Risk Parity Radio

Episode 402: Getting A Little More Aggressive, A QREARX Redux, And What Does "Value" Mean Anyway

• Frank Vasquez • Season 5 • Episode 402

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In this episode we answer emails from Philip, David and Keith.  We discuss an aggressive risk-parity style portfolio (without leverage), review QREARX, which we analyzed in Episode 81, and how the value factor is determined by various funds and indexes.

Links:

Father McKenna Center Donation Page:  Donate - Father McKenna Center

Portfolio Matrix Tool at Portfolio Charts:  Portfolio Matrix – Portfolio Charts

The Weird Portfolio:  Weird Portfolio – Portfolio Charts

Morningstar Page for QREARX:  QREARX – TIAA Real Estate Account Fund Stock Price | Morningstar

Amusing Unedited AI-Bot Summary:

Ready to rethink your investment strategies? Discover how pushing the boundaries with aggressive risk parity portfolios can transform your financial growth. Inspired by listener Philip's question, we unravel the potential of a 70% equity allocation, showing you why it might be your ticket to a prosperous retirement with a longer horizon or increased growth needs. Learn how to artfully allocate the remaining 30% across assets like large-cap growth, small-cap value, long-term treasuries, gold, and managed futures for optimal diversification. Plus, get the scoop on our informal meetup at the Economy Conference—it's where finance meets fun.

In this episode, we're not just about strategies but interactions. As we sift through listener emails, we spotlight financial strategies and fund analysis, tackling topics from the intriguing weird portfolio to critiques of funds like QREARX. Unearth the complexities of value stock categorization and challenge the purported benefits of illiquidity premiums in outdated financial structures. As travel plans call for a brief hiatus, we invite you to keep the conversation alive through emails and our website. Tune in for insights, engagement, and a touch of humor designed to entertain and inform our valued listeners.

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Mary and Voices:

A foolish consistency, is the hobgoblin of little minds, adored by little statesmen and philosophers and divines.

Mostly Uncle Frank:

If a man does not keep pace with his companions, perhaps it is because he hears a different drummer.

Mary and Voices:

A different drummer and now, coming to you from dead center on your dial, welcome to Risk Parity Radio, where we explore alternatives and asset allocations for the do-it-yourself investor, Broadcasting to you now from the comfort of his easy chair. Here is your host, Frank Vasquez.

Mostly Uncle Frank:

Thank you, Mary, and welcome to Risk Parity Radio. If you are new here and wonder what we are talking about, you may wish to go back and listen to some of the foundational episodes for this program.

Mary and Voices:

Yeah, baby, yeah.

Mostly Uncle Frank:

And the basic foundational episodes are episodes 1, 3, 5, 7, and 9. Some of our listeners, including Karen and Chris, have identified additional episodes that you may consider foundational, and those are episodes 12, 14, 16, 19, 21, 56, 82, and 184. Whoa, and you probably should check those out too, because we have the finest podcast audience available.

Mary and Voices:

Top drawer, really top drawer.

Mostly Uncle Frank:

Along with a host named after a hot dog.

Mary and Voices:

Lighten up Francis.

Mostly Uncle Frank:

But now onward, episode 402. Today, on Risk Party Radio, we're just going to get back to what we do best here, which is attend to your emails. Yes, but before we get to that, I've had a couple of inquiries from my listeners you good people about whether Mary and I were attending the Economy Conference this year, which is in March, and the tickets have been sold out for some time and the answer is yes, we will. It's the one conference we do a year.

Mary and Voices:

There can be only one.

Mostly Uncle Frank:

And I will be handling some breakout sessions for my friend Diana who runs the conference. But I was thinking, if there's a few of you who are going, we might have an impromptu informal meetup, and I was thinking of doing it on Friday in the afternoon at the Solari Hotel the new one perhaps in the rooftop bar there.

Mary and Voices:

Top drawer, really top drawer.

Mostly Uncle Frank:

But I probably really won't figure it out until that week. But I probably really won't figure it out until that week. Anyway, if you are going to the Economy Conference and are interested in having such an informal gathering, please send me an email at frankatriskparodyradiocom. That email is frankatriskparodyradiocom and I'll see who we have and what we might do. But now on with the show.

Mary and Voices:

Here I go once again with the email.

Mostly Uncle Frank:

And First off we have an email from Philip.

Mary and Voices:

Phil.

Mostly Uncle Frank:

Hey, phil, phil, phil Connors, phil Connors, I thought that was you.

Mary and Voices:

And Philip writes Hi Frank, I made a donation to the Father McKenna Center. I listened to episode 389, where you answered a question from John about transitioning to a risk parity style portfolio. As part of that discussion, you provided a guideline that the equity portion of the portfolio should be between 40% and 70% and it should be split between growth and value. I have heard you say the 40 to 70% equity allocation guideline on a few other episodes, but most of the risk parity style portfolios discussed seem to be closer to 40% than 70% equities, for example, the golden butterfly portfolio, the golden ratio portfolio, the all seasons reference portfolio and your personal portfolio.

Mary and Voices:

I have two questions. One, what is the case for an aggressive risk parity style portfolio with a 70% equity allocation? Would this be for investors who retired early and have a longer retirement horizon and need more equities to keep pace with inflation? Investors who want higher growth at the expense of higher volatility and perhaps a lower safe withdrawal rate? Investors who have the ability to take more flexible withdrawals or some other reason? Two, what would an aggressive risk parity portfolio look like and, more specifically, what is the best way to allocate the 30% non-equity portion of the portfolio to achieve maximum diversification? One option I thought of is as follows, but I would welcome any thoughts you have Sample aggressive portfolio 35% large cap growth, 35% small cap value, 10% long-term treasuries, edv or GOVZ for the longest duration, highest volatility, 10% gold and 10% managed futures. Thank you, philip.

Mostly Uncle Frank:

Bing again. Well, first off, philip, let me apologize for not getting to your email sooner. As a donor to the Father McKenna Center, you are entitled to go to the front of the line, and I did not move you to the front of the line because I got this mixed up here, but at least you're at the front of the line today. That goes without saying. For the three of you who don't know, we do not have any sponsors on this program. We do have a charity we support. It's called the Father McKenna Center and it supports hungry and homeless people in Washington DC.

Mostly Uncle Frank:

Full disclosure I am on the board of the charity and am the current treasurer. But if you give to the charity, you get to go to the front of the email line. There are a couple ways to do that. You can either go to our support page at wwwriskparityradiocom and do it through patreon, or you can go directly to the father mckenna website, which I will link to in the show notes, and donate there. Either way, please let me know and I will move you to the front of the line. At least I'll try. I do miss a few every once in a while and I'm sorry again about that. Philip, are you stupid or something?

Mary and Voices:

Stupid is what stupid does, sir.

Mostly Uncle Frank:

But fortunately the answer is very easy to your question because I think you're pretty much doing the right thing that, yes, if you do want to attempt to get higher returns out of a portfolio, you need to increase the equity portion of it. As a consequence, you will have higher volatility and potentially longer drawdowns, but you're still going to have lesser drawdowns than some other less diversified combination. I do think your suggestion of 10% treasuries, 10% gold and 10% managed futures for the diversifying portion does make a lot of sense, and if you go to Portfolio Matrix, you can run something like this. I did it, but I substituted commodities for managed futures because you do not have a managed futures option there. I think managed futures actually will work better than commodities, but if you run that in the portfolio matrix, you see that it does have a higher average return, which is what you're looking for, but still retains a lot of the positive characteristics of a risk parity style portfolio. It is similar to what is called the weird portfolio, which is a creation of the value stock geek, and that is also at the website. I'll link to that in the show notes for the whole description of that.

Mostly Uncle Frank:

That one's 60% in equities, but he does use that also as his accumulation portfolio, because he also invests in individual companies on the side, and I'm not sure I would use this formulation as a retirement portfolio, though I suppose you could.

Mostly Uncle Frank:

I think it probably works better for somebody who is accumulating but is on the conservative side and just does not want to see their portfolio have 50% drawdowns and things like that. If they were just going to be total stock market, I could see. If you wanted to get really complicated and do some kind of reverse glide path retirement portfolio, you could start with something that's more conservative than this and then ratchet up the equity portion over time until you got to the 70%. I have not attempted to model such a thing, but in theory that should be a good way to handle retirement, given the research on reverse glide paths from Michael Kitsis and others. Anyway, I think you've come up with a useful variant here and I'm always interested to see what my listeners come up with. I see you've resisted any temptations to go to levered thingamabobs, like some of our listeners, but if you were going to do something like that, it would look more like the Optra portfolio looks right now.

Mary and Voices:

You have a gambling problem.

Mostly Uncle Frank:

And that's the last of the sample portfolios that we just started last year. That's based on the concept of return stacking. Anyway, thank you for sharing your ideas with us. Sorry I did not get to this sooner, and thank you for your email. Am I right or am I right? Am I right, am I right? I gotta go Second off, second off, second off. We have an email from David. Oh, david.

Mary and Voices:

And David writes I am an investor in QREARX and found your episode on it when looking for some information on the fund. Unfortunately, I found your description very misleading. The fund invests directly in a huge diversified portfolio of properties. The expense ratio includes these direct expenses, so cannot be compared to regular ETFs on which you are only paying fund management fees. Of course, the fund has performed poorly in the last few years, with commercial real estate offices collapsing in price, but multifamily has done well until recently. Retail staggered during COVID but has picked back up.

Mary and Voices:

The main advantage of this fund, which you missed completely, is that the NAV is set by a process of periodic revaluations of properties, so the NAV moves fairly smoothly, trailing market-traded ETFs and REITs which are forward-looking and far more volatile. This allows for market timing Twice. I have been able to get out very close to the top and then re-enter near the bottom. While holding the fund, my returns average 5-8% and I avoid the downward swings. This is why the fund has limits on liquidity. But you also failed to mention that the market gives a premium for illiquidity. And why do you interrupt the podcast with those weird squeaks and distorted voices? They are super annoying and not at all funny. Anyway, good luck with the show, david.

Mostly Uncle Frank:

That is awful. Well, David, sounds like we do not share the same sense of humor.

Mary and Voices:

Don't be saucy with me, Bernays.

Mostly Uncle Frank:

But you have to realize this is not intended as a commercial podcast and I'm not trying to attract the greatest audience. Forget about it. It is a retirement hobby for me and so I do like to have a little bit of fun with it. And including a little bit of fun with it is what my adult children find attractive, and they are my most important listeners, so I'm going to cater to them and not to the public at large. Donate to the children's fund. Why? What have children ever done for me? I am grateful. I have a significant audience now. Significant to me is about 1,500 regular listeners, and you know that's more than enough to make this worthwhile. It was worthwhile even with a lot fewer listeners, and I'm grateful to those who enjoy it and enjoy my sense of humor, ha ha, because I am fully aware it's not everyone's cup of tea. I don't like your attitude. What else is new? I'm holding you in contempt of court. It's a good thing. There's lots of podcasts out there to listen to. You need somebody watching your back at all times.

Mostly Uncle Frank:

Now, getting to the topic at hand what you were talking about is a fund we reviewed in episode 81. Back in 2021, I believe, and it is called QREARX. Yes, it has six letters, a lot of the TIAA-run retirement plans, which are run in this very kind of old-school style that originated in the 1990s that you still find at a lot of 403Bs and things where you're basically inside of this annuity structure or fund structure, depending on how they construct it, and you are limited to these certain kinds of funds. My opinion of this fund hasn't changed. It's still not a very good idea. If you look at its returns for the past few years they've been pretty abysmal and it certainly has underperformed a standard indexed REIT fund over the course of its existence. I will link to the page on Morningstar where this is described and you can look at the returns and you'll see they're not very good and the expense ratio is high, as we've mentioned, and I'm afraid that the attributes that you point to are just not that desirable.

Mostly Uncle Frank:

You should be getting way more than a 5% to 8% return for taking the risk of market timing. You should be getting in excess of an index fund return, something in the neighborhood of 12% to 15% I would be looking for out of something that requires market timing. So having 5% to 8% returns out of some fund that's taking up space in your portfolio is not desirable. I mean, there's an opportunity cost here. That space can be occupied by something that is actually making a much better return.

Mostly Uncle Frank:

And as for the downward swings, that is actually not a very interesting attribute, unless you are, like, solely invested in this thing. And it's certainly not an interesting attribute at all if you are in an accumulation phase. It is unclear where you are in terms of your financial life and whether you are withdrawing from this or not, but it's certainly not something you would use in accumulation. So the question I would have is what are you actually using this thing for? Because I see a problem that people have that they don't focus on the overall portfolio and instead focus on individual investments. And what happens when they do that is, it turns into this kind of shopping cart portfolio construction where you walk down an aisle, see things that say, oh, this looks good, you throw one of those in the cart. Oh, this looks good, throw one of those in the cart, and you're not evaluating how the things work together or don't work together. So, without knowing what else is in your portfolio, I couldn't tell you whether this is actually performing anything useful other than the entertainment value you seem to derive from the market timing, because 5% to 8% is not very useful.

Mostly Uncle Frank:

And as far as minimizing downswings, you want the whole portfolio to work together to minimize downswings in a way that you're getting a higher return for the risk you are taking. And that's just the basic principle of diversification, the Holy Grail principle. So you don't care about individual items, because if you just took everything and said, well, I'm going to look at each thing individually to minimize downswings, you know what you're going to get. You're going to get stuff like this and a big pile of cash and it's going to be really low yielding and it's not going to keep up with inflation. That's the fact, jack. That's the fact, jack.

Mostly Uncle Frank:

And frequently that is what happens when people take this approach. Let me just pick things and throw them in my shopping cart. Because they individually have lower downswings, because they individually have lower downswings, what you end up with is a bunch of low-yielding stuff that really doesn't work well together and suppresses your returns overall, and so it doesn't make for a good portfolio. What you actually want and what Cliff Asness of AQR has written about extensively, is things with higher volatility on their own, but when you combine them, you end up with a portfolio with lower volatility, and that is what we're trying to do here. We're trying to construct portfolios with things that work well together, not that have entertaining attributes on their own, and some of this just doesn't make any sense.

Mostly Uncle Frank:

You say there's a premium for illiquidity, and some of this just doesn't make any sense. You say there's a premium for illiquidity, there's no premium here. You're making far less on this than you would on an ordinary REIT fund. There is no premium here, it's illiquid and there's no premium. That's a silly statement and you ought to know better. Forget about it. So anyway, I stand by my analysis in episode 81.

Mostly Uncle Frank:

This thing is not that useful. It's kind of an obsolete component of an obsolete idea that TIAA has of putting these required funds under this kind of annuity structure. It's just expensive and it doesn't perform well. Overall is what you end up with, and there's no reason to be doing that in this century. I am sorry if you're stuck with that, because I know some people are just stuck with that, but if there's any way to get out of the whole system there, I would be off onto my own IRAs with this in an instant so you can construct a decent portfolio that does not include things like this. I know that's probably not what you wanted to hear, but I have the luxury since this is a retirement hobby that I do not need to pander to anyone to build an audience. We can just agree to disagree and thank you for your email Last off. Last off, an email from Keith. I can't believe it. Do you realize? People are actually stopping me on the street for my autograph.

Mostly Uncle Frank:

Face it, keith, you're the biggest thing, that's happened in this town since they dedicated the new gas station?

Mary and Voices:

And Keith writes Hi, frank and Mary. Thanks for another year of great content. May 2025 be awesome for y'all. Can you discuss what puts a stock in the value category? I believe Fama French used book-to-market ratios, but I'm unclear if they consider the highest X percentage to make up the value category, or is there some absolute ratio? Is there a common methodology or does each index use something slightly different? Keith?

Mostly Uncle Frank:

Well, keith, this is a very interesting question because there is no absolute consensus on how to define the value category. You are correct that FamaFrench used book-to-market ratios and they still do, but you will find other related kinds of metrics. If you look at, say, what does the S&P use for value? Or what does the Russell use for value, and if you go to your favorite AI these days and ask it those questions, it will give you a whole laundry list of the different factors that different entities or indices use in determining what is value and what is not. It all comes to the same idea that this is essentially a low-priced company, whether based on earnings, based on its book value or based on some other accounting measurement of value. And that's why, as we learned in the last episode, different value-based funds will have different returns over time, because it's not strictly a cap-weighted exercise, like you would see on the other end of this, where they're just going for size and some of the indices also add a profitability factor to exclude companies that would fall into the value category simply because they're going bankrupt or they've never been profitable. Those are low priced for a bad reason, which is why the S&P 600 does include a factor to exclude companies that have not been profitable for four quarters, whereas the Russell index does not include that filter.

Mostly Uncle Frank:

But the thing is, I'm not sure any one of these metrics is necessarily definitively better than another, although I do think excluding companies that are going bankrupt is a good idea, and that is probably one of the reasons that these DFA value funds seem to outperform regular indices, because they're a little better at separating the wheat from the chaff. So, in terms of discrimination, you might say that a Russell-based fund, small cap value fund like IWN is the least discriminating. Something like VIOV, which is an S&P 600-based fund, is more discriminating, but something like AVUV is the most discriminating. Now there will be environments where the lesser discriminating fund will outperform the more discriminating funds, but I think the idea is, over time, the more discriminating ones are more likely to do better, even though we can't necessarily prove that, given the amount of data we have right now. But this is a subject of endless debate amongst academics and others. So it's a very interesting question, even though it's not one with a definitive answer. But look at what has been done with hearts and kidneys.

Mary and Voices:

Hearts and kidneys are tinker toys.

Mostly Uncle Frank:

Hopefully that helps, and thank you for your email. I don't know what I'm up against. I don't know what it's all about. I got so much to think about, but now I see our signal is beginning to fade. Just one programming note we're about to go on hiatus here for about a two week period. We're doing a little traveling to someplace warm, so there may yet be a podcast this weekend, but there might not be, and there certainly will not be one for the next couple of weeks. After that.

Mostly Uncle Frank:

I will try to keep the website updated as best I can, but you may have to wait until March to hear from me again. It's not that I'm lazy, it's that I just don't care. In the meantime, if you have comments or questions for me, please send them to frankatriskparityradarcom. That email is frankatriskparityradarcom. Or you can go to the website, wwwriskparityradarcom. Put your message into the contact form and I'll get it all that way. If you haven't had a chance to do it, please go to your favorite podcast provider and like subscribe. Give me some stars, follow a review. That would be great. Okay, thank you once again for tuning in. This is Frank Vasquez, with Risk Parity Radio, signing off.

Mary and Voices:

The Risk Parody Radio Show is hosted by Frank Vasquez. The content provided is for entertainment and informational purposes only and does not constitute financial, investment tax or legal advice. Please consult with your own advisors before taking any actions based on any information you have heard here, making sure to take into account your own personal circumstances.

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