Perspectives from a Composer Power User: Pietros Maneos

One of the best parts of my job is talking to Composer’s users and particularly those who are excited about the power of systematic investing. A few weeks ago, I spoke with Kris Abdelmessih for his guest blog, and this week, I’m lucky enough to chat with Pietros Maneos.¹

Pietros is larger than life. His day job, real estate investing and development, spans picturesque North Carolina vineyards and affordable housing. He is also the author of several poetry collections and essays, as well as a novella. He is a keen investor who reads voraciously to keep up with markets. On our Zoom call, Bloomberg News played on the TV in the background, flashing updates about the Russia-Ukraine crisis and the impact on commodities.

Pietros is not one to hide behind a veil of secrecy or be coy about his investments, either. He publishes his investment results publicly on his website and talks through recent trends on his YouTube channel.

I think his perspective on the platform is insightful because, as an early beta user, he’s been using Composer longer than almost anyone. It’s helpful to view the world through the eyes of a power user, and after running over 1,300 backtests, Pietros definitely fits that bill. 

One of the questions I often get from folks is how to use Composer. They may understand the basics of portfolio construction and may even be interested in systematic investing, but the jump to investing or building their own strategy seems a bridge too far. I hope sharing the perspective of an incredibly active Composer user offers some insight on how to get started.

Before we jump in, I need to let you know that Pietros is an advisor to Composer and has a financial interest in the company through equity options. The following are my takeaways from our conversation. 

Syncretic 

Pietros describes his investment style as syncretic. Don’t worry. I had to look it up too. It means characterized or brought about by a combination of different forms of belief or practice. I like that perspective a lot and it mirrors Composer’s philosophy.

If you go to Composer’s Discover page you find portfolios inspired by Dalio, Buffett, and Swensen. There are also portfolios inspired by Meb Faber, Fidelity, and the internet sensation, Hedgefundie. 

In my personal view, no single person is “right” when it comes to building a portfolio. Investing in part is about lived experiences and personal taste. In that way, investing is like cooking; there are infinite ways to combine ingredients. Chefs from different regions and at different price points create amazing food. Although, if I had to pick one cuisine for the rest of my life, I think it would be Mexican. Not sure what that means in terms of investing, but I figured you might want to know. The good thing is that I don’t have to choose. I can eat different cuisines just like I can invest in a variety of strategies.

And, combining different strategies is the way the hedge fund industry is headed. Hedge fund firms are pooling different managers and strategies under one roof to give clients multi-strategy options (and likely to diversify their own firm risk). To quote Bloomberg: 

“Investors are plowing money into funds that don’t rely on the next macro genius or star stockpicker, but instead offer an army of traders who invest in an array of strategies”.

Composer software does the same! Momentum, tactical asset allocation, paired trades, risk parity, technical symphonies can be combined to create a portfolio of hedge fund-like strategies. [1]   

A Tale of Two Symphonies

During our conversation, Pietros walked me through two of his symphonies: Permanent Store of Wealth and Daily Harvest 3X Leveraged. I particularly enjoyed the variety between the two. 

Let’s start with Permanent Store of Wealth. The idea behind this symphony, and I’m paraphrasing Pietros, is, “the advice I’d give a friend who just won the lottery”. The inspiration behind the symphony is powerful. For this friend, the strategy needs to be simple to understand, easy to implement, and enduring. It’s similar to Ray Dalio’s inspiration for the All Weather portfolio. 

Using 4 ETFs, the Permanent Store of Wealth invests in a static allocation of 70% equities (VOO), 10% bonds (BND), 10% real estate (VNQ), and 10% commodities (DBC). 70, 10, 10, 10. Simple, easy, enduring. Set the rebalance frequency to once a year and that friend of yours has a tidy portfolio that will see them through the many ups and downs of the market.

The second symphony we discussed was completely different: Daily Harvest 3X Leveraged. As we discussed in last week’s backtesting blog, there is a tradeoff between trading frequency and costs. So before embarking on a daily rebalanced leveraged ETF symphony, carefully consider the costs and risks. 

The inspiration for this symphony was a post on SeekingAlpha that attempted to harvest daily gains in a leveraged ETF by rebalancing the portfolio daily. For Pietros that means 50% of the portfolio is invested in UPRO and 50% invested in bonds (BND). One thing that struck me about this strategy is that it mirrors the rebalance frequency of UPRO which invests in daily 3X futures contracts. I’d be interested to dig into the impact of daily rebalancing on volatility decay. Alas, for another time!

The strategy also touched on a recent conversation in Composer’s own #investment-strategy slack channel about Shannon’s Demon. Which, I have to say is one of the coolest names for a statistical property. Developed by MIT mathematician Claude Shannon, the concept shows it is possible to combine zero expected return assets together with systematic rebalancing rules to generate positive returns. It’s a fascinating concept and one that I hope to explore in a later blog. If you are interested in learning more, check out this explanation. 

In Pietros’ example, UPRO and BND have positive expected returns but the fundamentals are similar to Shannon’s Demon. He is combining a risky asset (UPRO) and a less risky asset (BND) that have a low expected correlation. When UPRO goes up, the symphony rebalances those gains into BND and when UPRO goes down, the symphony reallocates assets from BND into UPRO.

My takeaway from Pietros is that inspiration for symphonies can come from anywhere. It could come from an article on an investing website or mathematical property that you just learned about. It could also come from a conversation with a friend or a question from a parent on their portfolio. Embrace serendipity.      

Build through iteration

A theme in my blog posts has been iteration. We talked about it last week and I iterated through some portfolio variations during the Risk Parity series. Let me expand on that point by using an example from Pietros. 

As we talked about his portfolio–he’s running well over 50 symphonies–he mentioned how he’s always tweaking symphonies and testing new ideas. For his Permanent Store of Wealth symphony he shared two thoughts that led to iterations that he tested. 

INTERNATIONAL DIVERSIFICATION 

The original symphony is concentrated in +90% US-domiciled assets. And while Warren Buffet expounded on how great it is to be invested in the US during his most recent shareholder letter, research suggests that international diversification can play an important role in a portfolio. 

To test adding international diversification, Pietros kept the macro asset allocations the same (70, 10, 10, 10) and added two new ETFs. He swapped VTI for VOO and added VXUS to capture the entire world of investable stocks. On the bond side, he added BNDX to capture international bonds.

COMMODITY EXPOSURE

Invesco’s DBC offers diversified exposure to a range of commodities, including oil, gold, soybeans, aluminum, and others. However, over 50% of the portfolio is invested in futures tied to oil prices. What if you wanted a more targeted exposure? Or perhaps you have exposure to oil elsewhere in your portfolio and you don’t want to double up. Pietros tested a more targeted commodities approach where he replaced DBC with GLD and SLV. He went from a diversified (oil heavy) commodity strategy to targeted precious metals allocation.

COMPOSER TAKE

As Pietros described his symphony, I thought of the assets in two buckets: growth and volatility management. The majority of the portfolio (70%) is in equities focused on long-term growth. That makes sense given the long time horizon (permanent store!). The other part of the portfolio offers diversification through relatively less volatile and uncorrelated assets (e.g., bonds, real estate, commodities). Another iteration could be bucketing bonds, real estate, and commodities into a group and weighting them by inverse volatility. In that scenario, the symphony would actively reduce exposure to assets in this group as they became more volatile, potentially reducing overall portfolio volatility. Just a thought!

These are three examples of the thought process behind iterating on strategies. I feel a bit like a school teacher harping on a concept that will be on an upcoming test, BUT iterating and testing are what professional investors do. They use portfolio building blocks, fundamental investing concepts, statistics, and backtesting to develop portfolios. Through Composer, retail investors can now do the same.

Birdseye View

The last insight from my conversation with Pietros is a meta point about perspective. Earlier, we discussed Pietros’ syncretic investment philosophy. He’s invested in many of the symphonies from the Discover page and created many more of his own. He’s built systematic strategies, like the Daily Harvest symphony, and static portfolios, like Permanent Store of Wealth. He has also built what he calls “laundry list” symphonies where he targets a specific valuation metric (e.g., Price to Book) or factor (e.g., dividend yield) and adds individual stocks that meet those criteria. 

The end result is that Pietros has a portfolio of symphonies trading on different signals with different return profiles. By monitoring his portfolio and evaluating what is working well in the current market environment and what isn’t working well, he is able to spot patterns. Through his Composer account, Pietros has created a data set that I think many institutional investors don't have access to, let alone most retail investors. He is able to monitor live trading of multiple distinct strategies in real time.

And for retail investors, I’d argue there is no way to do this without Composer. It would be impossible to keep track of all these trades and manually input them every day, week, month, or even quarter. The logistics would be a nightmare. You’d spend so much time managing the strategies that you would miss the insights sitting right in front of you.

For Everyone

Pietros has found a compelling and powerful way to use Composer that works for him. Whether you want off-the-shelf symphonies, have the natural inclination to tweak, or like to build your own, Composer has options and tools for you. That said, I think we can all learn something from Pietros. I definitely did. 

A huge note of gratitude to Pietros for sharing his time and insight with me.