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 6, 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.

Fixed Income Portfolio Review

As many users might have known, MyPlanIQ’s fixed income portfolios (total return bond fund portfolios) have done very well.  They have consistently outperformed bond market indices and many excellent bond funds. These portfolios select a total return bond fund from a pool of candidate funds each month based on their recent performance (momentum). The candidate funds are those total return bond funds whose managers should have been at least one time selected as Morningstar’s fixed income managers of the year. The portfolios are brokerage specific, only using those no transaction fee (NTF) no load mutual funds available to a brokerage. They are listed on Brokerage Investors (What We Do -> Brokerage Investors). 

In the following, we will review how these portfolios did in 2016. First, let’s look at the candidate funds’ performance in 2016. 

Total Return Bond Funds Performance in 2016

The following table shows the performance of total return bond funds used as the candidate funds in our total return bond fund portfolios. 

Total Return Bond Fund Performance in 2016 (as of 12/31/2016):
Fund Name 1Yr AR 3Yr AR 5Yr AR 10Yr AR 10Yr Sharpe
LSBRX (Loomis Sayles Bond Retail) 8.4% 1.8% 4.7%  5.6%  0.94
PBDDX (PIMCO Investment Grade Corp Bd D) 6.9% 4.8% 5.2% 6.9% 1.22
DODIX (Dodge & Cox Income) 5.7% 3.5% 3.8% 5.0% 1.46
PONDX (PIMCO Income D) 2.8% 0.4% 3.2%    
VBMFX (Vanguard Total Bond Market Index Inv) 2.7% 2.8% 2.0% 4.2% 0.91
PTTDX (PIMCO Total Return D) 2.5% 2.3% 2.9% 5.3% 1.16
MWTRX (Metropolitan West Total Return Bond M) 2.4% 2.6% 3.8% 5.6% 1.3
WABRX (Western Asset Core Bond R) 1.7% 1.4%      
TGMNX (TCW Total Return Bond N) -0.4% 1.8% 3.8% 5.8% 1.42
DLTNX (DoubleLine Total Return Bond N) -1.7% -0.7% 0.1%    

From the table, one can see that about half of these funds outperformed Vanguard bond index fund (VBMFX). Among them, LSBRX (Loomis Sayles Bond Retail) was the number one, followed by PBDDX (PIMCO Investment Grade Corp Bd D). These funds did well as they invested in corporate bonds (in the Loomis Sayles case, it even had a sizable exposure in high yield bonds) which, as US stocks, did well last year.  However, about half of the funds underperformed the index fund as they were more conservative, investing mostly in Treasury bonds, short term bonds and mortgage backed securities. 

DLTNX (DoubleLine Total Return Bond N), in particular, ranked at the bottom in 2016 because of its overweight in mortgage backed securities. This is unusual as the fund had always ranked at the top before 2016. Again, this also confirms what we have always said: no single fund can persistently outperform every year. That is why we need to use fund rotation to weed out underperformers in an intermediate term. 

Total return bond fund portfolios outperformed in 2016

All of our total return bond fund portfolios outperformed the benchmark (VBMFX) in 2016: 

Total return bond fund portfolios in 2016

Ticker/Portfolio Name 1Yr AR 3Yr AR 5Yr AR 10Yr AR
Schwab Total Return Bond 7.6% 3.8% 6.0% 8.0%
Fidelity Total Return Bond 3.3% 2.3% 5.2% 7.4%
TDAmeritrade Total Return Bond 4.7% 2.9% 6.1% 7.9%
FolioInvesting Total Return Bond 7.6% 3.8% 6.0% 8.0%
Etrade Total Return Bond 3.2% 3.3% 5.8% 7.9%
Merrill Edge Total Return Bond 3.6% 4.2% 6.6% 8.4%
Vanguard Brokerage Total Return Bond 7.6% 3.8% 6.0% 8.2%
PTTRX (PIMCO Total Return Instl) 2.8% 2.6% 3.2% 5.6%
VBMFX (Vanguard Total Bond Market Index Inv) 2.7% 2.8% 2.0% 4.2%

In fact, all of our portfolios did better in the last 1, 5 and 10 year periods. For the past 3 years, only Fidelity portfolio did worse than VBMFX. Its lack luster performance in 2016 was the main factor that affected its 3 year performance. 

2016 was a good year for the total return bond portfolios as the algorithm directed their investments to the corporate bond heavy funds such as PBDDX and LSBDX. These trends were almost reversed before the election but then persisted after the Trump’s election victory induced risk asset rally at the year end. 

Fixed income investment outlook

The bond market has been scary for several years now as many pundits have predicted an up coming bear market. However, up to now, this doomsday scenario hasn’t materialized. 

The main reasons cited by bond bears are the increasing inflation and the rising interest rates because of the strength of US labor market and the infrastructure spending plan president Trump vows to carry out in the backdrop of ultra low interest rates by any historical standard. Others, on the other hand, point out that the US economy is still in an anemic growth mode while the infrastructure spending plan might not be as significant as what many think. Other factors that support this argument include demographic situation, the ever entangled global manufacturing process and the geopolitical risk. These create many uncertainties in global economy that might just easily tip the US back to deflation or hinder its growth.  

In the event of a bond bear market, as we pointed out several times before, there will still be a few of pockets of opportunities a good fixed income investor can take advantage of. Fixed income spans from spectrums of high yield bonds, emerging market bonds and long term bonds to floating rates and short term bonds. Interest rate risk, though significant, does not mean all is lost. Yes, it will be more volatile and possibly lower returns for bond indexes. But we have confidence that a good active strategy such as our total return bond fund rotation will help navigate through this secular period and achieve a reasonable return. If there is anything, this era calls for such active strategies even more. 

Finally, we would like to remind our readers that amid the bearish talk on bonds, we view fixed income or bonds are still the vital component in an asset allocation portfolio. Even in a bond negative environment, bonds still serve as an important hedge or stabilizer for a portfolio. An all stock portfolio, however how negative bonds are, still has much higher risk than a stock and bond mix portfolio. When stocks undergo a correction, bonds, especially those high quality bonds such as (long term) Treasury bonds, will still become a fly to safety asset. That in turn will help to mitigate a portfolio’s risk. 

Market Overview

Last week, other than REITs, practically all of major assets lost ground. It appears that investors are finally getting over the euphoric period of Trump’s election victory and are adjusting the reality. We have no idea what markets will do next but as long as we manage our risk properly and stick to our sound strategies, we will stay on the course to achieve long term investment goals. 

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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