jalanlong wrote: ↑
Wed Jun 24, 2020 9:13 am
https://www.theoptimizingblog.com/lever ... portfolio/
I came across this blog yesterday and it suggests a modification to Ray Dalio's All Weather Portfolio substituting Utilities for the Commodities portion.
30% Total Stock
40% Long Term Treasury
15% Intermediate Treasury
8% Utilities ETF
It also suggests a risk parity version of:
15% Long Term Treasury
20% Total Stock
40% Intermediate Treasury
13% Utilities ETF
Backtesting to 2008 it beats the PP in absolute and risk adjusted.
Mostly I'd echo what pmward said. Utilities have done well for 35+ years because we've been in a non-inflationary/deflationary/at times bordering on deflationary environment with falling rates (which helps utilities both because they are some of the most "bondlike" of stocks due to their relatively high dividends and also because they are typically fairly leveraged and falling rates let them refinance their debts at lower interest rates each time a bond matures). If you look at the Fama-French "Utilities" category (or just at the oldest utilities mutual fund around...Franklin Utilities...ticker symbol FKUTX) you will see that utilities got KILLED
in real inflation-adjusted terms from 1965-1981.
If one insists on substituting the commodity allocation with actual stocks I would suggest two potential changes to your idea:
One, don't just
use utilities....put in some other types of stocks that historically have done WELL during inflation (SCV, natural resource stocks, REITs, EM, etc) as well as utilities.
Two, if one insists on keeping what would've been the commodities allocation only in utility stocks at least diversify them somewhat. Regulated utilities tended to do badly during the late 1960s to early 1980s period because:
A. they had high debt loads that ended up having to be refinanced at higher rates (either that or they would've had to dilute current shareholders by raising capital via selling new stock...sometimes at the worst possible time; Southern Company--i.e. Georgia Power/Alabama Power--ended up refinancing some of its debt by selling new stock but this was virtually at the the very market bottom in late 1974; their stock price was in the toilet so not only was the offering heavily dilutive to existing shareholders but they ended up selling stock at a 14%
dividend yield!) instead of at lower rates as has been the case for the past four decades,
B. Their expenses for raw materials (coal, oil, natural gas, etc) and labor (most regulated utilities had/have highly unionized workforces) increased at a rapid clip due to double-digit inflation during much of this time,
C. The above two issues theoretically shouldn't have been a big problem since regulated utilities are by law supposed to be allowed a guaranteed return on invested capital (i.e. on capital plant investment....for instance, if a utility spent $10,000,000 to build a new power plant and the allowable return by law was 6% they were supposed to be allowed to make $600,000 on that plant and equipment even after subtracting interest costs/labor costs/raw material and energy input costs, etc...and if this meant that customers' electric bills had to rise to make that return possible, well, so be it) BUT
sometimes the state PSCs/PUCs/utility commissioners--being elected and accountable to the ratepaying voters--wouldn't let them increase electric/gas rates on customers fast enough and so the utilities' real after inflation earnings growth suffered.
D. Even in cases where their regulators DID
let them increase rates fast enough to earn their guaranteed allowable returns the utilities couldn't add enough capital plant to increase returns at or above the rate of inflation in many cases. Let's say a utility was allowed the same 6% return on investments in capital plant as above but inflation was 10% that year. Unless the utility could construct enough new plants/transmission lines/substations/etc to increase its total capital plant (that it was allowed to earn its 6% on) by more than the rate of inflation then they would still be falling behind in earnings in real terms....and the regulators weren't going to let them build a bunch of unnecessary plants and power lines without enough actual demand for them just to try and earn enough to beat inflation. Utility regulators rarely if ever allowed them to value their capital plant at actual current dollar real replacement cost--which from 1966 to 1981 almost tripled--rather than the cost it originally cost them to build it; as such, the utilities were in REAL inflation adjusted terms not earning 6% on said capital plant but maybe 1/3 to 1/2 of that.
As such, if you absolutely have to put some/all of the commodity investment portion into utilities at least choose some unregulated utilities as well as regulated ones; MFS has a decent (especially if you can get access to the institutional share class) fund offering--MFS Utilities--in this vein; it invests a bit less than half of its portfolio into traditional "bread-and-butter" widows-and-orphans regulated electric and gas utilities and has the rest in unregulated utilities, foreign utilities, actual energy producers (and/or utilities that own some of their own mines/gas/oil), and telecom/cable/phone utilities; as such, it should have a lot less inflation risk than a "traditional" utilities fund like FKUTX (and in fact has only about a 0.66 monthly correlation to FKUTX or to XLU) so maybe go half MMUIX and half XLU for the utilities portion of the portfolio and rebalance them each year.
Finally, I would also like to add that (and this is totally unrelated to utilities) the portfolio you suggested is rather bond-heavy and thus could get killed by unexpected inflation; you might want to consider replacing most of your ITT allocation with ITT TIPS instead.