By Founder & CEO Scott J. Savage.
What lights me up and has made our clients money in 2023? Diversified alternatives!
After an extensive year-long due diligence process by our Investment Committee seeking to access additional markets while staying true to the core MarketPlus® Investing philosophy, SJS approved the Stone Ridge Diversified Alternatives Fund (SRDAX) as a potential client investment in December 2021. SRDAX is an open-end mutual fund designed to provide access to five underlying investment strategies that have historically performed differently than global stocks and bonds: reinsurance, market risk transfer, style premia, alternative lending, and single-family rental homes.[1] All of these underlying strategies seek systematic income streams.
Starting in December 2021, we began adding SRDAX to client portfolios that we deemed to be appropriate. As of the end of 2023, the fund finished up over 19% for the year.[2]
Source: Stone Ridge Asset Management. Data from April 30, 2020 (inception of the fund) through December 29, 2023. Total return includes reinvestment of all distributions. Tax implications are not considered. Past performance does not guarantee future results. Short-term results may not be indicative of long-term performance. See Important Disclosure Information.
No investment that purports a return over the risk-free rate will move up consistently, and SRDAX is no different. For example, in November 2023, SRDAX declined almost 1% for the month. It just so happened that coincident with this short-term decline, global stocks and U.S. bonds rallied, up 9.3% and 4.5% respectively in November (as measured by the MSCI All Country World Index and the Bloomberg U.S. Aggregate Bond Index, respectively.)[2]
While November 2023 is anecdotal, we believe it is also evidence that SRDAX returns are not only uncorrelated to the performance of global stocks and bonds, but they are unrelated. Since adding this strategy to our client portfolios, SRDAX has been an excellent diversifier to our MarketPlus® Investing strategies (see table, below). We don’t believe the 2023 pace of return is sustainable due to underlying investment conditions; however, it is a shining example of the value alternatives can bring to traditional stock and bond strategies. Namely, providing expected returns commensurate with the risk that is being assumed while not following the ups and downs of the publicly traded stock and bond markets.
Source: Stone Ridge Asset Management, Morningstar. The MSCI All Country World Index captures large and mid cap representation across 23 developed market and 24 emerging market countries, covering approximately 85% of the global investable equity opportunity set. The Bloomberg U.S. Aggregate Bond Index measures the performance of investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. Indices are not available for direct investment. Index performance does not reflect the expenses associated with management of an actual portfolio. Index performance is measured in US dollars. The index performance figures assume the reinvestment of all income, including dividends and capital gains. Tax implications are not considered. See Important Disclosure Information.
In supplementing traditional bond strategies with an alternative income-seeking strategy, the diversification through SRDAX is as close to a free lunch we have found over the past couple of years. The search for what’s next to add to our MarketPlus® Investing portfolios continues.
Important Disclosure Information & Sources:
[1] Source: Stone Ridge Asset Management.
[2] Source: Morningstar.
Indices are not available for direct investment. Index performance does not reflect the expenses associated with management of an actual portfolio. Index performance is measured in US dollars. The index performance figures assume the reinvestment of all income, including dividends and capital gains.
There is no guarantee investment strategies will be successful. Past performance is no guarantee of future results. Diversification neither assures a profit nor guarantees against a loss in a declining market.
Statements contained in this article that are not statements of historical fact are intended to be and are forward looking statements. Forward looking statements include expressed expectations of future events and the assumptions on which the expressed expectations are based. All forward looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties which could cause actual events or results to differ materially from those projected.
MarketPlus® Investing models consist of institutional quality registered investment companies. Investment values will fluctuate, and shares, when redeemed, may be worth more or less than original cost.
Advisory services are provided by SJS Investment Services, a registered investment advisor (RIA) with the SEC. Registration does not imply a certain level of skill or training. SJS Investment Services does not provide legal or tax advice. Please consult your legal or tax professionals for specific advice.
Hyperlinks to third-party information are provided as a convenience.