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, October 20, 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.

Why Total Return Bond Funds

As promised, in this newsletter, we will discuss total return bond funds in more details. For people who need more background on these portfolios (Fixed Income Bond Fund Portfolios), please refer to 

Briefly, these portfolios work as follows: they select one or two top performing funds from a list of candidate funds monthly (without violating the minimum holding period requirement for a brokerage). The candidate fund list consists of a dozen or so total return (multi-sector) bond funds. These candidate funds should be managed by managers who have won at least once the Morningstar’s Fixed Income Manager of The Year award. 

Three Layers of Selection

The reason we feel comfortable with such an approach is that in essence, these portfolios go through three layers of selection in investing in bonds (fixed income). 

First layer: go anywhere total return oriented. A  total return bond fund takes a total return approach without being pigeon holed in some specific sectors. This opens up opportunities for bond mangers to go anywhere to achieve a total return. Such funds can invest in government bonds (Treasury or Inflation Protected TIPS), corporate investment grade or high yield bonds, foreign (both emerging market and developed market) bonds. They are also not limited to a specific duration to avoid interest rate risk: usually they are more intermediate terms in terms of duration or maturities, but when a situation calls for, they can invest most in short term bonds, for example. 

Second layer: managers of the year award. However, we don’t just feed portfolio/fund selection algorithm with any arbitrary total return bond fund. A fund can be a candidate fund in these portfolios only when the fund is managed by managers who have won Morningstar’s manager of the year award in fixed income area. It is our opinion that unlike equity (stock) fund managers, fixed income bond fund managers tend to be more consistent and less fickle when it comes to their funds’ performance. Managers such as PIMCO’s Bill Gross, Lomis Sayles’ Dan Fuss, Doubleline’s Jeff Gundlach have been able to keep their consistent outstanding performance records much longer than many equity star managers. 

We also maintain the flexibility to remove some funds from the candidate list when we see fit. 

The following are the total return bond funds included in these portfolios (see P Bond Funds Momentum Based on Upgrading Fixed Income Managers of the Year`s Funds Monthly or those on Fixed Income Bond Fund Portfolios page. Notice that not all of the following bond funds are available in any given brokerage. VBMFX (Vanguard Total Bond Market Index Inv) is used as a comparison benchmark. 

(as of 9/22/2014):

Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR 10Yr Sharpe
PTTDX (PIMCO Total Return D) 3.0% 3.6% 3.7% 4.9% 5.7% 1.12
TGLMX (TCW Total Return Bond I) 4.1% 6.1% 5.8% 7.0% 6.9% 1.6
WATFX (Western Asset Core Bond I) 5.4% 6.6% 3.8% 6.7% 4.8% 0.77
MWTRX (Metropolitan West Total Return Bond M) 3.9% 5.2% 5.3% 7.0% 6.3% 1.34
LSBDX (Loomis Sayles Bond Instl) 6.3% 8.6% 8.8% 9.9% 8.1% 1.32
DODIX (Dodge & Cox Income) 4.6% 6.1% 4.6% 5.5% 5.3% 1.4
FPNIX (FPA New Income) 1.2% 1.6% 1.4% 1.8% 3.0% 1.55
PBDDX (PIMCO Investment Grade Corp Bd D) 6.7% 8.0% 6.7% 7.7%    
PONDX (PIMCO Income D) 7.2% 9.6% 11.3% 12.7%    
VBMFX (Vanguard Total Bond Market Index Inv) 3.6% 4.1% 2.1% 4.0% 4.5% 0.87

See more detailed comparison >>

Other than FPNIX (FPA New Income), all other funds have consistently out performed Vanguard total return bond fund VBMFX for the past 3, 5 and 10 years. The performance consistency is pretty uniform. It should be noted that FPA New Income has adopted a radical conservative approach as manager Robert Rodriguez (and now Thomas H. Atteberry) dislikes the decade long U.S. overall debt market structure and government’s stimulus driven loose monetary policy. 

Third layer: recent performance. Among the candidate funds, our tactical or momentum based strategy examines these funds monthly or quarterly based on their recent up to 1 year performance. It then selects one or two top performing funds. This approach allows our portfolios only stay in those funds that have done well, avoiding under performance experienced by a manager. For example, in 2008, these portfolios successfully avoided Loomis Sayles fund as it experienced a large loss due to its high yield bond holdings. Similarly, recently, the portfolios have avoided PIMCO total return bond fund’s pitfall, caused by Bill Gross’ ill bet on several occasions in Treasury bonds. 

Combining the above three thresholds, these portfolios have done well, delivering steady out performance. 

What Are They Holding?

Let’s analyze top holdings in some of the funds to get a sense how these funds operate. Let’s begin with PIMCO Income fund, the best performing fund year to date in the above table. 

The following shows their sector allocation (see PIMCO’s website): 

Sector Diversification (%)

as of 08/31/14
US Government-Related1 -19
Mortgage 40
US Credit2 16
Non-U.S. Developed 24
Emerging Markets 37
Other3 1
Money Market and Net Cash Equivalents4 1

One can see that this fund invests over 60% in foreign bond funds. In fact, its performance is mainly attributed to the strong performance of  emerging markets, non-US developed markets and mortgage bonds. The shrewd little leverage also helps the performance. 

Next, let’s look at Loomis Sayles bond fund (LSBRX) (as of 8/31/2014 see Loomis): 

Sector Distribution  
Non-US Dollar (ex CAD) 19.4%
High Yield Credit 18.5%
US Treasury 16.7%
Investment Grade Credit 15.0%
Canadian Dollar 11.1%
Convertibles 8.4%
Preferred/Equity 5.9%
Bank Loans 1.8%
MUNI 0.8%
Emerging Markets Debt 0.1%
Cash & Equivalents 2.2

It has over 33% in foreign bonds: 

Country Distribution  
United States 67.3%
Canada 11.6%
Mexico 3.4%
United Kingdom 2.5%
Norway 2.4%
Australia 1.9%
France 1.7%
Supranational 1.5%
Netherlands 1.0%
Other 6.6%

It’s been well known that manager Dan Fuss and his associates are very good at using high yield bonds and convertible to enhance returns. Currently, for example, it holds about 33% in these ‘risky’ bonds: high yield, convertible and preferred. All of these have done well to help this year’s strong performance. 

Finally, let’s look at Doubleline Total Return Bond Fund (see Doubline website): 

As of 8/31/2014: 

Fund manager Gundlach has utilized mortgage backed securities (MBS) extensively to boost its fund’s performance, so much so that it generates controversial arguments between Doubleline and Morningstar. Nevertheless, its record has been exceptional. Currently, it holds over 72% in mortgage related securities. It holds 23.5% bonds that are below investment grade. 

The takeaway is that total return bond funds can invest in many high performing bond sectors, mainly in high yield/convertible, foreign bonds, long or short duration bonds, mortgage backed securities etc. Some of them might be even exotic. It is thus very crucial to install another level of filtering scheme to protect your portfolio from being stuck with some funds that happen to be in bad sectors at the bad times. 

Portfolio Review

It’s been a recurring theme this year that anything other than investing in US main stock index (S&P 500) has been miserable. This reflects too in our Strategic Asset Allocation portfolios: 

 (as of 9/22/2014): 

Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR 10Yr Sharpe
Six Core Asset ETFs Strategic Asset Allocation – Optimal Moderate 4.6% 7.0% 10.0% 7.8% 6.4% 0.41
MyPlanIQ Diversified Core Allocation ETF Plan Strategic Asset Allocation – Optimal Moderate 3.4% 5.9% 9.6% 8.3% 8.2% 0.58
Retirement Income ETFs Strategic Asset Allocation – Optimal Moderate 3.4% 5.8% 9.6% 8.7% 7.3% 0.52
DIA (SPDR Dow Jones Industrial Average) 5.9% 12.9% 17.6% 14.6% 7.9% 0.36
SPY (SPDR S&P 500) 9.3% 18.9% 20.8% 15.6% 8.0% 0.35
EFA (iShares MSCI EAFE Index) 0.3% 5.6% 13.6% 6.7% 6.1% 0.21
EEM (iShares MSCI Emerging Markets Index) 4.8% 2.7% 5.4% 4.0% 10.1% 0.27
IWM (iShares Russell 2000 Index) -2.0% 6.8% 18.9% 14.3% 8.3% 0.29
IYR (iShares Dow Jones US Real Estate) 14.7% 10.6% 12.7% 13.9% 6.5% 0.16
DBC (PowerShares DB Commodity Index Tracking) -8.5% -9.6% -6.2% 0.9%    

Market Overview

We are increasingly concerned about the market divergence. In addition to the fact that over 40% stocks in both Nasdaq and Russell 2000 small stocks are in a bear market, we also see quite divergence among high yield bonds, emerging market stocks, European stocks and commodities. Virtually, almost all are in a dump other than US large and mid cap stocks. Market internals are not healthy at all. 

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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