June 25, 2012: Conservative Allocation Fund Upgrading
06/25/2012 0 comments
Re-balance Cycle Reminder
Based on our monthly re-balance calendar, the next re-balance time will be on Monday, July 2, 2012. You can also find the re-balance calendar of 2012 on 'My Portfolios' page.
As a reminder to expert users: advanced portfolios are still re-balanced based on their original re-balance schedules and they are not the same as those used in Strategic and Tactical Asset Allocation (SAA and TAA) portfolios of a plan.
Also please note that we now list the next re-balance date on every portfolio page.
Conservative Allocation Fund Upgrading
In the previous newsletter, we discussed a portfolio that finds the best bond fund monthly or quarterly from a list of best total return bond funds. This portfolio has had good returns with acceptable risk for the past 10 plus years.
However, with trillions of new money printed to save troubled financial (banking) systems around the world, many people are concerned that the good time of fixed income (bond) markets is coming to an end. In fact, even without such a concern, to get the best returns with lowest risk, it turns out a portfolio still needs some stocks. This has some good mathematical intuition (you can skip the following paragraph if you don't want to mess with math):
Mathematically, to achieve optimial metric (such as the lowest standard deviation, a metric often used to represent a portfolio risk), the best outcome would be to have equal weights among the objects (such as a stock fund and a bond fund) for this metric (i.e. standard deviation). In general, a total bond index fund (such as Vanguard total bond index fund VBMFX) has about 1/5 standard deviation of a total stock index fund (such as S&P 500 fund VFINX or SPY). So to have equal standard deviation for both stocks and bonds, the best allocation would be 80% bonds and 20% stocks if the bond fund is as 25% volatile as the stock fund. Other bond funds have higher standard deviation such as 30% of S&P 500 (for an investment grade corporate bond fund).
This is best illustrated by the following chart from the article Long Term Treasuries Better Hedge For Stock Investments Than Corporate Or Muni Bonds
chart from Sober Look. x-axis represents the % of stocks in a portfolio. y-axis represents the volatility of the portfolio.
Conservative and very conservative allocation funds have limited stock allocations: in general, we view a fund with up to 40% stock allocation as conservative and up to 20% as very conservative. From the above discussion, one can see that these funds actually are much easier to manage and more predictable. They render themselves much better to a fund rotation process.
We have constructed portfolios P No Load Conservative Mutual Funds Upgrading Quarterly using a list of well chosen conservative funds based on their reputation and our knowledge on managers' conservative risk management skills.
- Berwyn Income BERIX
- Vanguard Wellesley Incom VWINX
- Permanent Portfolio PRPFX
- American Century One Choice Very Conservative AONIX
- Manning & Napier Pro-Blend Conservative Terms EXDAX
- Janus Conservtive Allocation JSPCX
- T.Rowe Price Personal Strat Income PRSIX
- Fidelity Strategic Real Return FSRRX
- James Balanced Golden Rainbow GLRBX
- Hussman Strategic Total Return HSTRX
In addition to the above conservative funds, the candidate funds also include several total return bond funds so that in a severe market distress, these funds can be used instead:
- PIMCO Total Return Bond Fund PTTRX
- Loomis Sayles Total Return Bond Fund LSBDX
- Doubleline Total Return Bond Fund DLTNX
- Metropolitan West Total Return Bond Fund MWTRX
At the end of every quarter, the portfolio selects 3 funds with the best momentum scores as the next quarter investments. See P No Load Conservative Mutual Funds Upgrading Monthly for the monthly rebalance portfolio.
We plan to update the candidate funds in the future as we see fit. Any input on the candidate fund selection is welcome.
This portfolio is now available on Advanced Users page. Any expert or pro user can follow or customize it.
The following shows the back tested performance.
Portfolio Performance Comparison
| Portfolio/Fund Name | 1 Week Return* | YTD Return** | 1Yr AR | 1Yr Sharpe | 3Yr AR | 3Yr Sharpe | 5Yr AR | 5Yr Sharpe | Since 2001 AR |
|---|---|---|---|---|---|---|---|---|---|
| P No Load Conservative Mutual Funds Upgrading Monthly | -0.1% | 5.0% | 7.5% | 218.0% | 9.8% | 304.1% | 8.2% | 168.2% | 7.0% |
| P No Load Conservative Mutual Funds Upgrading Quarterly | -0.6% | 1.4% | -1.4% | -27.1% | 8.4% | 162.2% | 7.9% | 123.2% | 8.6% |
| VBINX | -1.4% | 4.2% | 5.6% | 41.4% | 12.1% | 104.0% | 3.1% | 15.7% | 4.4% |
*: NOT annualized
**YTD: Year to Date
Furthermore, the monthly, quarterly portfolios have 4.2% and 5.5% standard deviation respectively, compared with 12.2% of VBINX. Their standard deviation is comparable with Vanguard total bond index VBMFX which is 4.3% in the same period. The annualized return of VBMFX is 5.6% in the same period.
The above portfolios again demonstrate our belief that to achieve reasonable returns, one does not need to make excessive risky investments.
Portfolio Reviews
We compare tactical portfolios for brokerage commission free ETF plans:
Portfolio Performance Comparison (as of 6/25/2012)
| Portfolio/Fund Name | 1 Week Return* | YTD Return** | 1Yr AR | 1Yr Sharpe | 3Yr AR | 3Yr Sharpe | 5Yr AR | 5Yr Sharpe |
|---|---|---|---|---|---|---|---|---|
| Vanguard ETFs Tactical Asset Allocation Moderate | -0.7% | 4.5% | 4.4% | 36.3% | 11.6% | 106.9% | 7.9% | 55.3% |
| Etrade All Star ETFs Tactical Asset Allocation Moderate | -0.8% | 2.9% | 5.8% | 54.4% | 13.8% | 117.4% | 11.4% | 86.9% |
| Fidelity Commission Free ETFs Tactical Asset Allocation Moderate | -0.6% | 3.7% | 4.4% | 41.1% | 10.3% | 99.0% | 6.6% | 50.3% |
| TD Ameritrade Commission Free ETFs Tactical Asset Allocation Moderate | -0.8% | 2.0% | 1.7% | 2.0% | 9.2% | 86.3% | 5.3% | 34.1% |
| Schwab Commission Free ETFs Tactical Asset Allocation Moderate | -0.5% | 3.5% | 7.5% | 91.3% |
Latest Brokerage Specific ETF Tactical Portfolio Performance Comparison >>
Market Overview
The new week began with another weakness in stocks. US REITs (VNQ) is the only risk asset that has been ranked above the total bond index consistently for most of the time this year. After today's close, even VNQ has dropped out of the top 3 positions. US stocks VTI now has negative trend score, lower than that of BND, the bond index. See 360° Market Overview for more details.
We again note that smart money allocation managers are still very steady on their risk asset allocations, as of last Friday. See Smart Allocation Fund Managers Are Still Steady In Stock Allocations.
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