The Golden Butterfly Portfolio

The Golden Butterfly Portfolio

The Golden Butterfly originated from Tyler’s  Portfolio Charts and is often considered as a derivative of Harry Browne´s Permanent Portfolio which I looked at in a previous post.  Like the permanent Portfolio is comprises of 4 asset types:-

• Equities
• Short term government bonds bonds
• Long term government bonds
• Gold

THE GOLDEN BUTTERFLY

Whereas the Permanent Portfolio has equal weightings of each asset,  the Golden Butterfly aims for higher growth by allocating 40% to equities split evenly between Total Market and Small Cap Value and equal allocations to short term government bonds, long term government bonds and gold.

As with the Permanent Portfolio the idea is to have four asset classes to deal with all likely market conditions  - equities provide growth in expansionary markets, gold  in inflationary markets, long term bonds during deflationary periods bonds and short term government bonds/cash provide protection during market crashes.  

ASSET CLASS PERFORMANCE

The Golden Butterfly provides more growth potential by allocating 40% to equities rather than 25% and an allocation of 50% of the equities to Small Cap Value (see Paul Merriman for more information about Small Cap Value).  The higher equity allocation results in higher volatility than The Permanent Portfolio but an average growth rate more than 2.5 percentage points higher. 

Many people will be wary of this portfolio.  Gold is not a well liked asset class and many investors will be wary of investing in long term bonds with interest rates at historic lows.  A further problem is that there are only around 50 years of data available on some of the asset classes so we have no knowledge of how the portfolio would have performed during the late 60s and early 70s when there were 2 market crashes close to one another.  However, the out performance of this portfolio and the rational behind the asset allocation makes it a very attractive option.

My Golden Butterfly Portfolio

GOLDEN BUTTERFLY PORTFOLIO
ASSET	%
CASH	20%	Ishares Gilts 0-5yr
TOTAL STOCK MARKET	20%	iShares Core MSCI World ETF
SMALL CAP UK	10%	BlackRock Throgmorton IT Standard Life UK Smaller Companies
SMALL CAP GLOBAL	10%	Edinburgh Worldwide IT Smithson IT
LONG TERM GILTS	20%	Vanguard Long Duration UK Gilt Fund
GOLD	20%	iShares Physical Gold ETF

   

I have chosen 4 Investment Trusts for the 20% small cap segment of the portfolio, 2 UK based and 2 global and have taken a risk in choosing Smithson but I did the same when Fundsmith launched and that gamble certainly paid off.  Opting for 4 trusts to represent the small cap sector makes portfolio balancing more complicated but reduces the risk of being dependent upon one trust and one manager but without doubt more monitoring will be required than for an index fund.

 So this is how my final portfolio looks (performance as of 11/3/2020):-

Manager	Unit Name	% of Portfolio	1 Year Perf.
iShares	iShares Core MSCI World UCITS ETF Acc GBP	20.0	-1.5
Vanguard Investments UK	Vanguard UK Long Duration Gilt Index	20.0	28.8
iShares	iShares UK Gilts 0-5yr UCITS ETF GBP	20.0	1.8
iShares	iShares Physical Gold ETC GBP	20.0	27.8
Fundsmith	Smithson Investment Trust ORD 1P	5.0	6.4
Baillie Gifford & Co Ltd	Edinburgh Worldwide IT PLC ORD 1P	5.0	1.2
Standard Life Investments	Standard Life UK Smaller Companies Trust PLC	5.0	14.3
BlackRock Investment Management	BlackRock Throgmorton Trust PLC	5.0	12.3
Total Portfolio	Total Portfolio	100.0	12.7
Selected Benchmark	FTSE All Share		-10.7

As one would expect the gold and long term gilts helped protect the portfolio from the Feb/March 2020 market declines.   

Five year performance is shown below (without Smithson due to its newness compensated for by an  extra contribution from Edinburgh Worldwide):-

Manager	Unit Name	% of Portfolio	5 Year Perf.
iShares	iShares Core MSCI World UCITS ETF Acc GBP	20.0	48.5
Vanguard Investments UK	Vanguard UK Long Duration Gilt Index	20.0	62.9
iShares	iShares UK Gilts 0-5yr ETF GBP	20.0	5.2
iShares	iShares Physical Gold ETC GBP	20.0	63.6
Baillie Gifford & Co Ltd	Edinburgh Worldwide IT PLC ORD 1P	10.0	105.6
Standard Life Investments	Standard Life UK Smaller Companies Trust PLC	5.0	89.6
BlackRock Investment Management	BlackRock Throgmorton Trust PLC	5.0	110.8
Total Portfolio	Total Portfolio	100.0	50.9
Selected Benchmark	FTSE All Share		11.6

The portfolio has higher growth and lower volatility than the FTSE All Share:-

Performance Analysis	Growth Rate %	Volatility	Alpha	Beta	Sharpe	Info Ratio %
Portfolio	8.8	6.5	7.4	0.4	0.8	0.6
Benchmark - FTSE All Share	3.6	10.7	0.0	1.0	0.0	0.0

International Diversification

Monte Carlo Simulation

A 5 year performance history is a good indicator of relative performance but only tells a small part of the story.  A Monte Carlo simulation is more useful as it analyses a portfolio of similar asset classes over a large number of historical and simulated scenarios.  I have used the Timeline simulation tool to compare the Golden Butterfly with a conventional 60/40 and permanent Portfolio. An exact replication wasn´t possible as Timeline do not have long term gilt or intermediate gilt asset classes, their nearest approximation being UK Aggregate Bonds.

ASSETS	60/40	PERMANENT PORTFOLIO	GOLDEN BUTTERFLY
Cash		25%	20%
UK Aggregate bonds	40%	25%	20%
UK Equities	60%	25%
UK Small Cap			10%
Global Equities			20%
Global Small cap			10%
Gold		25%	20%

The simulation is based upon a 4% withdrawal rate, 3.8% inflation and a target 30 year retirement. The simulation gives the Success Rate in not running out of money before the 30 years have ended, the age at which 10% or fewer retirees would run out of money (assuming an age 65 retirement start), the minimum legacy that 9 our of 10 retirees would leave and finally the lifetime income received.

The Golden Butterfly significantly outperforms the other two portfolios.

OUTCOMES	60/40 EQUITY/BOND	PERMANENT PORTFOLIO	GOLDEN BUTTERFLY
Success Rate	88%	83%	98%
Longevity	93 years	92 years	95 years
Legacy	£0	£0	£278.2k
Lifetime Income	£1.13m	£1.12m	£1.2m

  
Another useful means of comparing performance using historical actual data is through Portfolio Charts.  Again the exact asset classes are not available but using the best approximations does provide a means of comparing portfolios. 

• Max. Drawdown: Maximum decline in value
• Recovery Time. How long to recover from a downturn
• Average Return: Average Inflation Adjusted Return
• Safe Withdrawal Rate: The initial withdrawal rate that ensures not running out of money during a 30 year retirement with annual withdrawals increasing by the rate of inflation
• Perpetual Withdrawal rate: The initial withdrawal rate that ensures never running out of money with annual withdrawals increasing by the rate of inflation

PORTFOLIO CHARTS COMPARISON
	Max. Drawdown	Recovery Time	Average Return	Safe Withdrawal Rate	Perpetual Withdrawal Rate
60/40 Equity/Bond	57%	12yrs	6.1%	4.0%	3.2%
Permanent Portfolio	9%	5yrs	4.7%	5.3%	3.7%
Golden Butterfly	22%	5yr	5.3%	5.7%	4.3%

The Golden Butterfly permits the highest Safe and Perpetual Withdrawal rates at 5.7% and 4.3%, with a much reduced maximum drawdown and faster recovery time than a 60/40 portfolio.  The Permanent Portfolio offers the lowest maximum drawdown but lower withdrawal rates than the Golden Butterfly.

Conclusion

Using both historical data and Monte Carlo Simulation the Golden Butterfly is the top performing portfolio for retirement drawdown.   There are some caveats: some historical data is limited, some investment products have been in existence less than a decade and whilst is is relatively easy to simulate a US portfolio, the UK investor can only approximate to the ideal Golden Butterfly due to the absence of a UK Small Cap value class and of course finally - the past is no accurate predictor of the future.