Darwin Portfolio Review: 17 July 2022

Wurzburg, Germany

The Darwin Portfolio is a “Core” portfolio of fixed assets that is only adjusted when holdings move out of range by more than 20% of the calculated risk-parity allocations. Current calculated allocations, based on a very aggressive 10% volatility target and allowing 25% leverage, look like this:

While current holdings differ slightly (by 1 or 2 shares) from these numbers they are still within the +/- 20% range that I will allow before adjustment.

Performance to date looks like this:

or, in “stacked” format:

As can be seen from the above figures, Gold (GLD), although generating positive returns early in the year, has not performed well over the past 4 months, despite it’s reputation as a hedge against inflation (that we know has increased significantly over this period). Volatility in GLD has also been low, resulting in high allocations (on a risk-parity based allocation strategy) and this has resulted in the portfolio generating a negative 21% return over the past 12 months.

Apart from the fact that we know that markets are down ~20% in 2022, the poor performance of the Darwin Portfolio can be attributed to the very aggressive volatility targets chosen for this portfolio (10% per asset). A conservative investor would probably choose to use a much lower 3-4% per asset limit – that would significantly reduce allocations. Also, I have allowed 25% leverage that multiplies profits and losses. Since this is only a small portfolio I am not going to change my “rules” here in anticipation that the factors that have hurt performance to this point will benefit the portfolio when markets move back to their long-term historical bullish trend.

ITA members should not necessarily discard this investment style (although it’s certainly not my personal favorite) but it is maybe more suited to a conservative investor using significantly lower volatility targets and not using leverage. [The above charts include all trading costs including interest paid on leverage, commissions and even tax (since (as a Canadian resident) I have tax withholdings on dividends paid in the account) – The calculated IRR includes all these deductions.]

David