A viable replacement for US TIPS in a risk parity portfolio?(South Korea)

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Topic Author
justanordinary
Posts: 6
Joined: Mon May 17, 2021 3:40 am

A viable replacement for US TIPS in a risk parity portfolio?(South Korea)

Post by justanordinary »

Hello friends,

I am a novice to this scene, so please forgive my lack of in-depth knowledge on the subjects or customs of the forum. I would deeply appreciate any guidance or advices.


My question is, what asset would be a viable replacement for TIPS in a risk parity portfolio?

I was considering setting up a risk parity portfolio, based on EQM index's Advanced Research Risk Parity Index (RPARTR) (https://eqmindexes.com/risk-parity-index-summary/)

The index, as of March, tracks the value of following asset allocation:

1) Global equities: 25%(US: 12.5) (non-US developed market: 5.0) (emerging market 7.5%)
2) US treasuries(10 years): 22.5%
3) TIPS: 20%
4) Gold: 17.5%
5) Commodity producer equities: 15%

The portfolio seems to offer decent hedges to most economic environments, geographical diversification, and easier to emulate for a novice investor like me. Hence I was considering investing a part of my pension fund according to this index, partly as an entry-level exercise, and partly as a long term(20+ years) investment.

The problem is, the pension fund market in my country(South Korea) does not offer any access to TIPS, regardless of its issuing country. There is no TIPS-tracking ETF, and not even a TIPS related active fund. As of matter of fact, a lack of access to certain assets(emerging market credit, US corporate bond, etc.) was one of the main reason I looked into EQM index instead of other risk parity portfolios.

TIPS should play an integral role in this strategy, providing a hedge against inflation and lower growth economic environment. It also composes 20% of the entire portfolio, so I believe I should look for a replacement asset that could emulate the original index.


Could you recommend an asset class(and if possible, its allocation) that could replace TIPS in the aforementioned portfolio?

Although my country's pension market does not offer access to many asset classes, I would still greatly welcome the input.

I am considering reallocating the proportion of TIPS(20%) as of following:
i) gold(2.5%) : inflation hedge
ii) commodity producer equities(2.5%) : inflation hedge
iii) 10 year US treasuries(7.5%) : lower growth hedge
iv) Global equities (7.5%) : long term growth
(Or, I would consider including about 5% US REITs instead of increasing the portion of gold and commodity producer equities.)


I would deeply appreciate everybody's advices and ideas. Have a nice week!
AlohaJoe
Posts: 5980
Joined: Mon Nov 26, 2007 2:00 pm
Location: Saigon, Vietnam

Re: A viable replacement for US TIPS in a risk parity portfolio?(South Korea)

Post by AlohaJoe »

As a South Korean you wouldn't want to buy TIPS, those are really only for people living in America.

You should buy KTBi. Are those not available to retail investors?
Topic Author
justanordinary
Posts: 6
Joined: Mon May 17, 2021 3:40 am

Re: A viable replacement for US TIPS in a risk parity portfolio?(South Korea)

Post by justanordinary »

AlohaJoe wrote: Mon May 17, 2021 4:50 am As a South Korean you wouldn't want to buy TIPS, those are really only for people living in America.

You should buy KTBi. Are those not available to retail investors?
Thanks for the input. Unfortunately, both KTBi and TIPS are not available for South Korean individual pension accounts. So South Korean pension owners have to find replacement assets in order to hedge against inflation.
mrekvy491
Posts: 57
Joined: Wed Jul 29, 2020 10:43 am

Re: A viable replacement for US TIPS in a risk parity portfolio?(South Korea)

Post by mrekvy491 »

Since the availability of inflation-linked assets in the Korean pension fund market is the limiting factor here, it would be helpful if you could share the list of the assets available in your pension fund, or at least disclose what kind of options it provides roughly.

Does your pension fund have employer conrtibution and thus have limitations? I am not so sure what you mean by the pension fund. Cannot see why you cannot own TIPS when South Koreans can freely purchase US domuiciled ETFs directly through brokers outside the pension fund. Is it because of the tax breaks private pension savings instruments provide, up to 4 million KRW?

All I could say without the information would be that you should go for KTBi, global inflation linked bonds like IS3V in Europe outside the pension fund. In general investing just in TIPS is not optimal as what you need is the hedge to local inflation, although Koreans usually have good faith in the USD for historical reasons.

Sorry to ask questions rather than anwering, but I got curious as I am also from South Korea. You probably know more about investing there as I have been abroad for a while.
Last edited by mrekvy491 on Mon May 17, 2021 8:58 am, edited 3 times in total.
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galeno
Posts: 2312
Joined: Fri Dec 21, 2007 12:06 pm

Re: A viable replacement for US TIPS in a risk parity portfolio?(South Korea)

Post by galeno »

You don't need TIPS. KISS. If you like the idea of an "all weather port". Do this instead.

25% VWRD (world equities)
25% AGGG (world bonds)
25% CASH
25% SGLN (gold) a/o ICOM (commodities).

The OP is a repackaged Harry Browne portfolio. Just a lot more complicated. Old tires with fancy expensive rims.

The OLD HB port

25% SP500
25% LTT
25% Gold
25% Cash

It has an EXCELLENT backtest. From Jan 1978 - April 2021 CAGR = 8.34%. GSD = 7.14%. Sharpe = 0.55.

Compare to an OLD Boglehead port of 50%TSM / 50%TBM. CAGR = 8.55%. GSD = 7.74. Sharpe = 0.54.
KISS & STC.
Topic Author
justanordinary
Posts: 6
Joined: Mon May 17, 2021 3:40 am

Re: A viable replacement for US TIPS in a risk parity portfolio?(South Korea)

Post by justanordinary »

mrekvy491 wrote: Mon May 17, 2021 8:42 am Since the availability of inflation-linked assets in the Korean pension fund market is the limiting factor here, it would be helpful if you could share the list of the assets available in your pension fund, or at least disclose what kind of options it provides roughly.

Does your pension fund have employer conrtibution and thus have limitations? I am not so sure what you mean by the pension fund. Cannot see why you cannot own TIPS when South Koreans can freely purchase US domuiciled ETFs directly through brokers outside the pension fund. Is it because of the tax breaks private pension savings instruments provide, up to 4 million KRW?

All I could say without the information would be that you should go for KTBi, global inflation linked bonds like IS3V in Europe outside the pension fund. In general investing just in TIPS is not optimal as what you need is the hedge to local inflation, although Koreans usually have good faith in the USD for historical reasons.

Sorry to ask questions rather than anwering, but I got curious as I am also from South Korea. You probably know more about investing there as I have been abroad for a while.

"Is it because of the tax breaks private pension savings instruments provide, up to 4 million KRW?"
→ That is exactly right. I should have elaborated on the term 'pension fund,' as I was actually referring to the South Korea's private pension savings and IRP which offer tax breaks and deferrals.

I already set up a separate portfolio for US-domiciled ETFs based on a risk parity strategy, and was wondering if I could replicate the strategy with the aforementioned pension accounts.

As for the South Korean private pension savings and IRP, an investor could only purchase South Korea-domiciled ETFs and active funds and they do not offer a lot of choices.

Most notable unavailable assets would be:
- emerging market bonds
- emerging market REITs
- wholesale commodities index(such as DBC)
- inflation linked bonds.

IRP offers even narrower choices, as you cannot invest in US treasuries, gold, and separate commodities such as energy. 30% of the account should be invested in 'safer assets,' which virtually only includes South Korean treasuries and cash. (Now I really wonder how my fellow South Koreans invest in their IRP.)
Topic Author
justanordinary
Posts: 6
Joined: Mon May 17, 2021 3:40 am

Re: A viable replacement for US TIPS in a risk parity portfolio?(South Korea)

Post by justanordinary »

galeno wrote: Mon May 17, 2021 8:50 am You don't need TIPS. KISS. If you like the idea of an "all weather port". Do this instead.

25% VWRD (world equities)
25% AGGG (world bonds)
25% CASH
25% SGLN (gold) a/o ICOM (commodities).

The OP is a repackaged Harry Browne portfolio. Just a lot more complicated. Old tires with fancy expensive rims.

The OLD HB port

25% SP500
25% LTT
25% Gold
25% Cash

It has an EXCELLENT backtest. From Jan 1978 - April 2021 CAGR = 8.34%. GSD = 7.14%. Sharpe = 0.55.

Compare to an OLD Boglehead port of 50%TSM / 50%TBM. CAGR = 8.55%. GSD = 7.74. Sharpe = 0.54.

Thanks for the kind advice. I might just abandon the idea of risk parity altogether as it seems almost impossible to replicate the strategy with limited assets in the South Korean individual pension system.

Instead of trying to create proxies for unavailable asset classes, it might be wiser to adopt portfolios with accessible assets.

However, it is even more depressing that South Korean IRP(individual retirement pension) forbids you from investing in gold or commodities ETF. I really wonder how investors could hedge against inflation with these constraints.
User avatar
galeno
Posts: 2312
Joined: Fri Dec 21, 2007 12:06 pm

Re: A viable replacement for US TIPS in a risk parity portfolio?(South Korea)

Post by galeno »

Equities.

"I really wonder how investors could hedge against inflation with these constraints."
KISS & STC.
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