Gold makes a difference
One of the major changes we did to our model in February was to add physical gold. In our initial research we could not get gold to work. However, after more work and the right constraints in the portfolio optimization it was clear that physical gold was a real diversifier and so it was added in February. As of today the portfolio has a 5.3% exposure to physical gold which is a large active bet relative to a market weighted global asset allocation portfolio. In current market regime gold has proved to make a difference for risk-adjusted returns and it creates an extra cash-like risk layer for the Stronghold model before going heavily into synthetic cash (1-3Y government bonds).
Why Stronghold should be a core component in a portfolio
When we talk to clients we argue that Stronghold should be a core component to stabilize portfolio returns as its dynamic framework automatically reduces risk when needed and increases it intelligently when the cross-volatility structure allows it. With interest rates going even further towards zero (the G7 10Y yield-to-worst yield is now at 0.35%) the upside from bonds will be limited going forward. For risk parity it means more leverage if a 10% volatility target is the goal and standard portfolios it means worse portfolios in terms of risk-adjusted returns. A tactical asset allocation framework will dominate the next 10 years as the passive/strategic asset allocation ride ends with ZIRP and policy volatility like we haven’t seen in more than a decade.