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 2, 2015. You can also find the re-balance calendar for 2014 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.

Fixed Income Investing Review

We have discussed several times on how to utilize total return bond funds to construct a solid fixed income investment portfolio. We support model portfolios that are customized for several major brokerages. They are listed on Brokerage Investors or  Fixed Income Bond Fund Portfolios

In general, we believe that these mutual fund based portfolios are still better than those bond ETFs based portfolios, in terms of risk adjusted returns. We will discuss this a little bit more later. 

First, let’s review the candidate bond funds in these portfolios. As described, these candidate funds have to be managed by managers who have won at least once the coveted Morningstar fixed income manager of the year award. Furthermore, they should be no load and no transaction fee funds. These funds are

DLTNX DoubleLine Total Return Bond N
TGMNX TCW Total Return Bond N
MWTRX Metropolitan West Total Return Bond M
LSBRX Loomis Sayles Bond Retail
PBDDX PIMCO Investment Grade Corp Bd D
PTTDX PIMCO Total Return D
WABRX Western Asset Core Bond R

These are investor class funds that have a low minimum requirement. Investors who have larger accounts can consider other classes (institutional) that have much lower expense ratios. 

Morningstar recently announced its 2015 fixed income manager award nominees. Among them, Western Asset Core Bond fund managers are already in our list. Legg Mason Brandywine Global Bond fund GOBAX is a world bond fund, which does not fit into our category. Two other bond fund managers are Vanguard GNMA and Fidelity GNMA managers. We believe GNMA funds have some merits as they usually fit into a more stable and intermediate term category, which is the requirement for our candidate funds. 

Portfolio Performance Comparison (as of 1/16/2015): 

Ticker/Portfolio Name 2014 Return 1Yr AR 3Yr AR 5Yr AR 10Yr AR 10Yr Sharpe
Schwab Total Return Bond 5.8% 5.7% 5.8% 6.5% 6.9% 1.33
Fidelity Total Return Bond 4.9% 5.7% 5.4% 6.2% 6.4% 1.49
TDAmeritrade Total Return Bond 6.1% 4.9% 7.1% 6.0% 7.0% 1.38
FolioInvesting Total Return Bond 5.8% 5.7% 5.8% 6.5% 6.9% 1.33
Etrade Total Return Bond 5.8% 5.7% 5.8% 6.4% 7.0% 1.35
PTTRX (PIMCO Total Return Instl) 4.7% 5.6% 4.4% 5.1% 6.1% 1.24
PONDX (PIMCO Income D) 6.9% 5.8% 10.4% 11.0%    
LSBRX (Loomis Sayles Bond Retail) 4.5% 3.6% 7.7% 7.6% 7.1% 1.17
DLTNX (DoubleLine Total Return Bond N) 6.5% 6.3% 5.1%      
MWTRX (Metropolitan West Total Return Bond M) 5.8% 6.2% 5.9% 6.3% 6.4% 1.37
VBMFX (Vanguard Total Bond Market Index Inv) 5.8% 6.3% 2.8% 4.3% 4.7% 0.93

Year by year detailed comparison >>

In 2014, our portfolios matched Total Bond Market Index (VBMFX) and sit in the middle of the packs among candidate funds. The Fidelity portfolio had a glitch in the beginning of the year in 2014 that affected the performance. In general, the performance meets our expectation. The key success factor of our portfolios is to keep up with the returns in a good year while preserving capital (or reducing loss) in a bad year. 2014 performance was also affected by investing in Loomis Sayles bond fund  (LSBRX) which had a big swing due to its heavy exposure in high yield bonds which had a large loss at the later of the year. Loomis Sayles has a tradition to (smartly) invest in lower quality bonds to boost returns. However, this also caused it to have a bigger loss (and much higher volatility) in some periods such as  in 2008 than other funds. Similarly, PIMCO income funds was able to have an overweight bet in nonagency bonds coming out of 2008-2009 financial crisis. It also invested in lower quality bank loans in recent years. Both strategies have been successful to help to boost its returns. However, as we stated in our previous letter January 5, 2015: When Forecast Fails, it is important to have a fail safe plan when a manager’s bet goes south and that is why we rely on our upgrade strategy to avoid such large loss. 

Fixed Income Outlook

The following are some of our educated guesses. As always, one should take a grain of salt for these discussions whenever we are talking about future prediction or forecast, regardless of the sources (including ours): 

  • The deflation pressure is still upon us, globally. Since the financial crisis, we have seen a world that either has taken more debt or at best, has reduced debts in some sectors (such as in housing or personal debt in the US) but has increased in other sectors (such as in corporate sectors). We are still in the debt supercycle and it will take a long time to deleverage as authorities around the world are not willing to take more drastic actions for fundamental structural reform. In such a deleveraging cycle, it exerts more pressure to reduce consumption, thus deflationary. Directly, this will affect long term bonds and even gold price. 
  • The US is still the cleanest dirty shirt: as euro zone (and European Central Bank ECB) and other countries are embarking on more quantitative easing, all countries are racing to the bottom to defend/devalue their currencies if that is possible. At this moment, it does seem that US is going to be the first one to break out of this easing cycle. However, remember, it is still a dirty shirt though. As US poses to raise short term rates this year, relatively, the US dollar will be still favored. This again can affect currencies and that will affect foreign bonds in terms of US dollars. 
  • Similarly, US Treasury debts are going to be in favor, not necessarily domestically, but more internationally. 
  • As markets are undergoing more volatile corrections, high yield bonds are becoming more attractive. Though no one can predict a bottom, but in general, good opportunities will arise when an asset is beaten down. 

The good news here is that, similar to our statement in the previous newsletter January 12, 2015: How Does Trend Following Tactical Asset Allocation Strategy Deliver Returns, there will be good opportunities (and risk) to derive returns in fixed income investments, even though in general, their long term perspective is not that optimistic. To achieve this, we will need to rely on both actively managed total return bond funds (or multi-sector bond funds) and tactical rotation among a list of funds with excellent long term records. 

Unconstrained Bond Funds

We first looked at some of these funds in September 29, 2014: What Can We Learn From Bill Gross’ Departure From PIMCO? These funds were popular as investors were/are increasingly nervous on the upcoming (for sure) rate rise. They fret about how to obtain better returns in such a low yield environment. It was made more popular when Bill Gross joined Janus Capital to manage its unconstrained bond fund. 

The main problem for these unconstrained funds is that they are unconstrained and can go anywhere. They can even short Treasury bonds. As some of our long time users might have known, we are no fan on using short strategies or short funds. The reason is that they tend to increase risk dramatically when the bets are wrong. Using short strategies for hedging purpose (thus maintaining a net long position) is different story. 

The following shows how some popular unconstrained bond funds have performed: 

Portfolio Performance Comparison (as of 1/16/2015): 

Ticker/Portfolio Name 2014 Return 1Yr AR 3Yr AR 5Yr AR 10Yr AR 10Yr Sharpe
JUCAX (Janus Unconstrained Bond A) -1.5%          
PFIUX (PIMCO Unconstrained Bond Inst) 2.8% 2.2% 2.9% 2.8%    
GSZAX (Goldman Sachs Strategic Income A) -0.8% -2.9% 5.1%      
BASIX (BlackRock Strategic Income Opps Inv A) 3.6% 3.6% 5.2% 5.1%    
JSOAX (JPMorgan Strategic Income Opps A) -0.1% -0.5% 3.3% 2.8%    
MWSIX (Metropolitan West Strategic Income I) 2.9% 2.8% 6.5% 7.3% 3.7% 0.58
MASAX (MainStay Flexible Bond Opportunities A) 1.1% -0.2% 5.4% 5.5% 5.3% 1.14

Year to year detailed data >>

In general, these funds have a so so record so far. We will continue to monitor this space. 

Portfolio Review

As an interesting comparison, we look at a bond ETF based on momentum portfolio P Bond ETF Momentum Monthly. It uses momentum ranking among the following ETFs: JNK, LQD, TIP, MBB, TLT, SHY, IEI, BWX, CASH. 

Portfolio Performance Comparison

Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 5Yr Sharpe 10Yr AR
P Bond ETF Momentum Monthly 3.1% 11.6% 5.9% 7.7% 1.05  
Schwab Total Return Bond 0.9% 5.7% 5.8% 6.5% 1.65 6.9%
VBMFX (Vanguard Total Bond Market Index Inv) 1.3% 6.3% 2.8% 4.3% 1.2 4.7%

Its performance was boosted by big returns in 2014 and 2011, both are due to big rise of long term bonds. However, it is more volatile and thus has lower Sharpe ratio. This portfolio is not officially supported. Interested expert users can construct one using either Goldman Sachs Global Tactical strategy or Momentum Scoring strategy used in P Momentum Scoring Style ETFs and Treasuries

Market Overview

Stock markets continued to be weak. Last week, S&P 500 lost 1.3%. However, international and emerging market stocks went up as investors anticipated the ECB’s upcoming quantitative easing announcement. The Swiss Franc peg with Euro was abandoned by Swiss National Bank, which created a big shock in currency world. In addition to the continuous crude oil weakness, markets are becoming more and more volatile.  

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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