March 30, 2015: Brokerage Specific Core Mutual Fund Portfolios 2

Mar 31, 2015 | Asset-Allocation, Bonds, Economy, Feature, Gold, Headline, Income, Investments, IRA, Markets, Mutual-Funds, Newsletter, Retirement

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, April 13, 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.

Brokerage Specific Core Mutual Fund Portfolios 2

In this newsletter, we continue to discuss the brokerage specific core mutual fund portfolios, first mentioned in March 16, 2015: Brokerage Specific Core Mutual Fund Portfolios. As we stated in the newsletter, we are soliciting our users’ feedback on these portfolios. Up to now, we have received several comments  Brokerage Specific Core Mutual Funds Plans: Suggestions & Opinions  on our forum. Some users sent us emails on this topic. However, we would rather have an open vote/discussion/suggestion on the forum so that we can crowd source and work together to come up with a good solution. We understand many users have had trouble to post on our forum in the past. We have just fixed a bug related to the forum recently and would like to assure users that it is now more stable. 

Portfolios related to two brokerages, Schwab and Fidelity, were introduced in the previous newsletters. Users have requested us to support Etrade and Merrill Edge. Here are the two plans: Etrade Core Mutual Funds and Merrill Edge Core Mutual Funds. Both plans have 20 plus funds. They all cover the 6 core asset classes that we deem to be key in a diversified portfolio: US stocks, International stocks, Emerging market stocks, REITs, Commodities and bonds. 

First, the back tested performance: 

Strategic: 

Portfolio Performance Comparison (as of 3/30/2015):

Ticker/Portfolio Name YTD
Return**		 1Yr AR 3Yr AR 5Yr AR 10Yr AR 10Yr Sharpe
Etrade Core Mutual Funds Strategic Asset Allocation – Optimal Moderate 2.3% 7.5% 10.2% 10.0% 8.9% 0.63
Merrill Edge Core Mutual Funds Strategic Asset Allocation – Optimal Moderate 2.1% 5.8% 8.4% 9.6% 8.1% 0.57
VBINX (Vanguard Balanced Index Inv) 0.9% 9.6% 10.5% 10.5% 7.3% 0.53

Detailed year by year comparison >>

Both portfolios have outperformed VBINX for the past 10 years. Both have also under performed for the past 1, 3, 5 years. But the under performance is well understood as our portfolios are global portfolios whose investments in non-US assets have lagged the US stocks that are the only risk asset in VBINX (a 60% US stocks/40% bonds index fund). Year to date (YTD), the two portfolios have done better because of the recent strength in REITs and international stocks. 

Tactical: 

Portfolio Performance Comparison (as of 3/30/2015):

Ticker/Portfolio Name YTD
Return**		 1Yr AR 3Yr AR 5Yr AR 10Yr AR 10Yr Sharpe
Etrade Core Mutual Funds Tactical Asset Allocation Moderate 3.1% 9.1% 11.2% 9.9% 12.7% 1.15
Merrill Edge Core Mutual Funds Tactical Asset Allocation Moderate 2.6% 7.7% 11.4% 10.5% 13.0% 1.25
VBINX (Vanguard Balanced Index Inv) 0.9% 9.6% 10.5% 10.5% 7.3% 0.53

Detailed year by year comparison >>

Both portfolios have done fairly well, considering they have out performed VBINX for the past 3 and 10 years. Their 5 year returns are also close to that of VBINX. These are somewhat surprising as many of our tactical portfolios had done worse than VBINX for the past 3 and 5 years. 

The following compares the Etrade suggested all star mutual fund list based portfolios with the core mutual fund based portfolios:

Portfolio Performance Comparison (as of 3/30/2015)

Ticker/Portfolio Name YTD
Return**		 1Yr AR 3Yr AR 5Yr AR 10Yr AR 10Yr Sharpe
Etrade Core Mutual Funds Tactical Asset Allocation Moderate 3.1% 9.1% 11.2% 9.9% 12.7% 1.15
Etrade All Star Funds Tactical Asset Allocation Moderate 1.8% 4.1% 7.6% 8.5% 13.4% 1.39
Etrade Core Mutual Funds Strategic Asset Allocation – Optimal Moderate 2.3% 7.5% 10.2% 10.0% 8.9% 0.63
Etrade All Star Funds Strategic Asset Allocation – Optimal Moderate 1.9% 4.8% 6.9% 6.9% 6.9% 0.48

Detailed year by year comparison >>

The core mutual fund based portfolios have bettered their counterparts most of times (other than for the 10 years for the tactical ones).  We believe the out performance is due to the more stable core fund performance (compared with selecting some volatile funds in an asset class such as US stocks, only to suffer from whipsaw performance). Furthermore, as explained below, many PIMCO funds in the core fund portfolios are ‘enhanced’ index funds that have done a better job than an index fund. 

A closer look

We offer the following comments to answer some of the questions mentioned in Brokerage Specific Core Mutual Funds Plans: Suggestions & Opinions  on the forum. 

  • Do MyPlanIQ’s algorithm benefit from a wide selection of mutual funds? Many users would like to see our strategies can filter out ‘bad’ funds and only choose cream of the crop. It would be nice to throw several thousands of  no load no transaction funds available in a brokerage and the strategies can get the best of the best performance. Unfortunately, our strategies do not possess such ‘monotonic’ property: though they benefit greatly from a list of candidates that cover diverse, less correlated major and some minor asset classes, their performance can degrade when too many correlated and volatile funds are crowded in the list. It is not the more the better. 
  • Funds in the core fund lists. We have tried our best to find no load and no transaction (NTF) index funds in the major asset classes. However, we were constantly surprised by how few such index funds these brokerages carry. For example, Merrill Edge have no index funds in US REITs category and has only one international equity index fund (T.Rowe Price Inernational Eq. Index PIEQX). The lowest fee index fund in Merrill Edge is 0.3% (T.Rowe Price Equity Index 500), far more expensive than 0.17% of Vanguard 500 index (VFINX). Similarly, we also have had some hard time to find good index funds in Schwab for REITs.  In general, we dislike how index mutual funds are still able to charge so much higher fees than those of Vanguard index funds or many index ETFs. It is also ridiculous to charge transaction fees for index funds, which happens in many brokerages. Fortunately, we are able to find many PIMCO enhanced funds that, although more expensive, have done better. 

The following table shows how PIMCO funds have fared, compared with their lowest cost Vanguard index funds: 

Portfolio Performance Comparison

Ticker/Portfolio Name YTD
Return**		 1Yr AR 3Yr AR 5Yr AR 10Yr AR 10Yr Sharpe
PSPDX (PIMCO StocksPLUS D) 1.0% 13.9% 17.1% 15.4% 8.0% 0.33
VFINX (Vanguard 500 Index Investor) 0.1% 13.0% 15.5% 14.2% 7.9% 0.34
PIPDX (PIMCO International StocksPLUS TR Str D) 8.6% 16.2% 16.6% 11.1% 9.3% 0.38
VGTSX (Vanguard Total Intl Stock Index Inv) 4.4% 0.6% 6.4% 5.1% 5.3% 0.19
PETDX (PIMCO Real Estate Real Return Strategy D) 5.2% 29.2% 13.3% 20.3% 12.2% 0.3
VGSIX (Vanguard REIT Index Inv) 3.5% 24.3% 13.8% 15.2% 9.7% 0.24

Detailed year by year comparison >>

All the PIMCO funds in the table have done better than Vanguard funds, though PIMCO StocksPlus D and VFINX are very close in their 10 year returns. Based on PIMCO, these funds invest a small portion of its assets in index-linked instruments (often futures and swaps). The majority of the assets are then invested in a flexible bond portfolio. Using PIMCO’s bond investment prowess, these funds can out perform the vanilla index funds. Of course, these funds can under perform if bond markets are in a bear market. To mitigate the drawbacks, we usually try to select at least one or more index funds or diversified funds (if no index funds available) in the same asset class to complement PIMCO funds. However, we believe that in a long run, PIMCO’s method is sound and can produce our performance. 

Market Overview

Markets have behaved more volatile recently. In bond segments, total bond index (such as BND) has done better than other bond assets such as corporate bonds, high yield bonds and emerging market bonds solely because of the strength of Treasury bonds. For now, we are still seeing the strength of US stocks and US dollars. 

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. 

Latest Articles

Enjoy Newsletter

How can we improve this newsletter? Please take our survey 

–Thanks to those who have already contributed — we appreciate it.

Disclaimer:
Any investment in securities including mutual funds, ETFs, closed end funds, stocks and any other securities could lose money over any period of time. All investments involve risk. Losses may exceed the principal invested. Past performance is not an indicator of future performance. There is no guarantee for future results in your investment and any other actions based on the information provided on the website including, but not limited to, strategies, portfolios, articles, performance data and results of any tools. All rights are reserved and enforced. By accessing the website, you agree not to copy and redistribute the information provided herein without the explicit consent from MyPlanIQ.

Submit a Comment

Your email address will not be published. Required fields are marked *