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, June 6, 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.
The PIMCO (Dis)Advantages
PIMCO is a fund company that is known to have good bond funds. It’s funds are some of the most favorites among many financial advisors. In addition to its supposed fixed income investing prowess, PIMCO is also known to be adept to utilize derivatives to enhance fund returns. For example, its flagship total return bond fund PTTRX (PIMCO Total Return Instl) has used derivatives to achieve its outperformance, at least before Bill Gross left PIMCO.
However, PIMCO has also maintained several enhanced index funds that utilizes a combination of derivatives (such as futures on S&P 500) and fixed income portfolios to mimic an index. They believe that given its fixed income skills, such enhanced index funds can deliver better performance than a vanilla index fund in a long period of time.
We will discuss in some details on these funds. In our several brokerage specific investment portfolios (see Brokerage Investors), we use several PIMCO enhanced index funds. They are mentioned briefly in the following newsletters:
- March 16, 2015: Brokerage Specific Core Mutual Fund Portfolios
- March 30, 2015: Brokerage Specific Core Mutual Fund Portfolios 2
Let’s first look at the performance and expenses:
Ticker/Portfolio Name | Expense Ratio | YTD Return** |
1Yr AR | 3Yr AR | 5Yr AR | 10Yr AR |
---|---|---|---|---|---|---|
PSPDX (PIMCO StocksPLUS D) | 0.9% | 0.6% | -2.4% | 9.2% | 11.3% | 6.9% |
VFINX (Vanguard 500 Index Investor) | 0.16% | 0.9% | -0.4% | 9.9% | 11.1% | 6.9% |
PETDX (PIMCO Real Estate Real Return D) | 1.14% | 6.7% | 11.1% | 4.7% | 12.4% | 9.7% |
VGSIX (Vanguard REIT Index Inv) | 0.26% | 7.0% | 11.9% | 8.0% | 11.3% | 7.5% |
PPUDX (PIMCO Intl StkPLUS TR Strat (Unhedged) D) | 1.04% | -3.5% | -16.6% | -1.9% | 2.6% | |
EFA (iShares MSCI EAFE) | 0.33% | -3.0% | -13.5% | -0.2% | 1.8% | 1.0% |
From the table, for the past 5 and 10 years, PIMCO funds have outperformed or matched (in the case of US stocks, the first two rows) their index fund counterparts. However, for US stocks, US REITs and international stocks (last two rows), they have done worse for the YTD (year to date), 1 and 3 years. Or simply put, the performance of PIMCO funds have declined recently. Should investors be concerned about this?
In terms of cost, PIMCO funds are way more expensive than index funds, as can be seen in the first column.
For investors, that means PIMCO funds not only need to outperform their index counterparts, but they need to outperform a lot, more than the extra expenses they charge so that their performance after net of fees is better.
Pros and cons
In general, the PIMCO approach (i.e. derivatives to track an index plus remaining cash invested in a fixed income portfolio) has the following pros and cons:
- The cost of derivatives can be a performance drag. This is especially true for futures that can suffer from so called contango: a futures price can be a lot higher than its normal expected price, making it expensive to purchase and roll to a new contract when the current one expires. Simply put, derivatives can become too expensive to use when speculation is rampant.
- The error that a derivative tracks its underlying index, the so called tracking error. Of course, an error that makes a derivative better than its underlying index is welcome, but it could happen the other way around too.
- The underperformance of the fixed income portfolio. This is often a major source of performance deviation.
Recent underperformance
Upon a closer examination, we make a conjecture that PIMCO’s fixed income portfolio has not done well, thus distracting the performance of all the above enhanced index funds. The following is the sector exposure of PSPDX’s fixed income portfolio in the fund’s latest (March 31 2016) quarterly holding report:
This sector exposure has been consistent with PIMCO’s recent investment thesis: positioning for a rising rate environment and overweighting in credit investment. Unfortunately, the thesis has not worked well so far. For example, PIMCO total return bond fund also underperformed:
Ticker/Portfolio Name | YTD Return** |
1Yr AR | 3Yr AR | 5Yr AR | 10Yr AR |
---|---|---|---|---|---|
PTTRX (PIMCO Total Return Instl) | 2.7% | 3.4% | 1.8% | 3.5% | 6.1% |
VBMFX (Vanguard Total Bond Market Index Inv) | 3.9% | 4.2% | 2.5% | 3.4% | 4.9% |
What’s more, not shown in the above table, PIMCO, expecting a gradual rate hike and reasonable positive economic backdrop, took an extremely short duration exposure. This basically reduces its fixed income portfolio return dramatically. In fact, taking the overall futures’ cost and its fixed income’s returns together, the overall effect is that it underperforms its main index, in this case, S&P 500.
To summarize, the recent underperformance of PIMCO’s enhanced index funds is mostly due to its ill timed call in fixed income side. What we learn from this recent experience is that such enhanced index funds can only be used as secondary candidate funds, even though in a long term, they can add extra value. That is why in our brokerage core mutual fund portfolios such as Fidelity Core Mutual Funds., we also include other vanilla index funds so that our portfolios will not be impacted dramatically by these enhanced index funds when they go awry.
Market Overview
By now, with 91% of S&P 500 companies reporting Q1 2016 earnings which indicated a -7.1% decline, it is almost a forgone conclusion that Q1 2016 marks a fourth consecutive earning decline quarter and a third consecutive sales decline quarter (based on Factset, revenue declined -1.7%). What’s more, Bloomberg reported that corporate buyback, the largest stock buyer in the recent years, has pared down its planned stock repurchase. As summer has officially begun, the sluggish global economy continues.
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 6 years. Since the financial crisis in 2008-2009, we have not seen substantial structural change in the U.S., European and emerging market economies. Even though U.S. stocks have had a recent correction, their valuation is still at a historical high level. It is thus not a good time to take excessive risk.
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
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- May 2, 2016: Low Cost Index Fund Investing
- April 25, 2016: Tax Free Municipal Bond Funds & Portfolios
- April 18, 2016: Asset Class Trend Review
- April 11, 2016: Construction of Sound And Conservative Portfolios
- March 28, 2016: Total Return Bond ETFs Review
- March 21, 2016: Small And Large Company Stock Performance In Different Economic Expansion Cycles
- March 14, 2016: Are Tactical And Timing Strategies Losing Steam?
- March 7, 2016: Defined Maturity Bond Fund Analysis
- February 29, 2016: Smart Strategic Asset Allocation Rebalance When Market Trend Changes
- February 22, 2016: Be Cash Smart
- February 15, 2016: Bond ETF Portfolios
- February 8, 2016: Newsletter Collection Update
- February 1, 2016: Total Return Bond Fund Portfolios In A Volatile Period
- January 25, 2016: Alternative Portfolios Review
- January 18, 2016: Strategic Asset Allocation: A Cautious Outlook
- January 11, 2016: Review Of Trend Following Tactical Asset Allocation
- January 4, 2016: What Worked And Didn’t In 2015
- December 21, 2015: Distressed Assets
- December 14, 2015: High Yield Bonds And Their Correlation With Stocks
- December 7, 2015: Diversification And Global Allocation
- November 30, 2015: Investors and Speculators Combined
- November 23, 2015: Active Stock Fund Performance Consistency
- November 16, 2015: Permanent, Risk Parity And Alternative Portfolios Review
- November 9, 2015: Broad Base Core Mutual Fund Review
- November 2, 2015: Broad Base Index Core ETFs Review
- October 26, 2015: Total Return Bond Fund Review
- October 19, 2015: Advanced Portfolio Review
- October 12, 2015: What About Commodities?
- October 5, 2015: Core Satellite Portfolios In A 401k Account
- September 28, 2015: Risk Managed Strategic Asset Allocation Portfolios Revisited
- September 21, 2015: Quest For The Best Investment Strategy
- September 14, 2015: Core Satellite Portfolios In Market Turmoil
- September 7, 2015: Market Rout Creates An Opportunity to Reposition Your Portfolios
- August 31, 2015: Review of Asset Allocation Funds and Portfolios
- August 24, 2015: Market Rout And Your Portfolios
- August 17, 2015: ETF or Mutual Fund Based Portfolios
- August 10, 2015: Updated Newsletter Collection
- August 3, 2015: Slippery Asset Trends
- July 27, 2015: Performance Dispersion Among Momentum Based Portfolios
- July 20, 2015: Global Balanced Portfolio Benchmarks
- July 13, 2015: Pain in Tactical Portfolios
- July 6, 2015: Fixed Income Total Return Bond Funds In Strategic Asset Allocation Portfolios
- June 29, 2015: Core ETF Commission Free Portfolios
- June 22, 2015: Secular Asset Trends
- June 15, 2015: Giving Up Bonds?
- June 1, 2015: Summer Blues?
- May 26, 2015: Cash, Bonds and Stocks In A Rising Rate Environment
- May 18, 2015: Portfolio Update
- May 11, 2015: Pain in Fixed Income?
- May 4, 2015: The Balanced Stock and Long Term Treasury Bond Portfolios
- April 27, 2015: Long Term Treasury Bond Behavior
- April 20, 2015: 529 College Savings Plan Rebalance Policy Change
- April 13, 2015: Total Return Bond Funds As Smart Cash
- April 6, 2015: The Low Return Environment
- March 30, 2015: Brokerage Specific Core Mutual Fund Portfolios 2
- March 23, 2015: Investment Arithmetic for Long Term Investments
- March 16, 2015: Brokerage Specific Core Mutual Fund Portfolios
- March 9, 2015: Newsletter Collection Update
- March 2, 2015: Total Return Bond ETFs
- February 23, 2015: Why Is Global Tactical Asset Allocation Not Popular?
- February 16, 2015: Where Are Permanent Portfolios Going?
- February 9, 2015: How Have Asset Allocation Funds Done?
- February 2, 2015: Risk Management Everywhere
- January 26, 2015: Composite Portfolios Review
- January 19, 2015: Fixed Income Investing Review
- January 12, 2015: How Does Trend Following Tactical Asset Allocation Strategy Deliver Returns
- January 5, 2015: When Forecast Fails
- December 22, 2014: Long Term Asset Returns: How Long Is Long?
- December 15, 2014: Beaten Down Assets
- December 8, 2014: Implementing Core Asset Portfolios In a Brokerage
- December 1, 2014: Two Key Issues of Investment Strategies
- November 24, 2014: Holiday Readings
- November 17, 2014: Retirement Spending Portfolios Update
- November 10, 2014: Fixed Income Or Cash
- November 3, 2014: Asset Trend Review
- October 27, 2014: Investment Loss, Mistakes And Market Cycles
- October 20, 2014: Strategic Portfolios With Managed Volatility
- October 13, 2014: Embrace Volatility
- October 6, 2014: Tips For 401k Open Enrollment
- September 29, 2014: What Can We Learn From Bill Gross’ Departure From PIMCO?
- September 22, 2014: Why Total Return Bond Funds?
- September 15, 2014: Equity And Total Return Bond Fund Composite Portfolios
- September 8, 2014: Momentum Based Portfolios Review
- September 1, 2014: Risk & Diversification: Mint.com Interview
- August 25, 2014: Remember Risk
- August 18, 2014: Consistency, The Most Important Edge In Investing: Tactical Case
- August 11, 2014: What To Do In Overvalued Stock Markets
- August 4, 2014: Is This The Peak Or Correction?
- July 28, 2014: Stock Musings
- July 21, 2014: Permanent Portfolios & Four Pillar Foundation Based Framework
- July 14, 2014: Composite Portfolios Review
- July 7, 2014: Portfolio Behavior During Market Corrections
- June 30, 2014: Half Year Brokerage ETF and Mutual Fund Portfolios Review
- June 23, 2014: Newsletter Collection Update
- June 16, 2014: There Are Always Lottery Winners
- June 9, 2014: The Arithmetic of Investment Mistakes
- June 2, 2014: Tips On Portfolio Rebalance
- May 26, 2014: In Praise Of Low Cost Core Asset Class Based Portfolios
- May 19, 2014: Consistency, The Most Important Edge In Investing: Strategic Case
- May 12, 2014: How To Handle An Elevated Overvalued Market
- May 5, 2014: Asset Allocation Funds Review
- April 28, 2014: Now The Economy Backs To The ‘Old Normal’, Should Our Investments Too?
- April 21, 2014: Total Return Bond Investing In The Current Market Environment
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