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

For regular SAA and TAA portfolios, the next re-balance will be on Monday, July 1, 2019. You can also find the re-balance calendar for 2019 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.

Asset Allocation Funds Review

In addition to a well recognized theme that the US stocks have been a lone outperforming asset class in the current bull market (over 10 years and running), the other noticeable theme is that actively managed funds have lagged way behind index funds, being in stocks or even asset allocation. We will review the latest allocation fund performance in this newsletter. 

Global allocation continues to suffer

As long time readers might have known, this is not a unfamiliar theme. The following table shows the latest returns of some of best global allocation funds: 

Global allocation returns (as of 6/21/2019):
Fund/Portfolio YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR 15Yr AR
MPIQ Global Strategic Allocation Moderate 13.2% 8.2% 8.7% 6.5% 11.2% 8.7%
VBINX (Vanguard Balanced Index Inv) 13.5% 8.0% 9.6% 7.4% 10.4% 7.4%
GBMFX (GMO Benchmark-Free Allocation III) 6.8% 2.7% 5.4% 1.7% 5.6% 7.1%
PASAX (PIMCO All Asset A) 6.9% 3.9% 6.3% 2.1% 5.9% 5.1%
WASAX (Ivy Asset Strategy A) 14.6% 5.9% 8.1% 1.2% 6.3% 8.6%
SGIIX (First Eagle Global I) 13.6% 5.4% 7.3% 4.8% 9.4% 8.8%
MALOX (BlackRock Global Allocation Instl) 10.5% 3.3% 6.5% 3.4% 6.6% 7.0%
DMLIX (DoubleLine Multi-Asset Growth I) 10.4% 1.9% 6.9% 4.0%    

The above table compares some of best global allocation funds that are tracked on our SmartMoneyIQ Managers page. In addition to using Vanguard Balanced Fund index (VBINX) that’s 60% US stocks/40% bonds, we also include MPIQ Global Strategic Allocation Moderate. This portfolio is what MyPlanIQ is planning to offer as its standard strategic allocation portfolio. It consists of the following target allocation, rebalanced annually: 

60% in P_73286 (MPIQ AllStk)
40% inP_46880 (Schwab Total Return Bond)

The MPIQ AllStk was discussed in the previous newsletter May 6, 2019: Global Allocation Revisited that has the following target allocations: 

IntlStk VGTSX 14%
EmStk VEIEX 7%

Interested readers can refer to the previous newsletter in the above for rationale behind the above allocations. 

Schwab Total Return Bond represents our best idea portfolio using some of best total return bond mutual funds as candidate funds. This specific one is for investors in Schwab. You can find portfolios for other brokerages on What We Do -> Brokerage Investors page. 

A couple of comments: 

  • All of the funds in the table have some dismal returns for the past 5 years. They also badly underperformed VBINX for the past 10 years. 
  • Even the famed SGIIX (First Eagle Global I) faltered in 2018, dragging down its 5 year return. However, it still manages to outperform VBINX by large margin for the past 15 years (8.8% vs. 7.4%). This fund always holds some gold as an insurance (the latest holdings shows that it held 8% in gold). Its value investing in global stocks has paid off in the long term. So we expect again the recent underperformance is a short term aberration. 
  • Noticeably, PASAX (PIMCO All Asset A) has underperformed not only for the past 5 and 10 years, but even for the past 15 years. The fund has long held the belief that international stocks are cheaper. Furthermore, recently, the fund has held 60% to 70% in bonds, thus affecting its performance. Similar things can be said to GBMFX (GMO Benchmark-Free Allocation III)
  • MPIQ Global Strategic Allocation Moderate has some very respectable returns, balanced recent returns for the past 5 and 10 years but outstanding 15 years returns. This indicates a US stock tilted allocation (after taking large US companies’ international exposure into account) as well as the help of our excellent bond portfolio in fixed income portion. 

To summarize, the international exposure of the allocation funds has greatly affected their recent returns. But if history is any guide, the mean reversion will eventually happen, bringing these funds again back to their long term performance track. 

Active management doesn’t pay off

The above actually also shows that actively managing style depressed returns. For example, the heavy exposure in bonds by PIMCO All Asset certainly didn’t help. This is also evident in the following domestic allocation funds:  

Domestic Allocation Fund Performance Comparison (as of 6/21/2019):
Fund YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR 15Yr AR
FPACX (FPA Crescent) 13.9% 5.6% 8.4% 4.9% 9.1% 7.6%
LCORX (Leuthold Core Investment Retail) 6.5% -0.2% 6.1% 3.9% 7.1% 6.9%
BRUFX (Bruce) 12.3% 7.3% 6.2% 4.9% 11.3% 8.7%
DODBX (Dodge & Cox Balanced) 7.7% 2.0% 9.4% 6.1% 11.1% 7.0%
PRWCX (T. Rowe Price Capital Appreciation) 17.3% 14.7% 11.9% 10.3% 13.0% 9.6%
VBINX (Vanguard Balanced Index Inv) 13.5% 8.0% 9.6% 7.4% 10.4% 7.4%

Five year chart: 

Among them, FPA Crescent, one of the most stellar allocation funds, has lagged behind. The fund employs a value investing method to pick stocks. Furthermore, it can short stocks that it deems too expensive. The value investing style has underperformed for the past 5 years or so. This now affects this fund’s performance. 

The other active/tactical fund, LCORX (Leuthold Core Investment Retail), didn’t fare well either. The fund can be very tactical in its allocation of stocks and bonds, based on its outlook on these assets. This again severely affects its recent returns as the only best game in town in asset allocation is to hold steady allocations in both US stocks and bonds. 

We want to give credits to Dodge & Cox Balanced fund that employs a growth at reasonable price (GARP) stock investing methodology that actually works well in the current growth dominant stock market. Similarly, the ‘best’ balance fund T. Rowe Price Capital Appreciation also employs GARP and its adept investing in fixed income also contributes to its continuing outperformance. 

Market overview

S&P 500 rose to record as the Federal Reserve is now perceived to cut interest rates in the near future. The recent strength of markets is based on two major assumptions: in addition to interest rate cut, a reasonable outcome of trade negotiation with China. At this moment, even though headline stock indexes like S&P 500 and Dow Jones Industrial are in record highs, other stocks such as small cap and mid cap stocks have not been able to breach their highs made last year. Either the current euphoria will continue to push the overall markets to record high or the large cap heavy indexes will revert back their up trend. As usual, no one is able to accurately predict among uncertainties and the best action is to stay the course and let the long term process takes care of itself. 

For more detailed asset trend scores, please refer to 360° Market Overview

In terms of investments, even after the recent retreat, U.S. stock valuation is still at a historically high level and a bigger correction is still waiting to happen. It is thus not a good time to take excessive risk. However, we remain optimistic about 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. 

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