Darwin Portfolio Review: 3 March 2023

Botanic Gardens, Singapore

The Darwin Portfolio is a risk-adjusted allocation model with volatility targeting used to determine how many shares of each asset to hold. The portfolio holds only 5 conventional, but diversified, asset classes plus a 10% holding in a volatility product (depending on whether volatility is expected to increase or decrease) as a portfolio hedge.

A current analysis of the portfolio generates the following recommendations regarding assets to be held:

Maybe a little surprisingly the recommendations are to hold more shares than are presently held. Since this is a small portfolio and I don’t want to overtrade and generate unnecessary commissions I only adjust holdings if the number of shares recommended differs from current holdings by more than 20%. As it turns out 4 of the 5 assets currently held are 20% below the recommended values. I have therefore adjusted holdings accordingly. Only VNQ does not now match the recommended holdings and remains at 12 shares rather than 13 (<20% difference). The increased recommended holdings are a result of lower volatility levels from the high levels at the end of 2022 resulting from the bearish market pullback.

Let’s take a look at performance since I changed the target risk level (per asset) to 3% (from the original, overly aggressive, 10%). At 3% per asset target volatility, portfolio volatility is likely to fall well below 15% (5 assets x 3%/asset) due to the impact of diversification.

As can be seen from the above screenshot, holdings are now increased significantly – in fact, since this portfolio is held in a margin account and I have set the calculations to allow up to 1.5x leverage, a little of that margin is currently borrowed money.

Another way of seeing these allocations is through the use of a stacked chart:

The following screenshot shows the activity in the portfolio since moving to the 3% volatility limits:

and shows the use of ~$440 in excess margin.

It has only been 3 months since this model was setup but current Internal Rate of Return (IRR) is showing as a little over 18%. I would be very happy if this level of performance could be maintained – but I am doubtful that this is realistic over the longer term.

Not shown in the above screenshots is the fact that portfolio volatility over this period is calculated at 9.5% – so well below the maximum target level of 15%.

David