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.
Ticker/Portfolio Name | YTD Return** |
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.
Latest Articles
- 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 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
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