Conservative Allocation Mutual Funds Based Portfolios
Recently, we received a user’s question/request on conservative allocation portfolios:
I have an interest in managing some money in a conservative portfolio. I have accounts at Fidelity, so I had some interest in the portfolio below. However, looking at the performance of this portfolio vs other conservative funds shown below, has me thinking, why would anyone follow this portfolio? It greatly underperforms the other options. I’d like to see a newsletter address your group’s current thinking on conservative portfolios. There has to be something better than Fidelity Conservative Allocation for Fidelity investors. Or this portfolio needs to be restructured.
The portfolio and comparison the user refers to is as follows:
Fidelity Conservative Allocation Performance Comparison
|1Yr AR||3Yr AR||5Yr AR||10Yr AR|
|Fidelity Conservative Fund Upgrade||-1.0%||-3.6%||-0.5%||1.1%||3.8%|
|VWINX (Vanguard Wellesley Income Inv)||-1.4%||3.2%||5.6%||6.1%||7.4%|
|BERIX (Berwyn Income)||2.4%||0.9%||3.1%||4.1%||6.6%|
This conservative fund upgrade portfolio is a Fidelity brokerage specific portfolio that’s similar to a model portfolio P No Load Conservative Mutual Funds Upgrading Quarterly listed on Advanced Strategies. The performance has been extremely disappointing, to say the least.
In this newsletter, we will look at this problem in more details. We also want to answer a more general question: should one utilize ready made existing conservative allocation mutual funds or should we just construct a conservative allocation portfolio using stock and bond funds on his/her own?
Availability of no load and no transaction fee conservative mutual funds in a brokerage
The idea to construct conservative allocation mutual fund upgrade portfolios is to first pick a selective subset of ‘good’ conservative mutual funds and then use our fund momentum ranking technique to pick funds with the highest momentum score to invest. The frequency is to do this monthly while in the meantime to obey the minimum holding period requirement for each fund. The ‘good’ fund candidates are based on our own research and Morningstar’s ratings. For P No Load Conservative Mutual Funds Upgrading Quarterly listed on Advanced Strategies, we choose a set of such ‘good’ funds without considering their actual availability in a brokerage.
The following are the candidate funds used in the above portfolio (you can find this info on the portfolio page too):
- Berwyn Income BERIX
- Vanguard Wellesley Incom VWINX
- Permanent Portfolio PRPFX
- American Century One Choice Very Conservative AONIX
- Manning & Napier Pro-Blend Conservative Terms EXDAX
- Janus Conservtive Allocation JSPCX
- T.Rowe Price Personal Strat Income PRSIX
- Fidelity Strategic Real Return FSRRX
- James Balanced Golden Rainbow GLRBX
- Hussman Strategic Total Return HSTRX
Unfortunately, these funds are not always available as NTF (No Transaction Fee) no load fund in a specific brokerage. To make matters worse, many brokerages have very limited subset of NTF conservative funds available.
For example, we did a screen on Fidelity website to see the availability of its NTF funds, surprisingly, we only find 22 such funds available. Furthermore, there are only very few good funds:
There are only 3 funds that have Morningstar’s 10yr 5 star ratings. Many excellent funds like Vanguard’s VWINX or Berwyn Income BERIX are not available as NTF in Fidelity.
This is the challenge to construct a good list of candidate funds. In fact, in Fidelity Conservative Fund Plan, the one used for the user’s portfolio in question, it has only 6 such candidate funds.
The limited availability of ‘good’ conservative funds is not just in Fidelity. This occurs in virtually all of the brokerages.
High fees and lousy performance
It’s also very disappointing that for these allocation funds charge very high fees. From the above table, one can see the net expense ratios range from 0.5% to 1.7%.
This is very high, compared with many equity index funds’s 0.3% or lower.
Furthermore, these funds all underperformed BERIX and VWINX in the last 10 years.
Now let’s compare the Fidelity portfolio in the user’s question with the ‘generic’ one:
|1Yr AR||3Yr AR||5Yr AR||10Yr AR||10Yr Sharpe|
|P No Load Conservative Mutual Funds Upgrading Quarterly||-0.4%||4.5%||5.0%||5.5%||6.8%||1.41|
|Fidelity Conservative Fund Upgrade||-0.8%||-3.5%||-0.3%||1.0%||3.7%||0.7|
|Fidelity Conservative Total Return Dividend Portfolio||-0.1%||3.3%||5.4%||6.1%||7.9%||1.17|
|BERIX (Berwyn Income)||2.4%||0.9%||3.1%||4.1%||6.6%||1.09|
|VWINX (Vanguard Wellesley Income Inv)||-1.4%||3.2%||5.6%||6.1%||7.4%||1.1|
The ‘generic’ one outperforms the Fidelity one by a big margin. It also did better than BERIX while slightly underperformed VWINX in the last 10 years. Notice however, it has the highest 10 year Sharpe ratio, indicating better risk adjusted return. In fact, its maximum drawdown in the last 10 year is only 9.4%, less than half of VWINX’s 19%.
Of course, none of these are no better than our Fidelity Conservative Total Return Dividend Portfolio that’s listed on What We Do -> Brokerage Investors page. We covered this type of portfolio in January 30, 2017: Brokerage Specific Conservative Portfolios and other newsletters.
From the above exercise, we can see that the limited availability of conservative mutual funds in a brokerage and high fees in these funds severely affects our ability of building a good conservative portfolio using these actively managed existing funds. On the other hand, even assuming all of the ‘good’ conservative allocation funds are available in a brokerage (i.e. the ‘generic’ portfolio P No Load Conservative Mutual Funds Upgrading Quarterly), it’s still not as competitive as the ones constructed using low cost stock index funds and a total return bond fund portfolio (i.e. Fidelity Conservative Total Return Dividend Portfolio)
Of course, Fidelity Conservative Total Return Dividend Portfolio is US centric: its stock funds are US stocks and US REITs which have outperformed other international funds for the past 10 years. However, one can follow the similar methodology to construct a global stock based conservative allocation portfolio that’s still better than many excellent conservative allocation funds.
In conclusion, we do not advocate using existing conservative allocation mutual funds to construct a conservative portfolio. We prefer using either index funds or our own stock and bond portfolios to build such a conservative portfolio. In the next newsletter, we will discuss this in more details.
US stocks shook off the trade war concern and staged another attempt to ascend. However, one should be very concerned that stocks in the rest of the world were all weakened considerably last week. US stocks are now the only bright star among all risk assets, as in past many years. Bonds have recovered somewhat, signaling rising interest rate fear might be waning. As always, we believe it’s futile to attempt to predict market direction in a short term. The best is to follow a well designed plan and stay the course.
For more detailed asset trend scores, please refer to 360° Market Overview.
Now that the Trump administration has been in the office for more than a year, the economy and financial markets are in general still in a good shape. Whether the economy will continue to benefit from the supposedly trickle down of the tax cut, the deregulation, and the promised infrastructure spending remains to be seen. On the other hand, stocks continued to ascend, regardless of the progress. Looking ahead, however, we remain convinced that markets will experience more volatilities at some point when reality finally sets in.
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 about 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.
How can we improve this newsletter? Please take our survey
–Thanks to those who have already contributed — we appreciate it.
- July 2, 2018: Small Cap Stocks For The Long Term
- June 25, 2018: What Can We Learn From GE’s Removal From Dow Jones Index?
- June 18, 2018: The ‘Best’ Balanced Portfolio Continues To Excel
- June 11, 2018: Is 10 Year Long Enough For Portfolio Comparison?
- June 4, 2018: Action Plan: Risk Review For Investments
- May 21, 2018: Rising Rates, Consumer Staples And Stock Index
- May 14, 2018: Newsletter Collection Update
- May 7, 2018: Money Market Fund Taxonomy
- April 30, 2018: Momentum Investing Review
- April 23, 2018: Commodities In Current Environment
- April 16, 2018: Municipal Bonds As A Fixed Income Asset Class
- April 9, 2018: Exponential Or Compounding Nature In Investing
- April 2, 2018: Inside Of The Stock Chaos
- March 26, 2018: Total Return Bond Update
- March 19, 2018: Treasury Bills vs. Brokered CDs
- March 12, 2018: Defensive Conservative Portfolio Review
- March 5, 2018: Warren Buffett’s Advices
- February 26, 2018: Pros And Cons of Strategic And Tactical Portfolios In 2018
- February 12, 2018: Trend Review
- February 5, 2018: Market Selloff And Long Term Investing
- January 29, 2018: The New Addition To Our Total Return Bond Fund Candidates
- January 22, 2018: Where Are Bonds Heading?
- January 15, 2018: Tactical Portfolios Review
- January 8, 2018: Strategic Portfolios Review
- December 18, 2017: Record Highs And Risk
- December 11, 2017: Cash Return And Interest Rate Update
- December 4, 2017: Mutual Fund Star Ratings: Are They Useful?
- November 20, 2017: Thankful And Mindful
- November 13, 2017: Is This A Good Time For Retirees Or Would Be Retirees?
- November 6, 2017: Newsletter Collection Update
- October 30, 2017: Rising Interest Rates
- October 23, 2017: A Primer For Portfolios
- October 16, 2017: REITs As An Asset Class
- October 9, 2017: Conservative Portfolios Revisited
- October 2, 2017: The Role of Short Term Bond Funds
- September 25, 2017: Fees In Cash Investments
- September 18, 2017: Conservative Portfolios Review
- September 11, 2017: International Diversification Effect
- September 4, 2017: Invest And Speculate Revisited
- August 28, 2017: Total Return Bond Fund Portfolios: Where Do They Fit?
- August 21, 2017: Portfolio Performance: A Walk In The Past
- August 14, 2017: Fidelity Commission Free ETFs Update
- August 7, 2017: I Didn’t Learn Anything — Mistake vs. Temporary Underperformance
- July 31, 2017: Asset Classes And Fund Choices: A Primer
- July 24, 2017: Total Return Bond Fund Portfolios And Cash
- July 17, 2017: Long Term Stock Holding Periods For Retirement
- July 10, 2017: Half Year Asset Trend Review
- June 26, 2017: How To Beat The Best Balanced Allocation Fund
- June 19, 2017: Newsletter Collection Update
- June 12, 2017: A Mixed Bag Performance of Momentum Investing
- June 5, 2017: How To Start A New Portfolio
- May 29, 2017: Alternative Assets And Their Role In Portfolios
- May 22, 2017: Summer Seasonality And Portfolio Management
- May 15, 2017: Cash: Banking Or Investing?
- May 8, 2017: Holding Period of Long Term Timing Portfolios
- May 1, 2017: Debate on Risk vs. Volatility
- April 24, 2017: The Long Term Stock Market Timing Return Since 1871
- April 17, 2017: Risk vs. Volatility: Long Term Stock Market Returns
- April 10, 2017: Total Return Bond ETFs And Portfolios
- April 3, 2017: Quarter End Asset Trend Review
- March 27, 2017: Practical Consideration For IRAs And 401k Accounts
- March 20, 2017: Fund Fees: That’s (Still) Outrageous
- March 13, 2017: Long Term Stock Valuation Review
- March 6, 2017: Asset Classes for Retirement Investments
- February 27, 2017: Fidelity Total Bond Fund Review
- February 20, 2017: Long Term Stock Timing Based Portfolios And Their Roles
- February 13, 2017: Alternative Investment Portfolios Review
- February 6, 2017: Tax Free Municipal Bond Investments Review
- January 30, 2017: Brokerage Specific Conservative Portfolios
- January 23, 2017: Fixed Income Portfolio Review
- January 16, 2017: Long Term Trend Following Portfolio Review
- January 9, 2017: Tactical Asset Allocation Review
- January 3, 2017: Strategic Asset Allocation Review
- December 12, 2016: Enhanced Index Funds
- December 5, 2016: Review Of Broad Base Core Mutual Funds For Brokerages
- November 28, 2016: Core Index ETFs Review
- November 21, 2016: International Exposure Of U.S. Large Companies
- November 14, 2016: Asset Trends After The Election
- November 7, 2016: Rising Rate And Current Bond Trend
- October 31, 2016: Economy Power And Long Term Stock Returns
- October 24, 2016: Current Commodity Trend And Managed Futures
- October 17, 2016: Investment Mistakes And Good Or Bad Investment Strategies
- October 10, 2016: Momentum Investing Review
- October 3, 2016: Survey & Feedback
- September 26, 2016: Fixed Income Investing: Actively Managed Funds vs. Index Funds
- September 19, 2016: Stock Investing: Actively Managed Funds vs. Index Funds
- September 12, 2016: Newsletter Update
- September 5, 2016: Overvalued Markets And Long Term Timing Strategies
- August 29, 2016: Your 401K Finally Draws Attention
- August 22, 2016: Inflation Protected Securities TIPS For Current Overvalued Markets
- August 15, 2016: Risk On: Emerging Market Stocks And Small Cap Stocks
- August 8, 2016: Portfolio Construction Using Stock ETFs And Bond Mutual Funds
- August 1, 2016: Adding Value To Your Own Investments
- July 25, 2016: Tactical Asset Allocation Funds Review
- July 18, 2016: Strategic Asset Allocation & Lazy Portfolio Review
- July 11, 2016: Asset Trend Review
- June 27, 2016: Secular Cycles For Tactical And Strategic Investment Strategies
- June 20, 2016: A World of Debt
- June 13, 2016: Managed Futures For Portfolio Building
- June 6, 2016: Newsletter Summary
- May 30, 2016: Swensen Portfolio And Permanent Portfolios
- May 23, 2016: AAII Article And Some Web Changes
- May 16, 2016: The PIMCO (Dis)Advantages
- May 9, 2016: Boost Your Dull Summer Investments
- 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