (the index, not the etf) and matches the volatility of PCRIX and IAU to a certain degree. Whereas volatility of PTTRX (as proxy to BOND) is about 1/5th of the index.
This is not the way a proper risk balanced fund is constructed. I call this BS! You can call this an allocation/balanced portfolio with some alternative asset class exposure (gold, commodities).
There is no justification of how this portfolio did either. No performance numbers. Nothing...
I did not look too closely at the portfolio, but I like that the article calls attention to need for looking beyond the traditional 60/40 fixed strategy and references some pretty good offerings.
For actual risk parity, the schtick is to jack up the bond exposure through leverage; bond exposure should be somewhere near double the stock exposure. ABRIX, for example, is leveraged at 38% of the port, with stock 39%, bond 75%, & "other" 24%, according to M*.
The spot for an RP fund for me would be if (when?) I had (have?) a very simple, long-term, unmanaged-by-me portfolio based on a small number of allocation & related funds.
I do agree that if I could own only one bond fund, it'd be BOND at this point.
Then there is no backtesting of this portfolio vs a benchmark balanced portfolio. I suspect even if he is using a low volatility version of stocks, he is adding much more volatile commodities and gold into the mix. So, I do not expect this portfolio will do much differently than a standard 60/40 portfolio in terms of volatility.
Also while BOND might be better for long term returns, it probably has higher correlation with stocks than a AGG so inclusion will also increase the volatility a bit. PTTRX (proxy for BOND) is ~40% more volatile. Because of this, you will include less of BOND in a true risk parity portfolio removing the gain advantage.