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.

Divergence Between Value And Growth Stocks Everywhere

Headline stock indexes are rising strongly, with Nasdaq composite making historical highs recently. However a closer examination reveals some big divergence, especially between value and growth stocks. 

Value stocks lagging behind

First, let’s take a look at our trend score table among nine US stock styles:

As of 07/17/2020

Description Symbol 4 Weeks 26 Weeks 52 Weeks Trend Score
Russell Largecap Growth IWF 5.52% 9.04% 25.67% 11.55%
Russell Midcap Growth IWP 4.29% 3.86% 13.3% 8.49%
Russell Smallcap Growth IWO 5.19% -3.21% 7.5% 7.4%
Russell Largecap Index IWB 4.37% -2.15% 10.06% 5.43%
Russell Midcap Indedx IWR 3.7% -8.9% -1.12% 2.58%
Russell Smallcap Index IWM 3.97% -12.68% -3.33% 2.44%
Russell Largecap Value IWD 2.75% -14.63% -6.43% -1.44%
Russell Midcap Value IWS 2.84% -17.77% -11.03% -1.78%
Russell Smallcap Value IWN 2.42% -23.65% -16.93% -3.78%

The above table shows the three value styles are ranked at the bottom with negative trend scores. Also notice that only Large cap growth and Midcap growth stocks have had positive returns for the past 26 weeks! It’s very revealing that large growth stocks are the only pulling engine for the recent stock rally. 

The following chart shows a historical chart of Russell 1000 Growth (Large Cap Growth) IWF over Russell 1000 Value (Large Value) IWD ratio: 

Growth has been favored over value since the 2008 crisis and its ratio is at a historical high right now. By the way, the latest exponential rise of this ratio started since February 25 this year, a time when stocks peaked. 

The divergence in allocation funds

This growth/value (and large over small) divergence is showing up everywhere. The implication is that there are many funds/portfolios that have underperformed S&P 500 (and of course Nasdaq). Specifically, let’s look at how some of good asset allocation funds have performed lately. 

MyPlanIQ keeps track of a list of excellent allocation funds on our SmartMoneyIQ Managers page. The following table shows some of US (domestic) allocation funds: 

US allocation funds returns (as of 7/17/2020):
FundName YTD
Return**
1Yr AR 3Yr AR 5Yr AR 10Yr AR 15Yr AR
FPACX (FPA Crescent) -8.7% -4.7% 1.6% 3.6% 7.2% 6.5%
LCORX (Leuthold Core Investment Retail) 0.7% 4.2% 3.6% 4.1% 6.5% 6.3%
GRSPX (Greenspring) -15.9% -10.9% -1.9% 1.9% 4.1% 4.4%
PRWCX (T. Rowe Price Capital Appreciation) 4.6% 10.4% 11.2% 10.3% 12.3% 9.4%
BRUFX (Bruce) -1.6% 7.0% 6.5% 6.0% 9.7% 7.3%
HSGFX (Hussman Strategic Growth) 13.6% 6.7% -1.8% -5.4% -6.9% -4.1%
VWINX (Vanguard Wellesley Income Inv) 2.9% 7.8% 7.0% 6.9% 7.9% 7.0%
VBINX (Vanguard Balanced Index Inv) 3.7% 10.2% 9.1% 8.1% 9.9% 7.3%

Observation and comments: 

  • For the last trailing year, only PRWCX managed to outperform VBINX, the de facto US moderate allocation index fund. 
  • YTD (Year To Date), famed FPACX and BRUFX still had loss while Greenspring fund continued its stream of underperformance. This fund underperformed VBINX by 3% to 5.8% annually for the past 10 and 15 years. 
  • Both managers of FPACX and BRUFX are extremely well respected value investors. We attribute their underperformance strictly due to heavily value tilted investments. FPACX, for example, tends to have some sizable exposure to energy stocks that are often undervalued. This certainly hurts its recent performance. 
  • On the other hand, the ‘world’s best balanced fund’ PRWCX continued to outperform — this fund invests in growth stocks that the managers deem to possess reasonable prices. The following are its top 10 holdings as of June 30, 2020, most of them are growth stocks (some are not, for example GE is value stock). We highly commend the fund’s savvy and balanced investment approach!

  • Similarly, Vanguard Wellesley (VWINX)’s balanced stock exposure has served the fund very well. 
  • Finally, we want to commend Hussman’s Strategic Growth fund HSGFX. It finally broke out of its recent long period of bad fortune and returned 13.6% YTD. We highly respect Dr. Hussman’s integrity and consistency. Similar to PRWCX, the fund invests in a core portfolio of stocks that fall into Growth with reasonable price category. Its previous underperformance was mostly due to over hedge when stocks were highly overvalued and highly extended (but investors were still willing to speculate). He has since corrected that approach by adding market uniformity as one of the key factors to guide the fund’s short term hedge. We truly hope and believe that the fund will be back on track as it’s one of very few funds that take risk seriously and can help to hedge big risk. 

In the global allocation front, we see more divergence/underperformance: 

Global allocation fund performance (as of 7/17/2020) 
Ticker/Portfolio Name YTD
Return**
1Yr AR 3Yr AR 5Yr AR 10Yr AR 15Yr AR
GBMFX (GMO Benchmark-Free Allocation III) -7.9% -4.2% 0.3% 1.4% 4.2% 5.3%
PASAX (PIMCO All Asset A) -3.8% -0.6% 2.2% 3.5% 4.0% 4.3%
WASYX (Ivy Asset Strategy Y) -2.2% 2.8% 6.7% 2.6% 5.8% 7.5%
SGIIX (First Eagle Global I) -4.8% 0.4% 3.5% 5.2% 7.6% 7.6%
MALOX (BlackRock Global Allocation Instl) 4.9% 11.3% 5.9% 5.2% 6.5% 6.7%
DMLIX (DoubleLine Multi-Asset Growth I) -6.4% -2.6% 1.0% 3.4%    
DGSIX (DFA Global Allocation 60/40 I) -2.0% 3.6% 4.7% 5.3% 7.3% 5.7%

Observations: 

  • GBMFX, PASAX and SGIIX are all well known for their value conscious investment approach. 
  • GMO’s famous allocation fund GBMFX is affected most. it has underperformed DFA 60/40 index based allocation fund DGSIX for a long period of time now (since 2008). PIMCO All value fund PSASX has also fared poorly. 
  • First Eagle Global (SGIIX)  fund did better than the previous two funds, This is mostly due to its traditional exposure to gold: as of 4/30/2020, it held 12.6% gold! This fund has a stellar track record: it outperformed DGSIX for 10 and 15 year periods. 
  • Finally, BlackRock Global Allocation fund MALOX did a strong come back recently by refocusing on growth stocks (its largest holdings as of 4/30/2020 include Microsoft, Amazon, Apple and Google). 

To summarize, it’s been a period when investors can very much judge a fund’s performance by merely looking at how much growth stock exposure it has. The growth over value phenomenon has become a dominating factor in investments (other dominant factors include large over small, US over international). 

Market overview

Major stock indexes defied recent negative news from Covid19 pandemic and China trade relationship. S&P 500 breached its recent highs and now is year to date positive. It’s encouraging to see both small cap stocks and mid cap stocks indexes have now been above their 200 day moving averages respectively. They have also turned positive in our trend score table on 360° Market Overview). 

However, there are still too many individual stocks that are still not in an uptrend. The following chart shows the percentage of stocks in New York Stock Exchange that are above their 200 day averages: 

At the moment, 38.8% of NYSE stocks are above their 200 day moving averages. This is still much lower than its average (around 45 to 50%). Just like what we see in the above analysis of allocation funds, investors are more likely to experience a bear market return than a bull market one. 

We call for patience. We believe that the uncertainties caused by the pandemic will be soon cleared up in the coming months, one way or the other. Though we are aware of some unreasonable bubble in growth stocks, we also recognize that many companies do possess a lot of cash that can be put to work (such as buying back company stocks once the pandemic crisis recedes, see, for example, JP Morgan’s CEO Jamie Dimon’s recent investor letter). 

Regardless,  we 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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