So, in general, I'm hopeful that each fund adds something to the strength of the whole portfolio. I tend to approach portfolio changes, additions especially, in three steps:
1. is there something that I believe I should have exposure to (for a bad example, crypto) but don't? If yes ...
2. is there a particularly good vehicle for gaining that access? Experienced manager, high insider investment, track record across multiple market cycles, clearly articulated positions on risk management and strategy capacity ... If yes ...
3. is the fund highly correlated with something I already own? I might, for a bad example, think that crypto is interesting but learn that corporate high-yield debt is so correlated with crypto - presumably because they are driven by similar forces - that adding crypto has no benefit.
Ran a correlation matrix just now. My top holding is FPA Crescent, at about 21% of the portfolio. For those not familiar, Crescent as a go-anywhere hybrid fund that started long ago as a hedge fund, has an absolute value discipline, about 60% equity just now, most of the rest in cash.
Quick quiz: which of these funds is highly correlated (an R-squared of 85 or above) with Crescent?
Grandeur Peak Global Microcap, 121 very small growth companies, about 13% EM exposure
Leuthold Core, a quant-driven tactical allocation fund
Seafarer Overseas Growth & Income, a GARPy emerging markets equity fund
T Rowe Price Spectrum Income, a fund of actively managed T Rowe Price funds
At the other end of the spectrum, which fund is most independent? T Rowe Price Multi-strategy Total Return, a sort of retail hedge fund, or Palm Valley Capital, a small cap value fund for people still shaking their fists at the 21st century?
David
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Question 1. Leuthold Core Equity. LCORX/LCR does not seem to track passive 60/40 funds. Technology is the largest sector the fund invested in, but is hedged with a short position on QQQ. Having over a 10% in cash shows the defensive posture. Leuthold should have low correlation to that of FPA Cresent.
Question 2. Palm Valley Capital. The firm is ran by two experienced managers. Investing in smaller caps takes guts when the market is dominated by large cal tech stocks. I never fully understood TMSRX’s strategy. Owned TMSRX briefly when it was introduced.
Re #2 - TMSRX is liable to go anywhere. Presently net short equities by 10%. So it is not presently correlated with FPA Crescent - or much else. But PVCMX does not appear correlated either with only 14% in equity and most of the remainder split between cash and bonds. Small cap performance tends to diverge from large cap. PVCMX’s emphasis on value further promotes the divergence. M* is not displaying bond quality, but I’ll guess it’s very high.
To answer the question, I’d say PVCMX is less correlated with FPFRX over longer stretches.
As to the others, the correlations with Crescent are nearly identical for all four funds at 86 - 88. Given the negligible overlap in holdings (even with LCORX, the differences in region, sector, asset class and size are substantial) between them (FPACX has 0.26% in EM equity, for instance, and 1.4% in microcaps), I found the results fascinating. Apparently there are common drivers of performance that span the five portfolios?
It's the sort of puzzle that I sort of enjoy, until my brain starts to bubble.
Your guess?
Another parameter worth to look at is recovery period under MFO Premium. For allocation funds with flexible or tactical mandates, recovery period reveals how the funds perform through the drawdowns.