Using Morningstar's Top Bond Manager to Build a Low Stress Portfolio
11/19/2010 0 comments
Conventional wisdom is that risk based assets as the main engine of portfolio growth. While this remains true in the long run, recent history has caused us to question some of the concepts we thought sacrosanct.
We present here a very simple investment strategy -- pick the top five bond managers and own the top performing bond fund which you review on a monthly basis (or quarterly if you prefer).
Every year you review the list of top performers and you update your list of funds to maintain only the top performers in your list. We will call this Best of Bonds (BoB).
|
Bond Fund |
Ticker |
|
PIMCO Total Return |
|
|
TCW Total Return Bond |
|
|
Western Asset Core Bond |
|
|
Metropolitan West Total Return Bond |
|
|
Loomis Sayles Bond |
|
|
Dodge & Cox Income |
|
|
FPA New Income |
We built a portfolio of these funds and every month we scored the funds and selected the best fund.
We will then compare this with a Five asset class SIB (Simpler is Better) that has
index funds for five different asset classes and is an ideal benchmarking vehicle.
Portfolio Performance Comparison
| Portfolio Name | 1Yr AR | 1Yr Sharpe | 3Yr AR | 3Yr Sharpe | 5Yr AR | 5Yr Sharpe |
|---|---|---|---|---|---|---|
| P Bond Funds Momentum Based on Upgrading Fixed Income Managers of the Year`s Funds Monthly | 9% | 194% | 12% | 199% | 11% | 165% |
| Five Core Asset Index Funds Tactical Asset Allocation Moderate | 8% | 58% | 7% | 57% | 12% | 98% |
| Five Core Asset Index Funds Strategic Asset Allocation Moderate | 13% | 100% | 2% | 9% | 7% | 34% |
So BoB delivers very reasonable returns over the period -- comparable with a five asset class portfolio using tactical asset allocation.
The benefit is going to be peace of mind -- or lack of volatility.
Comparison of Drawdown ratios between 5SIB TAA and BoB
This comparison of the drawdown ratios over the last decade between the SIB and BoB shows that BoB is going to be easier to live with.
We can also look at the BoB's transaction history
Compared to the Five SIB History
We can see from this that there has been less trading activity -- making it a lazier portfolio and easier to manage. Of course this is not guaranteed going forward.
Note that this is a simple strategy but it does not follow the classical diversification of risk based and fixed income assets.
In the next article we will look into the bond fund that is currently being held in this portfolio and compare it with the bond trends that track the movement of different bond styles.
labels:investment,
Symbols:PCY,JNK,TLH,IEF,LQD,CIU,TIP,WIP,TLT,MBB,BWX,BND,MUB,CMF,NYF,CSJ,SHY,SHV,
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