On August 31, I added T. Rowe Price Multi-Strategy Total Return (TMSRX) to my non-retirement portfolio. I funded that position by transferring about half of my stake in T. Rowe Price Spectrum Income (RPSIX).
Why does this make sense?
I traditionally have minimal savings, in the sense of money in a savings account at the bank. That decision makes sense for me because my income is incredibly predictable (a perk of being a tenured senior member of the faculty at a strong college), though it grows minimally. Because savings accounts have for so long offered near-zero to negative real returns, I chose to keep the money otherwise destined for savings in exceedingly low volatility funds that offered the prospect of low- to mid-single-digit returns. RiverPark Short Term High Yield (RPHYX, 3% annual returns, 0.8% standard deviation, 1% maximum drawdown since inception) and Spectrum Income (RPSIX, 4.5% annual reports, 5.1% standard deviation, 9.7% maximum drawdown over the same 9-year period) earned spots in my portfolio as a low-volatility, steady returns sort of funds.
I’ve been tracking TMSRX since inception, about 2.5 years ago. It has offered slightly higher returns since inception than RPSIX has over the same period (about 5.5% annually versus 5.0%) with substantially lower volatility (5.8% standard deviation versus 7.9%, maximum drawdown of -4.7% versus -9.7%) and a lower correlation to the US stock market.
This change has been on my mind since we profiled Multi-Strategic Total Return in July 2020 but, like you, I’d had a bunch of other stuff on my mind. The decision to add Palm Valley Capital (see Portfolio Update #1 in this issue) offered a convenient spur to make this second adjustment.
The fund has attracted $93 million, with very modest inflows. It appears, for example, that the fund drew an additional $1 million in the last week of August. Manager Richard de los Reyes has invested over $1 million in his fund and Stefan Hubrich has invested between $500,000 and $1 million.
What do they do?
This is a hedge fund-like operation that draws on T. Rowe Price’s vast, global network of analysts who cover a myriad of asset classes. The managers seek to invest in “non-market sources of return,” that is, returns that can be delivered whether the market rises or not. That’s possible by choosing investments that are intrinsically uncorrelated with the market or by using hedges to offset market exposure. If, for example, you have a stock investor who is capable of using good security selection to produce returns 4% higher than the market’s, you would then hedge your market exposure so that you could harvest the 4%. When the market rises or falls by 10%, you would still earn 4%.
The strategies currently available to the managers include Macro and Absolute Return; Fixed Income Absolute Return; Equity Research Long/Short; Quantitative Equity Long/Short; Volatility Relative Value; Style Premia; Dynamic Global FX; Dynamic Credit; and Global Stock.
That lineup might expand as Price discovers new sources of non-market returns.
This is a tweak rather than a spasm. I think I can modestly raise my portfolio’s likely returns while adding a bit more insulation against market volatility and decline.