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
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THE GOLDEN BUTTERFLY |
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.
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ASSET CLASS PERFORMANCE |
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.
Manager
|
Unit Name
|
% of Portfolio
|
1 Year Perf.
|
iShares
|
20.0
|
-1.5
| |
Vanguard Investments UK
|
20.0
|
28.8
| |
iShares
|
20.0
| 1.8 | |
iShares
|
20.0
|
27.8
| |
Fundsmith
|
5.0
|
6.4
| |
Baillie Gifford & Co Ltd
|
5.0
|
1.2
| |
Standard Life Investments
|
5.0
|
14.3
| |
BlackRock Investment Management
|
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
|
20.0
|
48.5
| |
Vanguard Investments UK
|
20.0
|
62.9
| |
iShares
|
iShares UK
|
20.0
|
5.2
|
iShares
|
20.0
|
63.6
| |
Baillie Gifford & Co Ltd
|
10.0
|
105.6
| |
Standard Life Investments
|
5.0
|
89.6
| |
BlackRock Investment Management
|
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
|
- 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.
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