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

Regular AAC (Asset Allocation Composite), SAA and TAA portfolios are always rebalanced on the first trading day of a month. the next re-balance will be on Monday August 3, 2020.

Please note: As of March 1, 2020, we officially phased out our old rebalance calendar for both SAA and TAA. They are now always rebalanced on the first trading day of a month. 

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.

Total Return Bond Funds Update

Morningstar recently announced the winners. for the managers of the year (2020) award. As Morningstar changed its award structure two years ago, the awards are only in the three categories: Outstanding Portfolio Managers, Rising Talent, and Exemplary Stewardship. For any given year, it’s likely there won’t be any award given to a fixed income manager. 

This year, PIMCO’s Mohit Mittal was named to receive Rising Talent award. He is a co-manager of PIMCO Total Return Bond fund (PTTAX). Since this fund is already in our candidate fund lists for total return bond fund portfolios, we will not have any new addition this year. 

Even though the Morningstar’s award is our main criterion for selecting funds for our total return bond fund portfolios, please note that we do occasionally use other discretion to maintain the lists. We believe some extra efforts to add/delete a new fund is warranted: as times goes, old managers may have retired and a fund might have changed dramatically. Similarly, as the Morningstar award is now irregular to choose a fixed income manager, it’s possible that we might be able to find some good funds that are missed in the awards.  

Recent performance

The following table shows the latest performance for the candidate bond funds: 

Bond fund total returns as of 7/24/2020:
Ticker/Portfolio Name YTD
Return**
1Yr AR 3Yr AR 5Yr AR 10Yr AR 15Yr AR
Schwab Total Return Bond 6.8% 11.1% 6.3% 6.2% 6.8% 7.8%
PTTAX (PIMCO Total Return A) 7.0% 9.2% 5.0% 4.1% 3.9% 5.0%
DLTNX (DoubleLine Total Return Bond N) 3.0% 4.3% 3.7% 3.3% 4.9%  
LSBRX (Loomis Sayles Bond Retail) -3.3% -0.4% 0.7% 2.6% 4.3% 5.1%
PONAX (PIMCO Income A) -0.8% 1.4% 3.2% 4.5% 7.0%  
PBDAX (PIMCO Investment Grade Corp Bd A) 4.2% 8.4% 5.7% 5.6% 6.0% 6.5%
MWTRX (Metropolitan West Total Return Bond M) 7.7% 11.3% 6.1% 4.6% 4.9% 5.6%
WABRX (Western Asset Core Bond R) 7.0% 9.7% 5.5% 4.6%    
TGMNX (TCW Total Return Bond N) 7.7% 9.5% 5.3% 3.9% 4.7% 5.7%
PDBZX (Prudential Total Return Bond Z) 5.7% 9.1% 5.9% 5.3% 5.3% 5.8%
FTBFX (Fidelity Total Bond) 7.1% 9.9% 5.6% 4.9% 4.6% 5.4%
DODIX (Dodge & Cox Income) 6.4% 9.0% 5.5% 4.9% 4.6% 5.1%
VBMFX (Vanguard Total Bond Market Index Inv) 7.5% 10.2% 5.5% 4.4% 3.8% 4.4%

A few comments: 

  • Loomis Sayles total return bond fund underperformed significantly year to date, and for the past 1, 3 and 5 years. This is somewhat expected as this fund tends to have sizable exposure to corporate bonds with low quality (high yields). Based on Morningstar, as of May 31, 2020, the fund had at least 23% (actually more as there was another 10% bonds as not rated) exposure on bonds rated BB or lower (junk bond rating). Though this fund has lagged recently, since 2000, it has outperformed other funds meaningfully (but with much higher volatility): 

  • DoubleLine fund lagged for the past 1,3, and 5 years, though it’s still one of the best performers for the past 10-year period. The fund is especially fond of mortgage back securities and usually has sizable exposure to them. Unfortunately, these bonds didn’t benefit much from the recent Federal Reserve’s unprecedented open market purchases of Treasury and corporate bonds. 
  • Year to date, funds that have less exposure in Treasury bonds have underperformed VBMFX, Vanguard total bond market index fund. Only Metropolitan and Prudential funds managed to slightly outperform VBMFX. 
  • Similarly, PIMCO income fund lost its recent shine and actually had a negative return year to date. This fund relies on sizable bets on corporate and foreign bonds with some derivative leverage to enhance its returns. We’ll discuss this fund in more depth shortly. 
  • However, all of total return bond funds have bettered VBMFX for a period of 10 years or longer, indicating a consistent long term outperformance from these excellent bond funds. 
  • Our representative Schwab total return bond portfolio has managed to outperform VBMFX and virtually most of funds in the table for past 1, 3, 5, 10, and 15 years! The only exceptions are MWTRX’s one year outperformance and PONAX’s 10 year outperformance. 

The PIMCO Income fund phenomenon

Over the past several years, PIMCO income fund has been one of the stellar outperformers: it has bettered other funds and even our total return bond fund portfolios by some big margins over the years. It was so good that we every now and then received emails from subscribers who claimed that it might be just better off to invest in this fund and forget about other methods. 

However, its recent underperformance has made it lag behind (sometimes by some large percentages) for the past years. Its 3 year annualized return, for example, is more than 3% less than the Schwab portfolio’s (3.2% vs. 6.3%). It was only able to beat our Schwab portfolio 7% vs. 6.8% annually for the past 10 years. But it still lagged behind since its inception: 

We didn’t intend to brag about our portfolios over PIMCO income fund, which, by the way, we value highly. What we want is to do is to take the current situation as a historical snapshot and re-emphasize our belief: regardless how good a particular fund is for a long period of time, it’s very likely (and probably virtually certain) that there will be some periods of time in which the fund will underperform significantly. A regular review and fund rotation strategy like the one employed by our total return bond fund portfolios can help to mitigate these short term bumps, avoid some long term performance traps if a fund indeed turns into a more permanent loser, and enhance long term returns with similar or lower risk.   

This kind of phenomenon has occurred again and again from time to time. We hope one can learn from these situations when they arise. 

Market overview

We are now in the earnings report period of Q2: so far, with 26% of companies having reported results for S&P 500 companies, 86% of them reported better than their expected earnings last week. The blended earnings decline was -42.4%, better than the expected -44.1% on June 30. Of course, one shouldn’t read too much into this as companies and analysts have had no much visibility on earnings these days due to the great uncertainty of the Covid19 pandemic, the ‘beaten’ expected earnings were too arbitrary to have good credibility. 

There has been slight positive improvement last week in stock market internals: both ratios of the number of stocks that are above their 200 day moving averages for NYSE index and S&P 500 have improved. However, these are still not robust enough for us to declare an up trend. 

As pointed out last week, we are still seeing great performance dispersion and see most of headline stock indexes gain were from a few (dozen) of technology stocks. Furthermore, the current stock valuation, even without the impact of the current pandemic, has been historically very high. The government’s strong support of capital markets has propped up stocks but as the pandemic drags on with ups and downs, more and more companies have suffered from not-so-temporary damage (such as permanent layoffs and bankruptcies). Perhaps a good analogy is that current markets are just like a patient with some chronic conditions on steroid: looks healthy but sick inside. 

Simply put, if the current situation doesn’t warrant a prudent risk conscious stance, we don’t know what situations will be. 

We again emphasize the following in the current situations: 

  • For strategic allocation (buy and hold) investors, ignore the current market behavior. Remember, as what we have emphasized numerous times, when you choose and commit to a strategic portfolio, you essentially know and commit that your investment horizon (or the time you need to utilize this capital) is 20 years or longer. As we pointed out, if your investments are those diversified (index) funds such as an S&P 500 index fund (VFINX, for example), you know your money is in some solid ‘business’ that eventually (20 years later) will deliver some reasonable returns. As long as you are comfortable with this thesis, you should sit tight and forget about the current gyration.
  • For tactical investors, again, you have to ignore the current market noise. Furthermore, you should follow your strategy rigorously, especially in a time like this. Human emotion, both optimistic and pessimistic, and human desire, both greedy and fearful, are your worst enemies. This has been shown to be true time and time again.

In terms of investments, stocks are somewhat cheaper. Investors should not be swayed by the current market volatility and economic distress, instead, they should stand ready to take advantage of the opportunities. For most Americans, we offer the following Winston Churchill’s remark made in the darkest days of World War II: “The Americans will always do the right thing, but only after they have tried everything else.” As a country, the US (and the rest of the world) will get over this, as always, even after stumbles. The past development has been very supportive to our optimistic long term view so far. 

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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