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, August 15, 2016. You can also find the re-balance calendar for 2016 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.

Tactical Asset Allocation Funds Review

This week, we continue our last week’s review on asset allocation funds and focus on tactical and world allocation funds. We did this almost a year ago (see August 31, 2015: Review of Asset Allocation Funds and Portfolios).  Not only these well known funds can be useful for some investors, they also serve as references for our model portfolios. 

World allocation funds: lack luster performance

The following table lists many well known funds that are monitored on  SmartMoneyIQ Managers page. These funds allocate in a go anywhere style and diversify globally. 

Portfolio Performance Comparison (as of 7/25/2016):
Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR Max. Drawdown
Six Core Asset ETFs Tactical Asset Allocation Moderate 8.3% 6.8% 4.5% 4.1% 8.7% 10.3%
FPACX (FPA Crescent) 2.3% -0.4% 4.7% 6.2% 6.7% 31.6%
MNBAX (Manning & Napier Pro-Blend Extnd Term S) 6.6% 0.2% 4.3% 5.5% 5.9% 39.6%
GRSPX (Greenspring) 3.6% -1.2% -0.1% 3.7% 4.6% 25%
GBMFX (GMO Benchmark-Free Allocation III) 2.8% -2.8% 1.2% 3.7% 5.7% 20.1%
PASDX (PIMCO All Asset D) 11.8% 2.5% 1.2% 2.6% 4.7% 27.8%
PGMAX (PIMCO Global Multi-Asset A) 2.2% -3.5% 1.8% -0.0%   N/A
WASYX (Ivy Asset Strategy Y) -2.5% -11.3% -1.2% 0.8% 5.8% 35.7%
SGIIX (First Eagle Global I) 9.0% 7.0% 5.6% 6.3% 7.6% 37%
MALOX (BlackRock Global Allocation Instl) 2.3% -1.9% 3.1% 3.7% 5.8% 32.8%
DMLIX (DoubleLine Multi-Asset Growth I) 4.5% 0.7% 2.9% 2.8%   N/A
EAXFX (Wells Fargo Advantage Asset Alloc R) 3.6% -2.7% 1.1% 2.7% 3.9% 34.4%
VFINX (Vanguard 500 Index Investor) 7.6% 5% 10.8% 12.3% 7.9% 55.3%

Year by year detailed comparison >>

For the past 10 years, SGIIX (First Eagle Global I) and FPACX (FPA Crescent) stand out in terms of their annualized returns. The First Eagle fund is known to be adept to utilize gold and gold miner stock investments/allocations to hedge equity market downside. FPA Crescent, under Steven Romick, is a long short fund. The manager short stocks that have weak fundamental to hedge its long investments. In our opinion, both are excellent world allocation funds that have withstood the test of time. 

As global stock markets are again in an over extended (from 2009 and counting) bull market right now, we would like to draw readers’ attention to maximum drawdown metric of a fund, which measures the maximum percentage drop from a recent peak to its subsequent trough. Unfortunately, we find that many of the above funds incurred too large drawdown to our liking. Our benchmark tactical allocation portfolio Six Core Asset ETFs Tactical Asset Allocation Moderate has had the lowest maximum drawdown and highest annualized 10 year return. Who said one can not deliver a good reasonable return with acceptable risk? Notice that even today when S&P 500 is at an all time high territory, the portfolio has a better 10 year annual return (8.7%) compared with the 7.9% of S&P 500 VFINX (Vanguard 500 Index Investor). From its start date 12/31/2001, the portfolio had 8.4% annual return, compared with VFINX’s 6.5% total return (dividend reinvested)!

Tactical allocation funds

Since the financial crisis, many tactical allocation funds have been introduced  to market. The following table shows how they have performed:

Portfolio Performance Comparison (as of 7/25/2016):
Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR 2008 Drawdown
Six Core Asset ETFs Tactical Asset Allocation Moderate 8.3% 6.8% 4.5% 4.1% 8.7% 10.3%
P Momentum Scoring Style ETFs and Treasuries -0.7% -8.9% 2.5% 5.5% 8.2% 21.7%
GTAA (AdvisorShares Morg Crk Glbl Tacticl ETF) 6.0% -1.1% 0.8% -0.6%   N/A
GMOM (Cambria Global Momentum ETF) 5.7% -2.7%       N/A
GDAFX (Goldman Sachs Dynamic Allocation A) 3.2% -2.7% 0.4% 0.7%   N/A
DWTFX (Arrow DWA Tactical A) 7.2% 0.3% 5.4% 4.3%   46%
BRAVX (Braver Tactical Opportunity N) 9.2% -2.0% -0.4%     N/A
CLTCX (Catalyst/Lyons Tactical Allocation C) 2.8% 1.0% 7.6%     N/A
GHUAX (Good Harbor Tactical Core US A) 5.5% -0.4% -6.7%     N/A

See year by year comparison >>

In the above table, the highlighted funds/portfolio only invest in US stocks and bonds. The rest can invest globally. 

Unfortunately, other than DWTFX (Arrow DWA Tactical A), all other funds were introduced after the 2008-2009 crisis. We are disappointed by the performance of the majority of them. The two tactical ETFs (GTAA and GMOM) have not performed as well as what their creators intended. Since they are still relatively new, maybe time will tell. 

Based on the above data, we also want to point out that it’s incredibly important to stick to a strategy and implement it accordingly. As we stated in July 22, 2013: Tactical Asset Allocation: The Good, The Bad And The Ugly, perhaps the biggest challenge for investors using such an active strategy is that it’s very easy to second guess/’improve or optimize’ and thus overwrite the strategy and go based on your own hunch, or it’s very hard to ‘blindly’ follow the strategy. This even often occurs for professional investors. 

One way to alleviate the second guessing/’over’ optimizing problem is to adopt core satellite approach, investing in both strategic and tactical portfolios so that the tactical part does not possess the complete anxiety when it underperforms. The other way is to prepare yourself before adopting a (tactical) approach, fully understand the possibility that such a portfolio can suffer from underperformance for an extended period of time (see June 27, 2016: Secular Cycles For Tactical And Strategic Investment Strategies). Regardless, we suspect that when the current underperformance cycle ends, investors will suddenly ‘discover’ the tactical strategy actually works and the whole cycle starts again. 

Market Overview

Q2 earnings so far have been better than expected: based on Factset, with 25% of S&P 500 companies reporting, the blended (actual + expected) earnings is -3.7% vs. expected -5.5% decline at the end of June. Nevertheless, if earnings are indeed to decline -3.7% as expected, it’ll mark the fifth consecutive quarter of year over year earnings decline since 2009. Investors are apparently hoping that after this quarter, earnings will recover again. However, given the current ill structured global economy, it’s very hard to believe that economy will recover strongly before it undergoes some serious adjustment. Since we don’t have a crystal ball, we can only rely on our strategies to navigate through. As always, stay on course. 

For more detailed asset trend scores, please refer to 360° Market Overview

We would like to remind our readers that since the financial crisis in 2008-2009, we have not seen substantial structural change in the U.S., European and emerging market economies. Economies have heavily relied on low interest debts. Capital might be misallocated to unproductive investments and consumption. U.S. stock valuation is at a historically high level. It is thus not a good time to take excessive risk. However, we remain optimistic on U.S. economy in the long term and believe much better investment opportunities will arise in the future. 

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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