JEPI - Reviewing My Alternative Assets And Their Purpose
2023-12-20 08:00:00 ET
Summary
- This article reviews portfolio assets with unique strategies that differ from traditional fixed income and equity assets. Each is described and the reason for holding covered.
- While three assets mentioned were also in a prior article in this three-part series, they also have features that differentiate them from standard fixed income or equity funds.
- The main learning from all three articles was the need to review each holding to be sure they still need to be held or are there better choices instead.
Introduction
This is the third and last in my series of reviewing our portfolio assets and why we hold them. The first covered fixed income assets, the second equity assets. Links to both are included at the end of this article.
This time I bunched together assets that have some kind of "twist" in their individual strategy that makes them different than most fixed income or equity assets. I also included a few assets that appeared in one of those articles because of their particular strategy even though the majority of what they held were standard assets.
The assets covered this time fall into one of these groupings:
- Trading one factor for another, like more yield but less return possibly
- Limiting the same factor, both good and bad
- Owning to reduce the overall portfolio volatility
- Special strategies
Thanks to being married and government rules, tax-wise and others, our invested assets are spread across these types of accounts.
- 3 taxable accounts: her's and two joint accounts held at different brokers.
- 3 traditional IRAs: mine, her's and her inherited one
- 2 Roth IRAs: one each
- 1 401k with both a pre-tax and Roth parts: mine
- 1 Health Reimbursement Account: mine
- 1 Treasury Direct Account: mine
- 1 Donor Advised Fund: mine
I imagine not every reader will agree either with where I placed the asset or my reasoning for why it is there. That is okay as some can be owned for reasons other than why I hold them or the reasoning I used them for.
Factor trading
JPMorgan Equity Premium Income ETF ( JEPI ): This ETF uses Equity-Linked-Notes for yield enhancement and limited set of S&P 500 stocks plus the ELNs for return. Recently, JEPI has provided more income, less volatility AND more return; what more could you ask! In a strong Bull market, one should expect only the first two to stay true. This is my only equity exposure in my HRA, representing 39% of the total allocation. All income generated from all HRA assets flow into more JEPI shares.
iShares iBonds 2029 Term High Yield and Income ETF ( IBHI ): I just added this ETF to my FI ladder. I discovered this ETF as part of my review of the 2026 version, IBHF . I needed more exposure in 2029, thus this one was picked. I consider the trade-off to be limiting interest-rate risk but foregoing some capital gains as the ETF terminates in 2029. This asset is held in my wife's Roth IRA at a 5% weighting.
Factor limitations
Innovator U.S. Equity Power Buffer ETF - October ( POCT ): After liking what I saw after my recent review , I added this ETF to our taxable account since it seldom pays a dividend, and this account has a very low equity ratio. It comes with both an upside and downside buffers, which reset each October 1st. POCT is about 5% of this account.
Volatility reduction
Calamos Market Neutral Income Fund ( CMNIX ): The managers describe their fund as:
The fund combines two complementary strategies with different responses to volatility: arbitrage seeks alpha and uncorrelated returns, while hedged equity provides income from options writing and upside participation.
Key Features
- Generates returns not dependent on interest rates, breaking from traditional bond strategies.
- Employs an absolute-return strategy with historically lower beta versus fixed income and equity markets as well as lower volatility and limited drawdowns.
- As one of the first alternative mutual funds, capitalizes on more than four decades of experience in the convertible space.
Portfolio Fit
The fund may provide potential diversification, particularly in a rising interest rate environment.
Source: calamos
John Hancock Seaport Long/Short Fund ( JSFDX ): Here is how the managers describe their fund:
Objective: Long-term capital appreciation Use for Alternative equity holding Morningstar category Long-Short Equity
Strategy:
- A hedge fund approach: Employing a long/short strategy that combines the insight and expertise of multiple investment teams in a single portfolio
- Managing market exposure: Investing in a portfolio of both long and short positions may help limit the fund's reliance on rising market prices to drive returns
- Better risk/return potential: By aiming to limit volatility and downside risk, the fund seeks better long-term risk-adjusted returns than its global equity benchmark index.
Source: jhinvestments
These are part of my "cash" allocation at Morgan Stanley as their true cash option still only pays .01%! They represent 12% of the portfolio value. Over the past decade, both have provided lower returns with lower StdDev than stocks but outperformed the PIMCO Investment Grade Corporate Bond Index ETF ( CORP ).
Giving each a 10% allocation combined with a 80% allocation to an equity ETF results in a 15% reduction in the portfolio' StdDev and equal or better risk metrics. In short, they are meeting their purpose. I did recently cut my allocation to JSFDX in half in order to increase the equity ratio in the MS account closer to 70%.
This account is itself an alternative strategy as explained in one of my first Seeking Alpha articles .
Special option strategies
I write Put options for two purposes. First is to enhance the yield on the cash we hold in our joint taxable account. Here, I write deep 15-20% OTM Puts using ETFs, targeting 3-4% additional yield. The other is a full Cash Secured Put strategy in my Roth IRA account. Here I am more aggressive, writing 10% OTM strikes. I have several articles covering this strategy, two of which are listed later.
Portfolio strategy
Compared to my 92-year-old parents, I am a "wuss" in the level of risk I take in our allocations. As their POA, I help monitor their portfolios which are 90% in dividend generating stocks or mutual funds except for the small level of cash they hold to pay bills within their taxable account and my dad's Stable Value Fund holding. My last review showed my equity ratio was below 50% overall though I have been pushing it up recently. Doing these three in-depth reviews of all our different accounts has resulted is selling off five assets that were underperforming compared to similar ones or whose risk level was higher than when bought and what I want to hold now. While hopefully years off, my share of my parents' estate will push my equity allocation near 60%.
By adding and expanding the two ETFs listed under Factor Trading, I can increase our equity allocation without taking on 100% of downside risk that asset class brings with it. Using the Volatility Reduction funds within the MS account has me comfortable with rising the equity allocation there to 70+%, which is almost the case now.
With cash now yielding 5%, my CSP strategy only needs to match that to equal what stocks have returned since 1972. Only need half that return to beat what a 69/40 portfolio has return since 1992. That said, today's volatility level is making that hard to achieve either target using 10% OTM strikes.
Article links
Here are the links that were the other articles in this series:
For other option writers, here are the articles that go into detail about those strategies:
For further details see:
Reviewing My Alternative Assets And Their Purpose