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Money manager Julian Klymochko believes it’s time to change the definition of a balanced portfolio once and for all.
“We believe the notion of a 60-40 balanced portfolio is dead. What happened to stocks and bonds in 2022 was the nail in the coffin,” says Mr. Klymochko, chief executive officer and chief investment officer at Accelerate Financial Technologies Inc. in Calgary, referring to the huge losses in global stocks and bonds last year.
Bonds, considered by many investors to be a portfolio stabilizer, remain volatile in 2023, underscoring Mr. Klymochko’s argument that it’s time to reinvent the meaning of a balanced portfolio to include alternative investments that provide added diversification and manage risk.
His firm offers four publicly funded hedge fund strategies. Accelerate Absolute Return Hedge Fund HDGE-T, which Mr. Klymochko says is in most demand today, is a long-short equity hedge fund that his firm says seeks “attractive risk-adjusted returns with low correlation to the broad equity markets.”
The fund has returned 10.7 per cent over the past year and saw an annualized return of 15.6 per cent over the past three years. The data is based on total returns and is net of fees as of Oct. 31.
“I like to think about our absolute return fund as portfolio insurance that you get paid to own because it’s provided great returns in challenging environments,” says Mr. Klymochko, whose firm oversees about $100-million in assets.
Mr. Klymochko has been managing hedge funds and alternative strategies for 15 years. In 2017, he founded Canada’s first cryptocurrency fund – Ross Smith Cryptocurrency Investment Fund LP, which closed a year later after he says it provided a triple-digit return to investors. (Mr. Klymochko also describes it as “ahead of its time.”) Accelerate manages Canada’s first Web 3.0 investment vehicle, the private Accelerate NFT Fund LP, launched in the summer of 2022.
The Globe and Mail spoke to Mr. Klymochko recently about his investing style and what he’s been buying and selling.
Describe your investing style.
Our focus is asset allocation and risk management. We’re not competing against stocks. We’re not competing against bonds. In general, we’re advocating for a more diversified, safer approach of roughly 50 per cent stocks, 30 per cent bonds and 20 per cent alternative investment solutions that can help reduce volatility and enhance returns. Examples of our alternative strategies include long-short equity, absolute return [an investment strategy that aims to generate a positive return regardless of the overall market conditions], arbitrage, and multi-strategy hedge funds. We also have a digital asset fund, but it accounts for less than 1 per cent of our assets today.
What’s your take on the current market environment?
We believe interest rates will stay higher for longer. However, we see rate cuts into 2024 and wouldn’t be surprised if there are several. It’s more of a question of how long will it take for inflation to get to 2 per cent. To us, the best way we deal with it is to be smart about asset allocation and to be diversified by building robust portfolios that can be prepared for any scenario.
What have you been buying?
We are long ARC Resources Ltd. ARX-T. It’s a highly profitable company with a high return on capital, an attractive valuation, significant share price momentum, a high free-cash-flow yield, an aggressive share repurchase program, and rising earnings estimates. It checks all the boxes and what we like to see from the stock. Also, our view has nothing to do with ARC being an energy company because we’re also short some energy names.
What have you been selling?
In the first quarter of this year, we were short Signature Bank SBNY, selling it short around US$135 a share. On March 12, banking officials in New York state closed Signature Bank, just days after the failure of Silicon Valley Bank and Silvergate Bank. It was the third-largest bank failure in U.S. history. All three failed banks were part of the S&P 500, and these banks’ shareholders suffered a complete wipeout. When Signature Bank’s stock resumed trading after the bank failed, our fund covered the short at around US13 cents a share.
Name one stock you wish you bought or didn’t sell, and why?
In 2021, we exited three of the ‘Magnificent Seven’ stocks that we owned including Apple Inc. AAPL-Q, Microsoft Corp. MSFT-Q, and Meta Platforms Inc. META-Q. Unfortunately, with the benefit of hindsight, it looks like we sold too early given that these stocks have substantially outperformed in 2023 and driven the bulk of the S&P 500′s year-to-date return.
What advice do you have for new investors?
Many new investors make the mistake of focusing on yield or income instead of portfolio construction and asset allocation. It’s analogous to the yield tail wagging the portfolio dog. Ultimately, investors should focus on total return and risk profile, with yield resulting from that process. Also, risk management is key. If you protect the downside, the upside will take care of itself.
This interview has been edited and condensed.
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