Imagine if you could put together a portfolio, in such a way, that it is return stacking the right combination of equities, bonds and alternatives to provide an all-weather solution that meets your performance needs while at the same time offering significant drawdown protection for any economic regime curveball thrown its way?
2022 has proven to be a frustrating year for investors pursuing a 1-2 approach to investing with various equity and bond combinations.
Historically uncorrelated assets have cosied up on a skewer to share the same shishkebab of carnage in recent months given pesky and persistent inflation.
2020 challenged investors in March with fierce equity drawdowns where bonds weren’t able to shield the damage.
The time has come to think about asset allocation from a bottoms-up approach where alternative investments are an integral part of the portfolio rather than considered to be some kind of roadside freakshow curiosity.
In order to build an all-weather portfolio it requires an imagination that extends beyond merely stocks and bonds.
An all-weather approach to investing is the optimal solution.
The Return Stacked 60/40 approach, (a fund of funds, multi-asset class and multi-strategy approach), is possibly the best attempt to date of combining equities, bonds and alternatives in an optimal manner.
Fortunately, for us, it’s just called “return stacking” as opposed to portable-beta multi-fund, multi-asset class, multi-strategy asset allocation.
Return stacking seeks to create space in the portfolio by being more efficient.
You take the 60/40, that everyone loves so dearly for whatever reasons, and boost it 1.5 times so that your portfolio expands its canvas and creates 33% room for something else.
Pile more stocks and bonds into that space?
Add uncorrelated assets and alternatives in a multi-strategy approach to improve the efficiency of the portfolio.
CTA. Macro. Convexity.
Return Stacking Review: Return Stacked 60/40 Absolute Return Index
Who Created Return Stacking?
Who put this together?
It’s a collaboration between ReSolve Asset Management and Newfound Research where Rodrigo Gordillo, Adam Butler and Mike Philbrick teamed up with Corey Hoffstein to assemble the Return Stacked 60/40 Absolute Return Index.
Does it all sound too good to be true?
Well, we’re specifically going to explore whether or not this strategy works better than the classic 60/40 in this review.
That’s its benchmark.
But first, let’s check out the evolution of expanded canvas products from gen 1 to gen 3.
Hey guys! Here is the part where I mention I’m a travel vlogger! This model portfolio review is entirely for entertainment purposes only. There could be considerable errors in the data I gathered. This is not financial advice. Do your own due diligence and research. Consult with a financial advisor.
Evolution Of Expanded Canvas Investing
Imagine a scenario where you’re in a high school cafeteria and you’re being served Thanksgiving dinner.
Your mouth waters in anticipation of a delicious well-rounded meal featuring turkey, mashed potatoes, mixed vegetables and stuffing with copious amounts of gravy poured on top of it all.
When you arrive at the food station, the server wielding a giant metal spoon, scrapes ferociously against the bottom of the tray scooping up a giant sized portion of mashed potatoes while delivering it smack-dab in the middle of your plate.
Woah! That’s a lot of “fill-in-the-blank” mashed potatoes!
Before you have time to process what has happened you’re distracted by a group of friends calling you over to sit next to them for dinner.
Turning your attention back to your plate you suddenly realize you’ve had two extra just-as-gigantic scoops of mashed potatoes formed on top of the first overly generous scoop.
You summon up the courage to protest but the slightly intimidating server yells out, “Next!” so defeated you go and sit down wondering how on earth you’re going to attempt eating this Mount Everest Of Carbohydrates stacked on top of your plate.
2X to 3X Equity Products (Gen 1)
Up until recently any investor seeking to stretch the canvas of their portfolio beyond 100% basically only had the options of 2X to 3X equity products.
These hero/zero products, which I like to call sequence of return-risk toys, take an already risky asset class and dial things up significantly.
Boy of boy you’re some kind of a genius if you plugged in a 3X QQQ from say 2009 until the end of 2021.
But what about the sequence of returns if you tried that one on for size from say 2000 to beginning of 2010.
Even the providers of such products, generally speaking, warn investors in the following way:
“Investors should monitor their holdings as frequently as daily. Investors should consult the prospectus for further details on the calculation of the returns and the risks associated with investing in this product.”
Hence, the label I’ve assigned to these types of products being hero/zero sequence of return risk toys feels justified and appropriate.
Going back to the turkey dinner analogy, these gen 1 products are specifically the plates of giant mashed potatoes. It is not a balanced meal.
Sensibly Leveraged Uncorrelated Assets (Gen 2)
Fortunately, for DIY investors, a more sensible type of generation 2 product has become available for expanded canvas portfolios.
Taking two historically uncorrelated asset classes such as stocks/bonds or stocks/gold or stocks/managed-futures and combining them together while ensuring no individual asset class within the portfolio stretches beyond 100%.
For example: 90/60 stocks/bonds or 90/90 stocks/gold or 50/100 stocks/managed-futures
When you back-test results from these combinations you’ll notice, generally speaking, outperformance versus 100% stock only portfolios with significantly less drawdown potential. You don’t get the -40% worst-case scenarios of equity only strategies in 2008.
Hence, I believe these generation 2 products are incredible “building blocks” for investors seeking to assemble expanded canvas portfolios.
Mix and match them together, as you wish, and you can potentially build a globally diversified all-weather portfolio with an equity + bond + alternative sleeve.
With the generation 2 products you have the potential to cobble together your own complete turkey dinner by serving it to yourself.
The biggest issue though is that you have to know how to make it and serve it to yourself.
Total Portfolio Expanded Canvas (Gen 3)
The main reason I’m so excited about the potential of the Return Stacked 60/40 is that it is one of the first attempts to serve turkey dinner complete all-in-one.
You’re not as an investor faced with the task of assembling the building blocks yourself to round out your plate.
Here it is served to you at the dinner table neatly plated and artfully presented with just the right amount of turkey, potatoes, sides and gravy. Maybe you even get dessert too.
This of course means an appropriate amount of stocks + bonds + alternatives.
A 1-2-3 approach to investing that provides all-weather coverage for your portfolio.
No sleeves of the portfolio extending beyond 60%.
This isn’t risky dialing up to the moon single asset classes in the hopes they catch the right kind of luck or lightning in a bottle.
It’s balanced. It’s sensible. It makes sense long-term.
Source: Meb Faber Show on YouTube
Return Stacked 60/40 Absolute Return Index: What’s Under The Hood?
Let’s pop the hood of the Return Stacked 60/40 wide-open to see what we’ve got inside.
What you’ll find is some of the most interesting expanded canvas portfolio solutions all-together under one roof.
It’s a bit like an all-star game where some very capable funds (on their own) have entered into the stadium and are now sharing the field with others of similar capabilities.
Instead of hogging the court the Return Stacked 60/40 fund of funds has been quite evenly distributed giving each a chance to contribute but not dominate over one another.
You’ll notice each fund brings with it allocations to either stocks, bonds or alternatives in a way that once the dust settles is as follows:
RETURN STACKED 60/40 LIST OF FUNDS
15% Newfound Risk Managed U.S. Growth (NFDIX)
15% Rational ReSolve Adaptive Asset Allocation Fund (RDMIX)
15% Catalyst/Millburn Hedge Strategy Fund (MBXIX)
12.5% Standpoint Multi Asset Fund (BLNDX)
12.5% Abbey Capital Multi-Asset Fund (MAFIX)
6% WisdomTree U.S. Efficient Core Fund (NTSX)
6% WisdomTree International Efficient Core Fund (NTSI)
6% Simplify US Equity Plus Convexity ETF (SPYC)
10% Simplify Risk Parity Treasury ETF (TYA)
3% Simplify Tail Risk Strategy ETF (CYA)
Return Stacked 60/40 161.7% Expanded Canvas
We’ll spend just a second touching upon the equities and bonds sleeve since the real ‘secret sauce’ of the Return Stacked 60/40 is the stacking of the alternative sleeve on top.
Basically the equities are mostly composed of market-cap weighted strategies giving you a globally diversified exposure whereas the bonds provide various treasury-level exposure.
This is your standard 60/40.
You wanted it. You’ve got it.
We’ll now jump now into the alternative sleeve to see what distinguishes the Return Stacked 60/40 from others.
Return Stacking: Alternative Sleeve Investment Strategy
Eric Crittenden of Standpoint probably created the most important resource ever put up on YouTube related to whether or not alternatives deserve a place in your portfolio.
I’ve now embedded this multiple times in articles and I’ll be darned if it doesn’t break 1000 views at some point in the near future.
Source: Standpoint on YouTube
Given that stock and bond allocations are static and have to endure whatever economic regime is thrown their way paves the opportunity for something in the portfolio that adapts like a chameleon.
Trend-following does just that.
It tracks major market future indices in commodities, grains, meats, metals, energy, global currencies, bonds and equities by going long/short.
Most importantly it adapts to the current trend by never fighting reality and always saying ‘yes’ to whatever is going on.
Yes, to commodities doing well by taking a long position. Yes, to bonds trending down by going short.
It’s a rules based system to following the trend.
The major advantage it has over a static allocation to gold and/or commodity funds is that it offers far more stability.
Long gold can mean brutal years. Allocating to fixed commodities has at times been even worse.
In a trend-following scenario that brutality is limited given the system adapts one way or the other when trends are strong.
This means you’re not holding a struggling asset in a long-position all year long while it is eaten alive.
Hence, it offers a superior alternative investment from a diversification and volatility control standpoint.
The Systematic global macro alternative sleeve refers to different managed futures strategies aside from just trend-following.
For instance, this could include relative value, carry, mean-reversion, volatility arbitrage and/or market neutral to name just a few.
The take-home message for me is that these two different approaches provide (as the creators of the Return Stacked 60/40 have suggested) “diversified diversifiers” in the alternative sleeve.
Last but not least, the convexity put-options component basically sets strike points at various numbers where if the market were to crash to these levels an insurance policy would be collected.
Return Stacking Recent Performance
One of the most exciting things about the Return Stacked 60/40 is that its live performance can be tracked at ReturnStacking.Live
How has it done so far versus the Milquetoast 60/40?
179 basis points of outperformance in 2020 (just 2 months of data).
294 basis points of clearly winning in 2021 over the course of a full-year.
809 basis points of kicking up dust and darting off to the races in 2022 thus far.
Simulated Return Stacked 60/40 Absolute Return Index
Return Stacking Simulated Backtest
Over the past three years we’ve seen how the Return Stacked 60/40 has fared versus the Milquetoast 60/40 but what about the big picture?
Queue the most inaccurate, unofficial and potentially error-ridden simulation of all-time.
Important to note: I’ve used the data I have gathered for Global Min Vol Equities instead of global market-cap weighted equities. But the general overlay of SG Trend as a 60% addition should give a very rough estimate as to what sequence of returns could potentially look like over an extended period of time.
And the long-term results?
320 basis points of total domination from the Return Stacked 60/40 over the Milquetoast 60/40
15/22 years of better annual performance from the Return Stacked 60/40 versus the Milquetoast 60/40
Additionally, the Return Stacked 60/40 had one less negative year overall and a worst overall year that was less significant as well.
No jarring negative years that equity-only investors are accustomed to over time.
Basically a masterclass of better performance and enhanced stability overall.
If you’re still convinced the Milquetoast 60/40 is a better option than the Return Stacked 60/40 I’ve got no words for you gentle kind soul.
You’re on a raft all by yourself.
Return Stacking Branding
In many ways return stacking is a branding stroke of genius.
Think of all the fun ways you’ve stacked things together in your life over the years.
Lego stacking was awfully fun as a kid. You could create anything you wanted with enough imagination.
Building a house, brick by brick, is a stacking procedure that ultimately leads to a home.
It’s even fun to be a greedy when it comes to stacking.
Think of the tempting low-cost upgrade scenarios where we have chances to stack an extra patty on our burger or upgrade our soda, so that it’s bigger than our heads.
In a more serious tone stacking together enough days of study, discipline or exercise leads to a transformation in fitness, learning a new language or pursuing a new artform.
The key point of stacking is that it is a positive message and positive branding.
When it comes to thinking of all-weather or all-seasons, my initial thought is towards carrying an umbrella due to the threat or rain or tearing around off-road in a 4X4 enjoying all-season tire performance.
I like to be prepared for all-weather and all-seasons but stacking is more fun.
How about risk-parity?
It includes the word “risk”.
Maybe the ultimate in challenging branding given that it is negative and/or fear based.
Put on a sweater or else you’ll risk catching a cold.
Don’t go out late at night or you’ll risk getting mugged.
Risk-management is of course important but I prefer a more positive message and I feel stacking offers just that.
Lifecycle Investing and Return Stacking
For those individuals on Twitter espousing aggressive equity only strategies, for early-life stage accumulators, it seems every other tweet is related to investor psychology.
Learn to love volatility/drawdowns.
Learn to make volatility/drawdowns your friend.
Those are most clever.
I’ll try one too:
Suck on that lemon with gusto and doe-eyed glee all at once now.
In what other spheres of life do we expect the average everyday citizen to learn to love drawdowns and negative volatility?
Enjoy moving from your dream home, where your family enjoys comfort and security, to suddenly cramped quarters in a rough part of town. Learn to make living on top of one another your friend. Don’t just enjoy it. Love it!
Enjoy your significantly reduced pay-cheque and massively eroded purchasing power. Learn to enjoy struggling to make ends meet your friend.
Maybe it’s time to admit industry-wise and as strategists, advisors and investors we’ve been going about things wrong for those in the accumulation stage of investing.
The truth is that a 1-2 left-hook and right uppercut of recency bias and loss aversion derails these types of aggressive investing strategies when a 2008 scenario rears its ugly head.
How many investors learned to love volatility under that scenario?
For many that was a permanent exit point.
Return Stacking For The Accumulator/Retiree
All-weather expanded canvas approaches allows accumulators to achieve the returns they need for future stages in life without the roller-coaster ride of jarring drawdowns.
How about for those nearing or enjoying retirement?
Well conventional wisdom means dialing down risk with the associated cost of reducing annual returns.
Increasing allocation towards bonds while shrinking equities.
The biggest problem here is when retirees haven’t saved enough for a life that may extend well into their 80s or 90s.
Finding a portfolio solution that can provide high returns yet manage downside risk ought to be the goal as opposed to sacrificing returns.
Hence, I believe all-weather expanded canvas portfolios have the potential to serve both the accumulator and the retiree.
This would represent a paradigm-shift in investing strategy and asset allocation for all stages of life.
Return Stacking Pros and Cons
- All-Weather approach to investing balancing equities, bonds and alternatives that is regime ready for any economic environment
- Performance collides with risk management where you’ll enjoy great returns without the jarring drawdowns
- Taking advantage of the best alternative sleeve strategies (that have the capability to adapt) such as managed futures, macro and convexity that offer advantages over static allocations to gold and commodities
- A multi-asset + multi-strategy + fund of funds approach to diversification versus a single strategy approach
- A portfolio with enough uncorrelated strategies that will most likely conspire to keep damage at bay when equities are struggling
- A portfolio that isn’t dependent heavily on equities as the only main driver of returns and point of failure during challenging markets
- A chance to support some of the sharpest and most creative minds in the boutique space of asset allocation rather than get cozy with the big guys (the iShares and Vanguards of the industry)
- The potential for tracking-error when the alternative sleeve is having a challenging year
- Issue of investors or advisors not understand the benefits of esoteric alternative strategies and application of modest leverage to create more space in the portfolio
Return Stacking Total Portfolio Solution
Does the Return Stacked 60/40 represent a potentially viable total portfolio solution?
In a word. Yes.
As a fund of funds featuring multiple asset classes and multiple strategies that cover equities, bonds and alternatives its the whole package creatively put together.
100% Return Stacked 60/40 Portfolio
That’s it. You’re done.
Return Stacked Core Portfolio Solution
The Return Stacked 60/40 as a core holding gives investors a great base to push-off from in any direction they so desire.
The suggestions I’ll provide are for those committed to the expanded canvas portfolio as the core overall strategy.
If an investor wanted to pursue more equity exposure they could consider adding WisdomTree 90/60 efficient core NTSX, NTSI and NTSE.
That might look like this:
50% Return Stacked 60/40
For allocators seeking more bond exposure than equities in the portfolio it would be easy to tinker a little bit with the formula and efficiently add more fixed income by utilizing Simply’s 3X TYA.
This would be something to consider:
90% Return Stacked 60/40
For contrarian investors more committed to the alternative sleeve of their portfolio they could tack-on more of a fund like Standpoint Multi-Asset REMIX / BLNDX which is a 50/100 equity + trend-following combination.
You might want to try that one on for size:
80% Return Stacked 60/40
20% REMIX / BLNDX
Return Stacking Partial Portfolio Solution
For investors curious about expanded canvas portfolios (featuring an alternative sleeve) but not wanting to commit fully to the strategy beyond it could pair well with whatever you’ve currently got under the hood.
A potential idea to ponder:
10 to 20% Return Stacked 60/40
80 to 90% Whatever You’ve Got Under The Hood
Final Thoughts From Nomadic Samuel
Expanded canvas portfolios that adhere to a 1-2-3 process of diversification between equities, bonds and alternatives offer investors exciting opportunities to potentially enjoy enhanced returns while managing downside volatility.
Would the Return Stacked 60/40 make it into my portfolio?
It would honestly rocket up to one of my core holdings if not the biggest position in my portfolio.
The whole point of this blog is to explore contrarian asset allocation strategies to find the optimal mix where performance intersects neatly with risk-management.
The Return Stacked 60/40, in my opinion, is one of the best attempts to date, of attempting to find that pulse.
For now the Return Stacked 60/40 is an index that is exciting to track as a model for investors/advisors.
Whether it becomes an investable product (mutual fund or etf) has yet to be determined.
I’m not going to ask any of the creators of the of Return Stacked 60/40 the question of what is its ultimate purpose. That is for them to decide and reveal at a time they deem appropriate.
If/when there is any news to announce on that front, I’ll update the article accordingly but for now the Return Stacked 60/40 is an exciting concept and model idea.
In the meantime, I’m kinda feeling ravenous over here.
All this talk of return stacking has me craving a return stacked artisanal burger with extra bacon, patties and cheese.
I’m gonna go grab that.
It’s time to go clog my arteries.
Ciao for now.