As portfolios go, the one put forward by John Arnold, the billionaire energy trader turned philanthropist, doesn't get simpler.
In a post on the social media service X, Arnold showed that a portfolio equal-weighted to the technology XLK and energy XLE sectors not only has posted double-digit returns in six of the last seven years, but done so when adjusted for risk. A Sharpe ratio measures an investment's return per unit of risk, so any number above 1 is considered good, and he calculates his portfolio had a ratio of 1.16.
Arnold's portfolio notably has outperformed the 60/40 balanced portfolio of stocks and bonds in those years, particularly in years like this one and 2022, when bonds fail to offer a cushion because of the surge in commodity prices. It did underperform the S&P 500 tracker SPY in some years, but unlike the main stock market index, stayed positive each year.
Arnold, who according to Forbes is worth some $2.8 billion, didn't describe why it works. But it makes intuitive sense. There's been rapid progress in new technologies, such as artificial intelligence, that is revolutionizing the world economy. At the same time, as the international order crumbles, there have been two wars, first Russia's attack on Ukraine and now the U.S.-Israeli attack on Iran, that have led to supply shortages of oil and gas, sending prices surging higher.
Louis-Vincent Gave, the founder of the research service Gavekal, has been for some time arguing that a structurally higher inflationary environment argues for a portfolio that is 60% in equities, 20% in precious metals and 20% in energy.
He says events over the last five years have shattered key assumptions: that U.S. Treasury securities can be transformed into energy at a moment's notice, that the U.S. Navy controls the world's sea lanes and that the U.S. is a benevolent hegemon with an embedded interest in maintaining the global trading system.
"The bottom line is that even if the Iran conflict finds a truce in the coming days, assumptions that underpinned policies and portfolios for the past decades are now obsolete," Gave said in a research note last week.
Granted, the simplicity of Arnold's portfolio could be its undoing. If fears that artificial intelligence expenditure prove correct, then the tech side of the portfolio, dominated by companies including Nvidia (NVDA), Microsoft $(MSFT)$ and Broadcom $(AVGO)$, would suffer. Equally, if countries respond to energy-price spikes with windfall profit taxes, then the energy side of the portfolio could stall even with rising prices.
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