Re-balance Cycle Reminder All MyPlanIQ’s newsletters are archived here.

For regular SAA and TAA portfolios, the next re-balance will be on Monday, February 18, 2014. You can also find the re-balance calendar for 2013 on ‘Dashboard‘ page once you log in.

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.

Please note that we now list the next re-balance date on every portfolio page.

Alternative Investment Funds & Diversified Portfolios

With the stock markets being in turmoil recently, it is a good time to reveal diversified portfolios and some alternative investment funds. 

It is a bit confusing to label an investment being alternative. In a traditional setting, anything that does not invest in stocks and bonds in a simple ‘long’ fashion (as opposed to ‘short’) is labeled as ‘alternative’. These might include REITs, commodities (gold, silver and other commodities) and any other long/short strategy based funds or portfolios. 

Let’s first review several diversified, ‘unconventional’ portfolios first. 

Permanent and risk parity portfolios are back

Many readers might be familiar with permanent and risk parity portfolios. We have written several reviews before: 

These portfolios had a miserable year in 2013. But now they are back: 

 Portfolio Performance Comparison (as of 2/3/2014):

Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 5Yr Sharpe 10Yr AR 10Yr Sharpe
Bridgewater All Weather Portfolio Risk Parity 0.9% -3.1% 4.4% 7.5% 2.03 5.8% 1.17
Permanent Income Portfolio 1.6% 1.1% 7.0% 9.6% 1.63 6.2% 0.85
Bridgewater All Weather Portfolio 0.2% -2.2% 5.2% 9.4% 1.75 7.1% 1.06
Harry Browne Permanent Portfolio 1.5% -2.7% 4.7% 7.8% 1.12 6.9% 0.82
VFINX (Vanguard 500 Index Investor) -3.5% 21.3% 13.8% 19.1% 1 6.7% 0.28
PRPFX (Permanent Portfolio) -0.6% -5.0% 2.1% 9.5% 0.87 7.9% 0.62
VBINX (Vanguard Balance Index) -2.5% 11.0% 9.3% 13.6% 1.21 6.4% 0.44

**YTD: Year to Date

See year by year comparison >>

Notice again that even though these portfolios achieved comparable returns in 10 year time frame as S&P 500 or Vanguard balance fund, they did this with much less risk. We encourage readers to click on the year by year comparison link to examine more metrics for these portfolios and funds. 

These portfolios withstood the recent selloff much better than conventional portfolios. This is because bonds and gold have done well, as the following table shows: 

Major Asset Class Performance (as of 2/3/2014): 

Ticker/Portfolio Name YTD
1Yr AR
VTI (Vanguard Total Stock Market ETF) -3.2% 22.6%
DBC (PowerShares DB Commodity Index Tracking) -3.0% -12.6%
VEA (Vanguard MSCI EAFE ETF) -5.2% 11.2%
GLD (SPDR Gold Shares) 3.4% -25.5%
VWO (Vanguard MSCI Emerging Markets ETF) -8.4% -13.0%
BND (Vanguard Total Bond Market ETF) 1.5% 0.1%
VNQ (Vanguard REIT Index ETF) 4.3% 2.8%
TLT (iShares Barclays 20+ Year Treas Bond) 7.3% -4.0%

We also make observations that in addition to the rapid rise of long term Treasury bonds (represented by TLT), both gold (GLD) and US REITs (VNQ) have had positive return year to date. 

Although a month is a too short to conclude anything, we nevertheless should understand that the well designed portfolios based on some sound reasoning should be given a consideration in one’s portfolios as they will behave much better during a storm. 

Alternative investment funds

Alternative investments include merge and acquisition arbitrage, long/short and managed futures. These funds were popular one time after the financial crisis in 2008-2009. But as stock markets and other risk assets roaring ahead, they were gradually forgotten by many. 

Granted, many of these funds are expensive (quite some are only available as load funds which we don’t recommend). But with some efforts and careful monitoring, one can still find some reasonable funds. 

Arbitrage funds:

An arbitrage fund invests in stocks of both parties in an M&A activity, usually long and short. The most representative arbitrage fund is Merger fund (MERFX) and Gabelli ABC AAA (GABCX). The other to consider is the AQR’s Diversified Arbitrage fund (ADNAX):

Fund  Performance Comparison (2/3/2014)

Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 5Yr Sharpe 10Yr AR 10Yr Sharpe
ADANX (AQR Diversified Arbitrage N) 0.8% 2.0% 1.6% 3.7% 1.68    
MERFX (Merger) -0.6% 3.7% 2.4% 4.0% 1.18 3.4% 0.43
GABCX (Gabelli ABC AAA) -0.3% 4.0% 3.7% 4.8% 1.4 4.6% 0.84

Year by year comparison >> 

In general, an arbitrage based fund can deliver 1-2% extra return above cash. However, these funds are not without risk: for example, Merger (MERFX) had over 12% maximum drawdown and lost -2.7% in 2008. Nevertheless, allocating some small portion in one’s portfolios (in place of short term investments) can have a diversification effect. 

Equity long/short funds

These funds long some stocks and short other stocks or stock indices. Some of the most representative funds in this category including Hussman Strategic Growth (HSGFX) and Marketfield: 

Performance Comparison (as of 2/3/2014): 

Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 5Yr Sharpe 10Yr AR 10Yr Sharpe
HSGFX (Hussman Strategic Growth) 1.9% -2.7% -4.9% -3.0% -0.46 -0.9% -0.24
DIAMX (Diamond Hill Long-Short A) -1.5% 14.4% 9.9% 10.9% 0.84 7.7% 0.45
MFLDX (Marketfield) -1.0% 10.4% 10.2% 16.3% 1.24    

Notice that Marketfield has an N class share fund MFNDX. Diamond Hill Long-Short A can be load waived in certain brokerage or advisor supported accounts. 

Hussman’s fund has suffered tremendously for the past 5 years. One should note that the fund still has 3.6% annualized return since its inception in 11/2000. 

All of these funds can be used as part of equity (risk assets) investments. The problem of investing in these funds is the consistency: many of these funds can under perform for a long period of time, as evident in Hussman fund. To invest in these funds, one should devise a filtering scheme to rotate out of under performers. 

Managed Futures

We are happy to see that Morningstar recently added Alternative Investment category in their annual Manager of The Year awards. The winner of 2013 in this category is AQR Managed Futures: 

Portfolio Performance Comparison

Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe
P S and P Diversified Trend Indicators -2.6% 0.4% -1.3% -0.26 -0.3% -0.06
AMFQX (361 Managed Futures Strategy A) 2.9% 5.0%        
AQMNX (AQR Managed Futures Strategy N) -3.1% 2.3% 1.1% 0.12    

We include our S&P Diversified Trend Indicators portfolio as this can serve as a baseline to evaluate these funds. These funds or portfolios had a very positive impact on portfolios during the 2008-2009 financial crisis: in a severe crisis with panic selling, commodities usually exhibit strong trend. These strategies thus excel during those times. For example, P S and P Diversified Trend Indicators had 20.7% return in 2008. 

Unfortunately, many of these funds have short history. Quite some have very bad performance and expensive. However, we believe it is worthwhile to include some of these investments as part of substitutes for commodities (and/or risk asset classes).  Similar to long short equity funds, these funds require careful monitoring and filtering to weed out under performer. 

To summarize, in our view, educating us in this new category of investments is important. For a diversified portfolio, it can be beneficial to consider using some of these funds. 

Portfolio Review

Swensen’s portfolio is one of few lazy portfolios that use Long Term Treasury bonds as hedge. It proves again this is a good choice in a panic selling: 

Portfolio Performance Comparison (as of 2/3/2014): 

Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 5Yr Sharpe 10Yr AR 10Yr Sharpe
David Swensen Six ETF Asset Individual Investor Plan Strategic Asset Allocation – Optimal Moderate -2.5% 2.9% 6.2% 12.5% 0.98 5.6% 0.35
David Swensen Six ETF Asset Individual Investor Plan Strategic Asset Allocation – Equal Weight Moderate -3.0% 0.1% 5.3% 12.4% 0.92 6.6% 0.39
P David Swensen Yale Individual Investor Portfolio Annual Rebalancing -0.4% 5.7% 8.2% 15.0% 1.03 7.9% 0.46
David Swensen Six ETF Asset Individual Investor Plan Tactical Asset Allocation Moderate -4.2% 5.2% 8.6% 9.7% 0.96 9.0% 0.76
VFINX (Vanguard 500 Index Investor) -5.7% 18.5% 13.2% 18.0% 1 6.5% 0.28
VBINX (Vanguard Balanced Index Inv) -2.5% 11.0% 9.3% 13.6% 1.21 6.4% 0.44

**YTD: Year to Date

The lazy portfolio also benefits from the recent relative strength in REITs. 

Market Overview

At the time of this writing, stocks continued their big liquidation trend.  In the meantime, as shown in the table above, we see a flight to safety action: investors are now flocking back to bonds, practically any bond segment, other than emerging market bonds and international bonds. We also observe that high yield bonds are still in a reasonably stable up trend, indicating there is still some room to go before this develops into a full blown correction or down trend. 

Again, we ask our subscribers to lessen your portfolio risk levels to the one you are comfortable with, as what was discussed in the previous newsletter

For more detailed asset trend scores, please refer to 360° Market Overview.

We would like to remind our readers that markets are more precarious now than other times in the last 5 years. It is a good time and imperative to adjust to a risk level you are comfortable with right now.  However, recognizing our deficiency to predict the markets, we will stay on course. 

We again copy our position statements (from previous newsletters): 

Our position has not changed: We still maintain our cautious attitude to the recent stock market strength. Again, we have not seen any meaningful or substantial structural change in the U.S., European and emerging market economies. However, we will let markets sort this out and will try to take advantage over its irrational behavior if it is possible. 

We again would like to stress for any new investor and new money, the best way to step into this kind of markets is through dollar cost average (DCA), i.e. invest and/or follow a model portfolio in several phases (such as 2 or 3 months) instead of the whole sum at one shot. 

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