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 Thursday July 1, 2021. 

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.

Outperform The Best Performing PIMCO Income Bond Fund

Our fixed income bond fund portfolios (see Income Investors page) have consistently outperformed many excellent total return bond funds for the past 10 years since they went live. It’s a remarkable feat to be able to outperform funds like PIMCO total return bond fund, DoubleLine total return bond fund, Loomis Sayles bond fund and others that have been managed by managers who have won at least one Morningstar fixed income manager of the year award. 

In this newsletter, we want to point out that our portfolios actually even outperformed the best in the pack of these bond funds, PIMCO Income fund. 

PIMCO Income fund, the best bond fund

Strictly speaking, PIMCO income fund (PONAX, PIMIX) is not a total return bond fund that’s usually more limited in their exposure to foreign and high yield bonds. But as our total return bond mutual fund portfolios (on Income Investors) use a dynamic rotation strategy that can rotate to other funds or even cash if its holding underperforms in order to avoid big loss, we decide to include this fund in the candidate fund list. 

Regardless, this fund has been the undisputed champion among the candidate funds (and all other intermediate bond funds): 

Total return bond fund returns (as of 6/11/2021):
Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR 15Yr AR
PONAX (PIMCO Income A) 1.7% 10.0% 5.5% 5.5% 6.5%  
PTTAX (PIMCO Total Return A) -1.3% 1.5% 5.6% 3.6% 3.4% 5.0%
PBDAX (PIMCO Investment Grade Corp Bd A) -1.6% 4.3% 6.7% 4.9% 5.2% 6.6%
DLTNX (DoubleLine Total Return Bond N) -0.1% 1.8% 3.9% 2.7% 3.7%  
LSBRX (Loomis Sayles Bond Retail) 1.8% 10.6% 3.9% 3.6% 3.8% 5.2%
TGMNX (TCW Total Return Bond N) -1.5% -0.3% 5.3% 3.0% 3.9% 5.5%
FTBFX (Fidelity Total Bond) -0.7% 3.5% 6.5% 4.2% 4.1% 5.4%
VBMFX (Vanguard Total Bond Market Index Inv) -2.0% -0.5% 5.4% 3.0% 3.2% 4.2%

**YTD: Year to Date, not annualized. AR: Annualized Return

Notice in the past 10 years, the ‘standard’ total return bond fund that has the best annualized return is Fidelity Total Bond (FTBFX). But including PIMCO Income (PONAX) and PIMCO Investment Grade Corp Bond (PBDAX), PONAX did way much better than the rest for the past 10 years (and 5 years and since its inception 4/2/2007). 

In fact, it more than doubled annualize returns of VBMFX! 

Notice also all of the funds did better than Vanguard total bond index VBMFX for the past 10 years. It’s interesting to see that DLTNX (DoubleLine fund) is the only one that underperformed VBMFX in the past 5 years (but it did outperform for the 10 years). 

Based on Morningstar, on 3/31/2021, the fund’s the top 3 holdings are all futures (derivatives):

  • 7.5% Brazilian Real CME Futures
  • 7.4% Interest rate swap Futures
  • 5.4% Euro interest rate swap Futures 

Again, this fund is not a vanilla style bond fund: it utilizes futures to leverage (based on Morningstar, 2x leverage) and get exposure in currencies, foreign bonds and even credit swaps (credit bonds). 

Outperform PIMCO Income fund

Now, let’s compare our total return bond fund portfolios with PONAX. You can find these portfolios from Income Investors page (scroll down on that page and then click to expand Latest Performance tab).

The following chart shows the total returns since PONAX inception date 4/2/2007:

We see other than Vanguard Brokerage Total Return Bond portfolio that underperformed PONAX, all others have done better (Fidelity one was very close to PONAX). On the other hand, let’s look at the above picture and the recent 5 year chart: 

PIMCO Income Fund had much larger drawdowns (interim loss) in 2008 and 2020, compared with a much more smooth returns of our total return bond fund portfolios. So it’s very clear our portfolios have much lower volatility (or risk). 

What’s more, if we compare this fund with our flagship ETF portfolio MPIQ ETF Fixed Income, one can see that this ETF portfolio has not only outperformed the fund, it did it with so much less volatility (our portfolio side stepped the steep loss in 2020):

Portfolio Performance Comparison (as of 6/11/2021):
Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR Since 12/31/2014
MPIQ ETF Fixed Income 1.8% 6.4% 8.3% 6.1% 5.4%
PTTAX (PIMCO Total Return A) -1.3% 1.5% 5.6% 3.6% 3.3%
DLTNX (DoubleLine Total Return Bond N) -0.1% 1.8% 3.9% 2.7% 2.8%
PONAX (PIMCO Income A) 1.7% 10.0% 5.5% 5.5% 5.2%
VBMFX (Vanguard Total Bond Market Index Inv) -2.0% -0.5% 5.4% 3.0% 3.1%

If the reason that our mutual fund portfolios can outperform PONAX is because these portfolios also utilize PIMCO Income fund and PIMCO Investment grade bond fund as their candidate funds (so that in some periods like right now, these portfolios can take advantage of these two funds’ outperformance), our ETF portfolio only uses plain vanilla bond ETFs as its candidate funds. No leverage and no exotic derivative exposure! This in itself is significant. 

In conclusions, we believe it’s possible to consistently outperform even the world’s best bond funds with less risk. Our fixed income bond portfolios have delivered to date and we have confidence that this will continue. 

Market Overview

US stocks defied the recent surging CPI numbers and reached new heights last week. Markets seem to believe (or have taken a bet) that the current runaway inflation numbers are temporary (or ‘transitory’, using the Federal Reserve’s chief Jay Powell’s words), once inflation falls back to normal numbers, the good time (stimulus driven) economy will continue. 

In our opinion (which should be treated more as an educated guess), we do believe it’s highly likely that the current inflation surge is temporary. The question is whether the economy can continue to grow strongly once the current strong fiscal stimulus (to counter the pandemic) runs out in September. So this is a deflation scenario worry. On the other side of the coin, it’s of course possible that the inflation might not be temporary at all. Both extreme scenarios await. Considering the current extremely high stock valuation and extremely low bond yields, we believe that markets can easily be tiptoed to downside.  

We are again cautiously optimistic and reiterate 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.

Enjoy Newsletter

How can we improve this newsletter? Please take our survey 

–Thanks to those who have already contributed — we appreciate it.

Latest Articles

Any investment in securities including mutual funds, ETFs, closed end funds, stocks and any other securities could lose money over any period of time. All investments involve risk. Losses may exceed the principal invested. Past performance is not an indicator of future performance. There is no guarantee for future results in your investment and any other actions based on the information provided on the website including, but not limited to, strategies, portfolios, articles, performance data and results of any tools. All rights are reserved and enforced. By accessing the website, you agree not to copy and redistribute the information provided herein without the explicit consent from MyPlanIQ.