November 22, 2021: The ‘Best’ Balanced Fund Revisited

Nov 23, 2021 | Asset-Allocation, Bonds, Economy, Feature, Gold, Headline, Income, Investments, IRA, Markets, Mutual-Funds, Newsletter, Retirement

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 Wednesday December 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.

Holiday newsletter schedule

As we are now entering the year end holiday period, we will reduce our newsletter publications in this period: there will be only one newsletter at the beginning of December. We wish everyone happy holidays in advance!

The ‘Best’ Balanced Fund Revisited

PRWCX (T. Rowe Price Capital Appreciation) is considered to be one of the ‘best’ balanced funds. MyPlanIQ has tracked and reviewed this fund for more than 15 years now. The following are some newsletters we wrote on this fund: 

In this newsletter, we look at this fund’s latest performance and compare it with some of our portfolios. 

Still a stellar balanced fund

PRWCX has been a consistent performer in its over 35 years history. The following chart compares it with S&P 500 (Vanguard VFINX):

Portfolio Performance Comparison for the past 20 years:
Ticker/Portfolio Name YTD
Return**		 1Yr AR 3Yr AR 5Yr AR 10Yr AR 15Yr AR 20 Yr AR
PRWCX (T. Rowe Price Capital Appreciation) 17.7% 21.9% 19.1% 15.2% 14.0% 9.3% 9.6%
VFINX (Vanguard 500 Index Investor) 26.5% 32.9% 22.4% 18.6% 16.6% 10.5% 9.3%

This fund is the culmination of steady hands in both stocks and fixed income investments. Its stock investment methodology is based on Growth at a Reasonable Price (GARP) strategy: basically, it invests in quality growth companies with reasonable prices. On the other hand, its fixed income portion ventures into convertible and high yield bonds in some opportunistic times to boost returns. This is somewhat similar to MyPlanIQ’s fixed income portfolios that can rotate among high quality or higher risk but higher return bond funds in various times (see Fixed Income Investor page). 

Morningstar ranks this fund as Gold in its ‘50% to 70% equity allocation fund’ category. The category is on balanced funds in US stocks/bonds. It called it as one of the best.

This fund is still doing a good job this year, even though fixed income/bond portion has been a drag because of weakness in bonds. 

How to construct a ‘best’ balanced portfolio

Well, it turns out that if one is just making enough effort to use a ‘best’ fixed income investment portfolio, it’s possible to construct a balanced portfolio that can rival PRWCX. In the following table, we show two ‘static’ portfolios that can closely match PRWCX’s returns:

Portfolio Performance Comparison (as of 11/19/2021):
Ticker/Portfolio Name YTD
Return**		 1Yr AR 3Yr AR 5Yr AR 10Yr AR 15Yr AR Since 2001 AR
70 Percent Static Balanced Portfolio 19.6% 24.6% 18.2% 15.1% 13.6% 9.8% 8.6%
70 Percent Static Stock REIT Balanced Portfolio 20.6% 24.7% 16.5% 13.5% 12.5% 9.1% 9.2%
PRWCX (T. Rowe Price Capital Appreciation) 17.7% 21.9% 19.1% 15.2% 14.0% 9.3% 9.5%

The two ‘static’ portfolios:

We can see that the two portfolios match PRWCX well, especially for the one with REIT allocation. Basically, the data show that even though we use ultra low cost stock index fund(s) (VFINX, VGSIX) for stock portion, our fixed income portion’s outperformance is good enough to propel the two simple minded ‘static’ portfolios to match the fund. 

To be fair, we should point out that PRWCX charges about 0.69%. So the fund actually still outperforms our portfolios before the fee. Or put it another way, the extra outperformance is mostly gone to the fund’s company, T.Rowe Price. Nevertheless, since after the fee, this fund has returned most among its category, investors certainly are still handsomely rewarded. 

In terms of risk or maximum drawdown, the two portfolios are also on par or slightly better than the fund. 

How to beat the ‘best’ balanced fund

In the previous newsletters that discuss this fund, we presented a simpler version of portfolio that utilizes a 200 day moving average on S&P 500 to replace the stock portion. This portfolio 50 To 70 Percent Tactical Balanced Portfolio has kept its outperformance: year to date, thanks to our strong fixed income portion return, it bettered PRWCX: 

Portfolio Performance Comparison (as of 11/19/2021):
Ticker/Portfolio Name YTD
Return**		 1Yr AR 3Yr AR 5Yr AR 10Yr AR 15Yr AR
50 To 70 Percent Tactical Balanced Portfolio 19.6% 24.5% 12.7% 12.0% 11.4% 11.0%
PRWCX (T. Rowe Price Capital Appreciation) 17.7% 21.9% 19.1% 15.2% 14.0% 9.3%

Here we want to show one can construct another portfolio to outperform both the above portfolio and the fund PRWCX. Basically, instead of using P_61056 (P SMA 200d VFINX Total Return Bond As Cash Monthly), we use P_73834 (P Composite Momentum Scoring Global Risk Assets), the portfolio listed on our Advanced Strategies page. This portfolio uses our Asset Allocation Composite strategy among major stock and bond assets that include international and emerging market stocks. It’s considered to be our representative portfolio for AAC (Asset Allocation Composite) strategy: 

Portfolio Performance Comparison (as of 11/19/2021)
Ticker/Portfolio Name Max Drawdown YTD
Return**		 1Yr AR 3Yr AR 5Yr AR 10Yr AR 15Yr AR Since 2001 AR
50 To 70 Percent AAC Balanced Portfolio 16% 16.1% 22.2% 17.5% 15.1% 12.6% 12.5% 13.6%
50 To 70 Percent Tactical Balanced Portfolio 15% 19.6% 24.5% 12.7% 12.0% 11.4% 11.0% 11.0%
PRWCX (T. Rowe Price Capital Appreciation) 45% 17.7% 21.9% 19.1% 15.2% 14.0% 9.3% 9.3%

To observe: 

  • The AAC balanced portfolio has done way better than both our ‘best’ static portfolio and PRWCX. The 4.3% extra annual return translates into a more than double cumulative return since 2001. 
  • What’s more, the two ‘tactical’ portfolios have cut down the maximum drawdown by 2/3: from PRWCX’s 45% to about 15% and 16%. The 45% maximum drawdown experienced during the great financial recession in 2008-2009 period is still way too greater for a normal investor to stomach. However, 15% or 16% is now a level that’s about the same as a very conservative fund. 

To summarize, we again marvel the consistency of the ‘best’ balanced fund PRWCX. Even though this fund is closed to new investors in brokerage accounts, in some 401k or other retirement plans, it’s still open. We highly recommend this fund for a strategic allocation. However, considering we are now near the end of the secular long bull market cycle, we believe that it’s prudent to consider utilizing MyPlqnIQ’s allocation portfolios to prepare for a possible steep correction. 

Market Overview

Stocks continued to make new highs. However, one strange thing did draw our attention: as we stated in the last week’s newsletter, the percent of stocks above their 200 day moving averages for Nasdaq stocks was at an alarming low level 39.21%. However, even though headline stock indexes like S&P 500 made new highs last week, this indicator now dropped to a new low at 34.6%:

For smaller stocks (those in NYSE), things are slightly better, but the same indicator is again in a down slope:

We can attribute this to growth to value rotation again. But at these low levels, stock indexes with new record highs are sitting on a shaky ground. 

As always, we remain cautious and 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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