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 22, 2016. You can also find the re-balance calendar for 2015 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.

Total Return Bond Fund Portfolios In A Volatile Period

In MyPlanIQ, we advocate using Total return bond funds that are managed by managers who have won coveted Morningstar Fixed Income Manager of The Year award as candidate funds for the fixed income (bond) part of one’s portfolio. We have written many articles on this: 

Investors can also find total return bond fund based portfolios on our Brokerage Investors page. Total return bond funds are supposed to be bedrocks in a volatile period like this one. Below, we first review how these funds performed in 2015. 

Total Return Bond Fund Performance in 2015

The following table shows the funds used as candidate funds in our total return bond fund brokerage specific portfolios: 

Total Return Bond Fund Performance Comparison (as of 1/29/2016):

Ticker 2015 YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR 10Yr Sharpe
DLTNX (DoubleLine Total Return Bond N) 1.7% 1.0% 2.0% 2.9% 5.2%    
PTTDX (PIMCO Total Return D) 0.1% 0.8% -0.9% 1.3% 3.4% 5.6% 1.15
PBDDX (PIMCO Investment Grade Corp Bd D) -1.3% 0.2% -2.4% 2.1% 5.2% 6.7% 1.11
PONDX (PIMCO Income D) -0.3% -0.2% 2.3% 4.0% 7.8%    
TGMNX (TCW Total Return Bond N) -0.1% 1.2% 0.9% 2.8% 4.8% 6.5% 1.56
WABRX (Western Asset Core Bond R) 0.3% 0.7% -0.2% 2.0%      
MWTRX (Metropolitan West Total Return Bond M) -0.2% 1.0% -0.4% 2.4% 4.6% 6.2% 1.36
LSBRX (Loomis Sayles Bond Retail) -7.1% -2.7% -8.9% -0.7% 3.2% 5.3% 0.85
VBMFX (Vanguard Total Bond Market Index Inv) 0.0% 1.2% -0.1% 1.9% 3.3% 4.5% 0.93


See detailed year by year comparison >>

2015 was a challenging year for bonds: the benchmark VBMFX (Vanguard Total Bond Market Index Inv) had a 0% total return. Most funds in the table had returns clustered around 0%. However, the glaring outlier is LSBRX (Loomis Sayles Bond Retail) that had a whopping -7.1% return in 2015 and continued to lose money this year. This is not surprising to us: we have detailed this fund many times (such as October 26, 2015: Total Return Bond Fund Review). This fund tends to invest heavily in low rated corporate bonds and it usually did badly when times are challenging. As of 11/30/2015, the fund allocated close to half (49%) capital in bonds that are rated below A. As junk bonds and the like have been hurt badly recently, this fund suffered. 

PONDX (PIMCO Income D), a stellar performer in the last 5 years, started to crater a bit last year, mostly hurt by its exposure in foreign bonds and corporate bonds. Though it hasn’t done as badly as Loomis Sayles bond fund, it is now a laggard among the candidate funds in the table. Again, this is a good example that no fund can out perform forever and one has to adopt a more dynamic approach even in total return bond fund investing. 

On the positive side, DLTNX (DoubleLine Total Return Bond N) stood out, had 1.7% return in the first place. However how much we admire Jeffrey Gundlach, the DoubleLine fund manager who has been a star all over the media recently, we caution that, just like PIMCO funds and/or Bill Gross, there will be times when things are not going their way. For now, we, just as Mr. Gundlach, will enjoy his fund’s outstanding performance. 

The Performance of Total Return Bond Fund Portfolios

In the following table, one can see that other than Merrill Edge Total Return Bond, in 2015, all other portfolios had a negative return that was around -1.0%. The positive 1.1% return of Merrill Edge Total Return Bond was due to the fact that we constructed this portfolio at the early 2015 with newly added PBDDX (PIMCO Investment Grade Corp Bd D) as its candidate fund. All other portfolios didn’t have this fund added before hand, thus their backtesting histories were not changed. This caused the different holding history that affected their 2015 holdings. The TDAmeritrade Total Return Bond differs from other portfolios because, unlike other portfolios that have a 3 month minimum holding period for the candidate funds, it has a 6 month minimum holding period restriction. 

Portfolio Performance Comparison (as of 1/29/2016):

Ticker/Portfolio Name 2015 YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR
Schwab Total Return Bond -1% 1.0% -1.0% 1.7% 4.5% 6.9%
Fidelity Total Return Bond -1% 1.0% -1.0% 1.6% 4.1% 6.2%
TDAmeritrade Total Return Bond -0.6% -0.2% -0.6% 2.2% 4.5% 7.0%
FolioInvesting Total Return Bond -1% 1.0% -1.0% 1.7% 4.5% 6.9%
Etrade Total Return Bond -1% 1.0% -1.0% 1.7% 4.5% 6.8%
Merrill Edge Total Return Bond 1.1% 1.0% 0.8% 3.5% 7.2% 8.5%
PTTRX (PIMCO Total Return Instl) 0.4% 0.8% -0.6% 1.6% 3.7% 5.9%
VBMFX (Vanguard Total Bond Market Index Inv) 0.0% 1.2% -0.1% 1.9% 3.3% 4.5%


See detailed year by year comparison >>

Because of the almost uniform anemic returns among all candidate funds, the negative returns in 2015 are not unexpected: when candidate funds exhibit trendless behavior, portfolios that employing momentum based strategies can suffer. This is similar to the lack luster performance of our asset allocation tactical portfolios as explained in January 11, 2016: Review Of Trend Following Tactical Asset Allocation. At the moment, equity markets have been in a downward trend, the question is whether we will have a similar return in 2016 for these portfolios.  

Total Return Bond Funds in Market Downturns

To answer the above question, let’s understand how these funds performed in a market downturn. The benchmark VBMFX (Vanguard Total Bond Market Index Inv) actually did pretty well in years like 2008, 2002, 2001, 1990. Similarly, PTTDX (PIMCO Total Return D), under Bill Gross, did pretty well in 2008, 2002, 2001. TGMNX (TCW Total Return Bond N) did reasonably well (though it had a small 0.9% return in 2008) also. We would like to remind our readers that this fund was managed by Gundlach during those years. 

MWTRX (Metropolitan West Total Return Bond M) had an uneven record during those bear market years. It lost money in both 2008 and 2002. Interestingly, Loomis Sayles fund did well in the 2000 to 2002 period but had a horrible -22% return in 2008. 

What we see is that we would expect the total return bond fund portfolio perform reasonably well in a downturn. However, as always, there is no guarantee and that is why we need to have a tactical rotation strategy such that when things are all bad, the portfolios can go into safe havens such as CASH. 

To summarize, we are optimistic on the total return bond portfolios in 2016. 

Morningstar’s Fixed Income Manager of the Year in 2015

Morningstar announced that they have given the fixed income of the year award in 2015 to PIMCO’s Jerome Schneider who manages PTSHX (PIMCO Short-Term Instl). As Morningstar admitted, this is unusual to give such an award to an ultra-short term bond fund manager. In the following table, we compare the PIMCO funds with Vanguard Short Term Bond Index funds in terms of performance and expenses: 

Portfolio Performance Comparison (as of 1/27/2016):

Ticker/Portfolio Name Expense 2015 1Yr AR 3Yr AR 5Yr AR 10Yr AR
PTSHX (PIMCO Short-Term Instl) 0.45% 0.9% 1.2% 0.9% 1.2% 2.5%
VBIRX (Vanguard Short-Term Bond Index Adm) 0.1% 0.7% 0.8% 1.0% 1.6% 3.3%
PSHDX (PIMCO Short-Term D) 0.7% 0.7% 0.8% 0.6% 1.2% 2.3%
VBISX (Vanguard Short-Term Bond Index Inv) 0.2% 0.7% 0.9% 0.9% 1.5% 3.2%

Although the comparison is not entirely apple to apple as we are comparing ultra-short term bond funds with short-term bond funds (the effective duration of the Vanguard funds is about 2.7 years compared with PIMCO’s less than a year duration), but we see some drawbacks of the PIMCO funds. First, their expenses are way too high (0.7% vs. Vanguard 0.2% in retail or investor class). This is especially challenging in the current low rate environment. Maybe the manager indeed can deliver some marginal outperformance before the fee, but after extracting the fee, investors would have ended up with worse return. In fact, the PIMCO funds have lagged behind Vanguard funds for almost 1% annualized return for the past 10 years. 

Second, the fund had a -1.6% return in 2008, compared with Vanguard’s 5.4%. We see the fund had no outstanding performance in a market stress, especially one with credit risk. Going forward, because of the loose lending policy in the recent years, we are afraid we will see the next market downturn will come with some credit shock (think about recent high yield bond debacle). Year to date, PIMCO funds has had a negative return while Vanguard funds stay positive. 

However, ultra-short bond funds do have an advantage in a period of rising rates. We believe this is one rationale behind Morningstar’s decision. 

To summarize, we adopt a critical view on Morningstar’s selection. Since this fund does not fit into an intermediate total return bond category anyway, we do not include it in our candidate funds in the total return bond portfolios. 

Market Overview

Stocks had a powerful one day rally on Friday, most likely because of Japan’s new negative interest rate policy. However, fundamental data are still pointing to the downside. So far, about 40% of S&P 500 companies have reported their Q4 2015 earnings (see Factset report here). In general, all S&P sectors earnings growth expectation has come down. Stock analysts have slashed their expectations for Q1 this year and it is now expected S&P earnings will grow about 0.7%. S&P 500 companies have experienced three consecutive earnings decline. A more realistic figure maybe the sales/revenue growth for S&P 500 companies: it has experienced four consecutive quarter negative sales growth. Even though companies have used stock buybacks (by utilizing cheap interest rate to borrow money by issuing bonds), business is definitely not as bright as what the stocks or earnings per share indicate. For now, stocks are stuck in a downward trend. 

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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