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, October 24, 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.

Fixed Income Investing: Actively Managed Funds vs. Index Funds

We continue our miniseries on active funds vs. index funds. In the previous newsletter September 19, 2016: Stock Investing: Actively Managed Funds vs. Index Funds, we discussed the rationale behind our preference of low cost index stock funds over active stock funds. In this newsletter, we look at fixed income funds. 

Unlike in stock investing, in principle, we prefer using a selected list of actively managed fixed income bond funds instead of bond index funds. However, that does not mean we like any actively managed bond funds. In fact, there are only handful of bond funds that qualify as our candidate funds. 

Capitalization weighting in a bond index fund is questionable

The very first objection to invest in a bond index fund is that it does not present an intuitive sense to use market value (capitalization) to decide how much an index fund should invest. For example, if a company borrows more, its bonds will have bigger capitalization, thus, its bigger weights in an index fund. Similarly, if government issues more debts, its bonds get more weight. This is exactly what has happened lately as the prices of U.S. Treasury bonds have risen so much. Even John Bogle, the champion of indexing, has voiced concerns on this. 

The other surprising fact for the most popular bond index Barclays U.S. Aggregate bond index (the index the biggest bond fund Vanguard total bond index fund VBMFX, ETFs AGG and BND are based upon) is that it has no or very little (less than 1%) exposure in high yield bonds as shown in this Morningstar’s article:

It’s also true that the total aggregate bond index has no exposure in municipal bonds and foreign bonds. Municipal bonds, though mostly used for taxable accounts, actually can outperform even taxable funds from time to time even before tax. They deserve to have a place. See April 25, 2016: Tax Free Municipal Bond Funds & Portfolios on municipal bond funds based portfolios. 

Notice the criticism of less exposure in high yields and other sectors can be remedied by investing in index funds in those sectors. However, the capitalization weighting is certainly something hard to be corrected in a normal index fund. 

Some actively managed bond funds can outperform index funds more consistently

What’s more important, is that, unlike in stock investing, there exist a few of actively managed bond funds that have outperformed general bond index funds in a long period of time. The following table shows the 15 year performance of the list of candidate funds used in our fixed income portfolios listed on Brokerage Investors page. 

Total Return Bond Funds Performance Comparison (as of 9/26/2016):
Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR 15 Yr AR
TGMNX (TCW Total Return Bond N) 4.4% 4.1% 4.1% 4.6% 6.5% 6.1%
DLTNX (DoubleLine Total Return Bond N) 3.7% 3.4% 4.1% 4.2%    
WABRX (Western Asset Core Bond R) 6.4% 6.0% 4.7%      
LSBRX (Loomis Sayles Bond Retail) 9.4% 7.8% 2.8% 5.5% 5.9% 8.4%
DODIX (Dodge & Cox Income) 6.8% 6.6% 4.3% 4.2% 5.4% 5.5%
MWTRX (Metropolitan West Total Return Bond M) 5.1% 4.9% 3.9% 4.5% 6.3% 5.6%
PTTDX (PIMCO Total Return D) 4.5% 4.8% 3.2% 3.7% 5.7% 5.5%
VBMFX (Vanguard Total Bond Market Index Inv) 5.6% 5.3% 3.9% 2.8% 4.7% 4.6%

*: NOT annualized

**YTD: Year to Date

See detailed year by year comparison >>

Unlike stock funds, these bond funds have consistently outperformed bond market index fund such as VBMFX (Vanguard total bond market index fund). In fact, not only they have done better for the past 15 years (for those that have data), each of them has outperformed VBMFX since its inception respectively. 

Take PIMCO total return bond fund (PTTDX) as an example, this fund was a consistent winner before 2014.  After its star manager Bill Gross left PIMCO, the fund suffered and thus it has worse 1 and 3 year returns than VBMFX. However, it still betters VBMFX by 1% in its 10 year annualized return. Another example is LSBRX (Loomis Sayles Bond Retail) that is the most aggressive one among this set of total return bond funds. It tends to take over sized high yield bond exposure to boost its return. That has helped its performance, though it was badly hurt in both 2008 and 2015 when low quality bonds (high yield bonds) had difficulty. However, this fund has a long outstanding performance record. Since its inception from 1997, its annualized return 7.6% is 2.2% higher than VBMFX’s 5.4%!

A similar but more conservative fund is DODIX (Dodge & Cox Income). It takes opportunistic bets on corporate bonds. It outperformed VBMFX by a smaller margin but with much smaller risk.

In general, we believe that because of the relatively stable trends in bond market, it’s easier for a manager to take advantage of the intermediate term strength of bond segments (such as high yield, long corporate bonds etc.).

More importantly it’s possible to pick a winning total return bond fund periodically

At MyPlanIQ, we have shown that a portfolio that periodically picks the best total return bond fund from a set of funds with solid long term record can outperform the bond index fund by some big margin. We recommend readers the following articles on these portfolios: 

The representative portfolios listed on Advanced Strategies serve as the benchmarks (brokerage specific portfolios can be found on  Brokerage Investors page): 
Portfolio Performance Comparison
Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR Since 7/30/2000
P Bond Funds Momentum Based on Upgrading Fixed Income Managers of the Year`s Funds Monthly 8.2% 8.5% 5.8% 6.5% 7.8% 9.4%
P Bond Funds Momentum Based on Upgrading Fixed Income Managers of the Year Quarterly 8.1% 7.8% 4.8% 6.2% 7.5% 8.9%
VBMFX (Vanguard Total Bond Market Index Inv) 5.6% 5.3% 3.9% 2.8% 4.7% 5.2%

**YTD: Year to Date

The two portfolios have had a more than 3.7% extra annualized return over VBMFX in the last 16 years. The outstanding performance (and ongoing) is the best testimony to our claim that it’s possible to utilize actively managed bond funds to achieve very reasonable return without much risk. 


Though we state in the above that it’s easier for an active bond fund to outperform its benchmark, such a claim is mostly limited to intermediate bond funds that have freedom to invest in various bond segments (though with certain limits such as maximum allocation to risky bond segments such as high yield or emerging market bonds). For other bond funds, it becomes more problematic. This is especially true for international/emerging market bond funds that can be affected greatly by currency exchange rates as well as sovereign credit quality. Long term bonds can also behave violently. 

Market Overview

Stocks are again wobbling. Investors are now expecting much higher earnings improvement. This adds to a long list of possible factors that can derail the elevated markets. Though this process has been on and on for quite some time, investors should not abandon a well designed strategy and be swayed away from some other theories, being bullish or bearish. A strategy is not a strategy if one does not allow time to play it out. For now, we should not be complacent nor be too proactively predicting the market direction. 

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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