Hmmm....I Wonder

My post the other day where I mentioned the Merger Fund (MERFX) got me to thinking about an idea. Not an idea without flaws mind you but an idea that if explored may provide some context for being a better manager of your own portfolio.

In that post I included this chart from Morningstar which shows MERFX in red compared to the S&P 500 in green over a ten year period. Ten years usually takes in a lot of cycles and a lot of stuff and is a reasonable benchmark of time.

If you knew you could get 80% of the market's return over that kind of time period with just a sliver of the volatility you might take that. Certainly there is a measurable chunk of the investment population that is not completely comfortable with the stock market's volatility.

I am wondering if there could be merit for a do-it-yourselfer to have most of their equity exposure in several things that behave in a similar manner to MERFX and then a little bit earmarked for a couple of more speculative ideas like maybe an Internet stock and an alternative energy name, just as examples.

If the market goes up a lot the idea would lag badly, when there is a bear market it would outperform by a mile.

There are a lot of ifs to the idea. While I have not yet looked for other things that behave similarly to MERFX, taking that fund a proxy for the idea there is no way to do any forward looking analysis on it. "Yeah I think that they will keep doing their thing the same way" is about all you can say or "I think the fund will be different two years from now." Neither one makes sense to me but that's about it for analysis.

One candidate for inclusion into this idea would be if something could actually mimic the CBOE Buy-Write Index. I plugged in just about every covered call CEF into PortfolioScience to try to find one that correlates highly to BXM and none of them do. Even the fund called S&P 500 Covered Call Fund (BEP) falls short with a correlation of only 0.459. With all the ETFs what about one that mimics one of the buy write indices? I believe in the concept and for now I think CEFs are the best way to capture it but I would not hesitate to swap for an ETF that could successfully mimic a buy write index.

This was the best chart I could find to compare BXM and SPX. It clearly is no MERFX but it is a noticeably smoother ride than the S&P 500.

With these two examples and any others that might come up I am not talking about fixed income products. The idea still centers around growth, boring sleep at night growth but growth nonetheless.

Clearly this will miss a lot of things and it does not strike me as the best possible way to manage your portfolio but if you do not already have an element or two if this, which I do, in your portfolio it probably makes sense to spend some time with this and learn a little more.