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 Tuesday March 1, 2022. 

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.

Asset Allocation Fund Review

Speaking of asset allocation funds, it’s kind of like dusting off something long forgotten out of one’s closet. For more than ten years, investments have always centered on one theme: US stocks and, to a less extent, US bonds. There isn’t much use to allocate to international and other assets. In fact, among stocks and bonds, there isn’t very much use to pick any asset other than US stocks. There Is No Alternative (TINA). 

Like what we have pointed out in recent newsletters, developments including the ending of the pandemic, the surging inflation and now the Russian-Ukraine war are finally bringing us to a likely investment ‘regime’ change: the ultra loose monetary and fiscal stimulating plans are rapidly phasing out. One has to seriously look at possible stock and bond risk because of this secular change. 

In this newsletter, we review some good balanced funds and discuss their allocations. It’s interesting to see how these good managers handle the current situation in their portfolios. 

Latest performance

MyPlanIQ has monitored some of the best asset allocation funds for more than 10 years. One can find them on SmartMoneyIQ Managers page. First, let’s take a look at their latest performance:

Portfolio Performance Comparison (as of 2/25/2021):
Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR 15Yr AR
MPIQ ETF Allocation Up To 70 Percent Stocks -6.8% 7.3% 12.8% 10.5% 9.5% 8.9%
MPIQ ETF Allocation Moderate -6.5% 6.9% 12.4% 9.9% 8.8% 8.4%
PASAX (PIMCO All Asset A) -4.1% -3.1% 5.3% 4.8% 3.9% 4.7%
WASYX (Ivy Asset Strategy Y) -6.5% -5.6% 6.8% 7.1% 4.6% 6.0%
FPACX (FPA Crescent) -2.5% -6.6% 6.8% 5.8% 7.3% 6.7%
PRWCX (T. Rowe Price Capital Appreciation) -4.6% 2.7% 11.6% 11.1% 11.5% 8.6%
BRUFX (Bruce) -5.9% -3.0% 8.7% 7.5% 8.4% 7.0%
SGIIX (First Eagle Global I) -0.7% 9.7% 9.9% 7.8% 7.6% 7.0%
VBINX (Vanguard Balanced Index Inv) -6.7% 7.7% 12.4% 10.2% 9.6% 7.7%

YTD: Year To Date

MPIQ ETF Allocation Up To 70 Percent Stocks has up to 70 percent target stock allocation, compared with 60% of our representative portfolio MPIQ ETF Allocation Moderate. The reason to have this higher risk portfolio is to make it more comparable with funds like PRWCX (that can allocate 70% or even slightly more at a time). 

A couple of notes: 

  1. Other than last one year or YTD, none of the funds or portfolios has been able to outperform the boring and standard 60% US stocks/40% US bonds Vanguard balanced index fund VBINX for the past 3,5,10 years. For the past 15 years, only the two MyPlanIQ portfolios and PRWCX have done better than VBINX. 
  2. The world’s ‘best’ balanced fund PRWCX continued to outperform, even in the last two volatile months. We have discussed this funds many times. See, for example, June 26, 2017: How To Beat The Best Balanced Allocation Fund.
  3. Year to date, we can see that the tide has started to turn: most of these funds have done better than VBINX. This might indicate that the time of ‘global’ active allocation funds has returned. 

The following chart shows a longer time return comparison (since 4/30/2003):

Interestingly, the less known fund BRUFX (Bruce) is the best performer since 2003 while SGIIX (First Eagle Global I) is the second best. In fact, both funds are also the top two best performers if we extend our period since 1/1/2001. However, they aren’t able to keep up with VBINX for the recent 10 years or so. 

Of course, MyPlanIQ’s portfolio has done very well with way smaller maximum drawdown or interim loss, compared with all of these funds. 

So even though our recent memory might have been US stocks or just US centric index fund (VBINX, for example), we should be reminded that things were different before 2009 and the ‘global’ and ‘active’ strategies might start to come back. 

Recent allocations

Although mutual funds only disclose their holdings (and thus allocations) once every quarter (with many days lag), MyPlanIQ utilizes a statistical algorithm to derive a fund’s latest allocations (or to be precise, correlations) to major assets such as US stocks, US bonds etc. We publish the latest (daily) data on SmartMoneyIQ Managers page. In general, we believe our algorithm has done a good job to deduce quite useful and reasonably accurate allocation information from a fund. 

For example, on that page, we see the following: 

Hussman Strategic Growth (HSGFX)
Date CASH USBond USStk
2022-02-04 100.0 0.0 0.0
2022-02-11 100.0 0.0 -0.0
2022-02-18 80.8 19.2 0.0
2022-02-25 100.0 0.0 0.0

What the above says is that Hussman fund HSGFX has been out of stocks and mostly in cash for the past 4 weeks (regular visitors to this page actually will find out this fund has been in cash for many years). In reality, as Dr. Hussman is a very regular prolific newsletter writer, we can see from his newsletters and fund quarterly reports that the fund has been mostly fully hedged in recent years, i.e. 100% stocks with 100% put options of broad stock indexes such as S&P 500 and Nasdaq 100 index. Since the put options offset broad base stock fluctuation, the fund’s returns mainly come from the difference between the underlying holdings and the broad stock indexes. 

Just a note, HSGFX has done very well in the last several volatile months as its hedged strategy starts to reap the benefits from the relative stable returns of its underlying value/quality growth stocks. 

The T.Rowe Price fund PRWCX’s allocations are interesting: it actually slightly increased its US stock allocation recently. This indicates the fund manager’s confidence on stocks: 

T. Rowe Price Capital Appreciation (PRWCX)
Date CASH USBond IntlStk USStk
2022-02-04 21.7 24.1 -0.0 54.2
2022-02-11 33.0 10.1 0.0 56.9
2022-02-18 40.0 1.9 0.0 58.1
2022-02-25 41.5 0.5 0.0 58.0

On the other hand, perhaps the ‘best’ global allocation fund First Eagle SGIIX shifted its allocation from US stocks to international stocks recently. Note that as the data in the tables are derived using statistical analysis, they might not reflect the actual allocation change. But they do reflect the underlying holdings correlation with a particular asset. For example, in the table below, on 2/25/2022, SGIIX’s US stock allocation (or normalized correlation) was 10.7% while Intl stocks one was 47.9%. It’s possible that the fund’s holdings didn’t change much since 2/18/2022 but instead, its holdings themselves are more closely correlated to international stocks during this period. Regardless, the data do give us a sense on how its holdings are related to these two asset prices change. 

First Eagle Global (SGIIX)
Date IntlBond CASH USBond IntlStk USStk
2022-02-04 28.9 20.1 0.0 17.0 34.0
2022-02-11 21.6 17.9 5.2 22.6 32.7
2022-02-18 2.3 8.5 37.1 24.7 27.3
2022-02-25 0.3 10.0 31.0 47.9 10.7

One can go through other funds listed in the tables on the page. We summarize our findings here:

  • These good allocation fund managers are mostly unfazed by the recent financial market turmoil. They keep their overall stock allocations relatively unchanged.
  • Funds have started to shift to international stocks from US stocks. 
  • In terms of bonds, we don’t see a uniform picture: some are most in cash (i.e. short term bonds) and some are more in bonds (i.e. intermediate term bonds). 

In a word, these funds are stable in terms of their allocations. 

Markets in the current war time

Any war is horrible. It’s a despicable act to start a war as there is no winner and only human lives are lost and people greatly suffer. However, the impacts of war on financial markets are not necessarily always bad. In fact, stocks on average have had positive returns in the past after a war broke out:

Of course, as stocks on average return positively for all periods, the above anecdotal data just tell us that wars are probably some significant but not exceptional events. We’ll have to deal with them case by case. 

At the moment, we are seeing a still growing economy, albeit the growth has slowed down (the latest Atlanta Fed GDPNow estimate for the current quarter GDP growth: 0.6%). Retail sales, unemployment rates and industrial outputs, among other economic indicators, are still positive. Furthermore, it’s encouraging to see long term bond rate starts to come down: 

However, market internals are still not encouraging. For example, only 46% of S&P 500 stocks are above their 200 day moving averages. This is a low number often signaling a downtrend. 

Market Overview

Q4 earnings reports continued to be good: FactSet reported that by last week, with 95% of S&P 500 companies reporting earnings, the blended growth rate was 30.7%, trending higher every week. However, among companies issuing next quarter earnings guidance, 70% of them issued negative guidance, which is higher than the 5-year average of 60%. As markets are often forward looking, negative earnings growth guidance is certainly not a good news to markets. 

We believe recent market volatility will continue as several major developments are intertwined together: the Russian-Ukraine war, the pandemic and the inflation. Given both stocks and bonds are still at highly elevated levels, the current market weakness can still develop into a full blown bear market. We call for caution and urge investors to review their risk exposure (i.e. stock exposure). You want to prepare your investments to a level you are comfortable with, especially for strategic allocation in order to ride out a possible serious bear market. We also advocate the following practice:

  • 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.

Stock valuation is still extremely high by historical standard. For the moment, we believe it’s prudent to be cautious while riding on market uptrend. However how serious a correction might be, we have confidence in the US economy in the long term and thus in the stocks in aggregate. We just need to manage through interim losses carefully.  

We again would like to emphasize that 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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