Re-balance Cycle Reminder All MyPlanIQ’s newsletters are archived here.

For regular SAA and TAA portfolios, the next re-balance will be on Tuesday, January 3, 2017. You can also find the re-balance calendar for 2017 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.

Due to holiday schedule, we will not have newsletters on 12/19 and 12/26. We will resume the publication on January 2, 2017. We wish everyone happy holidays!

Enhanced Index Funds

In our previous newsletter, we reviewed the core mutual funds used in our brokerage plans. Among them, there are several so called enhanced index funds from PIMCO. In this newsletter, we look at these funds more closely, specifically enhanced index funds from DoubleLine.  

DoubleLine Enhanced Shiller CAPE Funds

DoubleLine introduced these funds (DSENX (DoubleLine Shiller Enhanced CAPE N) or DSEEX for institutional class) in late 2013. Similar to PSPDX (PIMCO StocksPLUS D), The fund has had a stellar performance since its introduction. 

Enhanced fund performance (as of 12/09/2016):
Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 3Yr Sharpe 5Yr AR 10Yr AR
DSENX (DoubleLine Shiller Enhanced CAPE N) 18.6% 17.4% 14.6% 1.04    
PSPDX (PIMCO StocksPLUS D) 12.9% 13.2% 9.3% 0.67 15.4% 7.2%
VFINX (Vanguard 500 Index Investor) 12.7% 12.4% 10.0% 0.66 14.6% 7.0%

See detailed year by year performance comparison>>

This fund has bettered both Vanguard S&P 500 index fund and the PIMCO enhanced index fund by some big margins for the past 1 and 3 years. Strictly speaking, the comparison is not apple to apple as the fund does not track the S&P 500 index. However, as many might have known, we have been advocating using Shiller’s CAPE 10 as a long term US stock valuation metric (see, for example, September 5, 2016: Overvalued Markets And Long Term Timing Strategies). We believe using such a methodology can yield a better long term performance. 

This fund has two interesting properties. 

Shiller CAPE US Sector Index

The first is that it tracks Barclays Shiller CAPE® US Sector Index that is developed by RSBB-I, LLC, whose principal is Robert Shiller. The fund then uses so called index overlay technique to further enhance its returns. The following is from the fund’s description

The Barclays Shiller CAPE® US Sector Index shifts the exposure to the “cheapest” sectors of the large cap equity market by using Dr. Robert Shiller’s CAPE® Ratio which seeks to assess longer term equity valuations by using an inflation adjusted earnings horizon that is 10 times longer than the traditional Price Earnings or P/E measure. The Relative CAPE® Ratio subdivides the S&P 500 into 10 sectors, eliminating the 5 with the highest relative CAPE® ratios, leaving what we believe are the 5 better value proposition sectors. Index methodology eliminates the one sector with the worst one-year momentum, to try and avoid the value trap.

The interesting part here is that it eliminates one sector that has the worst one year return momentum. Thus, to some extent, this index uses some sort of momentum technique, coupled with long term valuation, a methodology we always advocate.

Index overlay

The second property is that it uses so called index overlay technique to further improve the returns. Basically, instead of directly investing in stocks in the four sectors selected, it uses derivatives (so called swap with a third party) to track the index. By doing so, it pledges so portion of its capital as the collateral and then, similar to the PIMCO fund, invests the remainder in a fixed income portfolio. The goal here is to use DoubleLine’s fixed income investment prowess to deliver extra returns over cash. The following picture shows this technique: 

 Similar to the PIMCO enhanced index fund, the fixed income portfolio is the ‘enhanced’ part. 

The fund’s outperformance is mostly due to the Barclays index, though we suspect that the fixed income part also plays some role here. 

Other Enhanced Index Funds

The other noticeable enhanced index funds include PETDX (PIMCO Real Estate Real Return D) that has done relatively well in Real Estate REITs asset class. Similar to the funds mentioned above, this fund uses derivatives to track an REIT index and invests the rest of capital to a fixed income portfolio. It has done better for the past 1, 3 and 10 years. As stated, we expect fixed income investments will encounter some near term difficulty in the current rising rate environment and this might dampen the fund’s performance near term. However, we remain optimistic about this fund in the long term. 

As a closing statement, enhanced index funds can be some useful candidate funds or alternatives for some asset classes. On the other hand, these funds have some tax disadvantage compared with vanilla type index funds. So it would be best to use these funds in a tax deferred account. 

Market Overview

US stocks continued their rally while bonds languished last week. REITs also had some strong reversal. For now, investors continue to be positive on the near term (or intermediate) stock prospective. Regardless, we will stick to our strategies and remain cautious: for both of our strategic and tactical  portfolios, we are enjoying the strong rally. For tactical portfolios, we will react to possible market corrections at some point and follow our rebalance instructions. 

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

As now we have a president elect who promised to challenge the status quo and make substantial structural change (such as infrastructure building), we are now in a wait and see period: as the nation is posed to invest, the most important factor to watch is how productive the investments will be. Simply put, productive investments will result in better return on investment (ROI), tangibly or intangibly. They should also increase productivity that in turns will improve our standard of living. Capital misallocation can result in a higher growth but might not improve the real standard of living, which is the ultimate goal of economic activities.

In terms of investments, 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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