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.

What Can We Learn From Bill Gross’ Departure From PIMCO?

Bill Gross’ departure from PIMCO has generated some big sensational reports from media. Apart from interesting entertaining stories for the event, we believe there is a thing or two one can learn from this. 

Bill Gross is widely known in financial investment world because  PTTRX (PIMCO Total Return Instl) fund he used to manage has become ubiquitous in virtually every insurance plan, 401k retirement plan, pension funds and financial advisors’ managed portfolios. The second largest mutual fund in the world (second to Vanguard Total Stock Market Index Fund), the total return bond fund has about $221 billion in assets under management.  In addition to the total return bond fund, Gross also managed several other PIMCO funds. Since founding PIMCO in 1971, Gross has garnered a nickname as ‘Bond King’ because of his solid fund performance record and his influential media appearance that sometimes can have substantial impact on markets. Many, including Bill Gross himself, have pointed out that his 40 plus year outstanding performance might have something to do with one of the longest bond bull markets during his career. 

In the following chart, one can see that since Gross started PIMCO in 1971, he experienced a mini bear market (rising bond yield till 1981) and then a secular declining rate market environment ever since. 

Based on PIMCO, the total return bond fund  has returned 7.91% annually since its inception on 5/11/1987 (as of 8/31/2014), a 1.06% advantage over Barclays total bond market index. 

Name   1 YR 3 YR 5 YR 10 YR Since Inception
PIMCO Total Return Fund At NAV 6.12% 4.29% 5.64% 6.11% 7.91%
PIMCO Total Return Fund At MOP _ _ _ _ _
Barclays U.S. Aggregate Index   5.66% 2.91% 4.48% 4.72% 6.85%
Lipper Core Plus Bond Funds   7.08% 4.52% 5.86% 5.11% 6.46%

Gross’ abrupt departure last Friday marked the end of a period of continuous under performance and redemption of the total return bond fund under his watch. So now, many investors, especially institutional ones, are wondering what to do next. We have seen this before: a star investor quit because of various reasons, his funds suffered. 

Human deficiency

As sensational and entertaining as this story goes, an important lesson from this is that any investor, however how brilliant he/she is, is subject to a fundamental limitation: human deficiency. Many life and work events can affect an individual’s performance. These include sickness, politics, big ego and attitudes, not to mention other unforeseen events. Relying on a single star manager or even a firm for your investments is dangerous. History has taught us numerous times: the great stock investor Peter Lynch and the great under performance of Fidelity Magellan after his departure is one thing, the gut wrenching loss of Legg Mason’s Value Trust fund managed by star manager Bill Miller is another. 

In addition, as we pointed out in June 16, 2014: There Are Always Lottery Winners, it is actually very hard to attribute a fund’s stellar performance to luck or the manager(s)’ exceptional ability. In Gross’ case, he has proven himself to be a effective investor in a career that spans mostly the long running bond bull market, will he continue to out perform in the coming years that might be a significantly different era. Is he proven to do so? To be objective and scientific, no one knows for sure. Admittedly, betting on Gross does have a higher odd than investing in some other unproven or mediocre funds, but what happens if the bet turns out to be disappointing?  Is there a systematic, non human emotion driven way to increase the fail safe odd?

Systematic investment strategy or plan

What investors need is a systematic plan or strategy in place that is not subject to their whims when such an event happens. In fact, even when such sensational events are absent, a plan should be in place to constantly monitor and weed out laggards or bad apples. 

In mutual fund or ETF investing, one way to do that is to take a middle of the road approach by just investing in a low cost index fund. An index fund invests in stocks or bonds using a simple, well defined mechanical approach. There is no human intervention and they are not subject to Gross’ departure type of problems. Repeatedly, this has been proved to be extremely effective in a long run. You might not hit a home run at any point of time but you are guaranteed to achieve a reasonable return markets can deliver. In fact, such a return often beats majority (60-80%) of actively managed funds in any given year. What is more important, you will not have a disaster year that can totally affect your retirement plan and financial well beings in your finite investment horizon (we are humans thus have a non-theoretical finite amount of time, unlike the often touted ‘stocks for a long term’ theory for that long long term in theory). Think about if you invested in Bill Miller’s LMVTX (Legg Mason Cap Mgmt Value) in 2007-2009, you would barely recoup back your investment loss. 

For bond or fixed income investments, however, as we pointed out in our previous newsletter September 22, 2014: Why Total Return Bond Funds?, it is still possible to invest in actively managed total return bond mutual funds to derive market beating returns. But on the other hand, just blindly investing in a fund like PIMCO Total Return Bond is not a good approach, as we learn from this event. What we need is a strategy like the one employed in Fixed Income Bond Fund Portfolios that is systematically examining fund performance regularly (monthly or quarterly) and invests accordingly. 

We would like to add that at the portfolio level, investors should adopt a systematic strategy such as  Strategic Asset Allocation (SAA) and Tactical Asset Allocation(TAA) (see March 4, 2013: Systematic Investing vs. Market Noises for example).

What happens to PIMCO funds

This brings up a question: should we ditch PIMCO Total Return Bond Fund or even PIMCO Income Fund that are in the candidate fund lists of our total return bond fund portfolios? The answer is no. 

First, as stated by PIMCO, PIMCO Total Return Bond fund is now managed by Mark Kiesel, Mihir Worah and Scott Mather. Kiesel was Morningstar’s manager of the year in 2012. Worah is an expert in real estate and Mather an expert in global bond allocation. As for PIMCO Income fund, it is still managed by Dan Ivascyn and Alfred Murata. Ivascyn was named as PIMCO CIO as the replacement of Bill Gross. 

Second, at this moment, none of our total return bond fund portfolios hold PIMCO total return bond fund since this fund has had an anemic performance anyway recently. Even though the fund’s performance might be affected due to a record redemption (forced sell), there is no harm to keep it in our candidate lists. 

Finally, we will start to monitor  JUCIX (Janus Unconstrained Bond I), a fund that is now managed by Bill Gross. At the moment, we have no plan to include this fund to our candidate lists. However, we will track and understand more on this fund (and other so called unconstrained bond funds). At any rate, if there is anything positive in Bill Gross’ departure, it is that we are excited to see he will be hard at work to prove himself again and that can prove to be a good thing for us investors to have another possible excellent bond fund choice. 

Portfolio Review

As Bill Gross is joining Janus to manage Janus unconstrained bond fund, we think it is interesting to look at how these funds have performed recently. 

Fund Performance Comparison (as of 9/29/2014):

Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR
JUCIX (Janus Unconstrained Bond I) -1.0%        
BSIIX (BlackRock Strategic Income Opps Instl) 3.3% 5.5% 5.7% 6.5%  
MSDIX (MainStay Flexible Bond Opportunities I) 2.5% 5.1% 7.8% 7.3% 6.2%
MWSIX (Metropolitan West Strategic Income I) 2.7% 4.2% 6.6% 9.3% 3.9%
BASIX (BlackRock Strategic Income Opps Inv A) 3.1% 5.2% 5.3% 6.2%  
IFUNX (Iron Strategic Income Institutional) 1.2% 3.2% 6.3% 5.9%  
DSTRX (Dreyfus Opportunistic Fixed Income I) 3.1% 5.2% 6.0% 6.2%  
GSZIX (Goldman Sachs Strategic Income Instl) 1.1% 3.9% 7.1%    
PPCRX (PIMCO Credit Absolute Return P) 2.5% 3.7% 4.6%    
JMBIX (JHancock2 Multi Sector Bond I) 2.2% 3.4% 5.3%    
LROIX (Legg Mason BW Absolute Return Opp I) 4.4% 5.5% 6.6%    

See detailed year by year performance >>

Although currently, such unconstrained bond funds are becoming more popular, investors should be aware that these funds can be more volatile and unpredictable, compared with total return bond funds and other multi-sector bond funds that have more constraints in their sector allocations. Furthermore, these funds are much less proven: among them, only two have 10 year performance history and they are not really that impressive. 

Market Overview

We are now at a major trend turning juncture: at the moment, all risk assets other than US stocks and US REITs have negative trend scores. At the moment, we will sit tight and let market events unfold and respond accordingly.

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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