Darwin Portfolio Review: 21 January 2022

Evening Cruise Departure from Vancouver to Alaska

The Darwin Portfolio is a five-asset “Core” Risk parity portfolio (à la Ray Dalio) with a separate Volatility component added for diversity.

After adjustments the portfolio looks like this:

with recommended holdings for the “Core” portion as shown in the bottom row (based on an aggressive 10% risk target per ETF).

Although this requires no adjustments to holdings in VTI or VSS it does require me to sell 4 shares in GLD (current holding = 20 shares) and to purchase 4 shares of VNQ (currently holding 16 shares) and 3 shares of TLT (currently holding 14 shares) to rebalance. This is marginal (with a 20% out-of-balance boundary) so I will not make any adjustments this month so as to save on transaction costs (since this is a small portfolio).

The other thing to note in the above screenshot is the current value of VIX3M (Volatility of SPX Options 3 months in the future) that is currently high (29.95):

In addition, the Term Structure of VIX Futures, that is normally in contango (front month expiry lower than back month expiry), is now in backwardation (front month higher than back month). The value of the VIX Index (VIX) is also currently higher than the VIX futures (it is “normally” lower). Since I am presently holding the SVXY (inverse) volatility ETF (based on futures prices) I am waiting for a trigger to switch to long volatility (VXX or VIXY). My trigger is to switch from SVXY to VIXY (or VXX) when the ratio of VIX/VIX3M moves above my cut-off value of 1.12. These signals are rare and I have not used this signal in live/real accounts before (except for the false start about a month ago when I got impatient and “jumped the gun” – and reversed the next day).

I’ll be watching this carefully next week – and I may use the signal as an exit signal for US Equity ETFs held in other portfolios where I do not have TSLOs in place or where they have not been hit.

Checking the performance of the Darwin portfolio since inception (~eight months):

we see a negative annualized Internal Rate of Return (IRR) of -8.2% – that is not good – but, allowing for the (bad) luck of the inception date, and the nature of the portfolio (“All Weather” diversified portfolio with aggressive risk parity targeting), I am not too worried about it. The portfolio is also leveraged 35%, so this exaggerates downside moves (that hopefully gets balanced out in bullish markets).

Graphically, performance looks like this:

Note the recent poor performance of equity (and equity-like) assets (dark and pale blue lines and brown line). Bonds (green line) were weak at he beginning of the month but have recovered a little since and Gold (gold line) has held up well. The inverse volatility ETF (SVXY) was doing well initially (purple line) but has lost ground in the past week – hence the reason for keeping a close watch on it going forward with the possibility of a switch to long volatility. Allocations to volatility are set at ~10% total portfolio value.

Viewed as a stacked chart, allocations look like this:

No adjustments planned at this point – but a close watch on volatility.

David