November 9, 2020: Fixed Income Funds Update | Better Financial Future -- MyPlanIQ

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 December 1, 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.

Fixed Income Funds Update

In this newsletter, we will review some bond mutual funds used in our Fixed Income Mutual Fund Portfolios. We will first look at the Morningstar Awards in 2020 and then discuss some of these funds performance.

But before doing this, let’s continue our discussion on polls now that the US election is over (at least the voting part is for sure over).

Polls are vindicated! Are they?

Barring an unlikely (but still possible) event of vote count changes in some key states, the US president election confirmed the higher odd prediction of polls: the Democratic candidate Joe Biden, as expected by most polls, won the election, at least based on major news networks.

Many would claim this time, polls are vindicated! The higher odd event did happen accordingly.

But are they really vindicated? Well, to be rigorous, similar to the argument we made in our previous newsletter that just because the polls were ‘wrong’ about the 2016 election outcome doesn’t invalidate them, this time, the ‘right’ prediction doesn’t automatically justify these polls.

Why?

It’s because, again, this is just one sample in many many possible samples. Like practically almost anything in our real world, polls are statistically random in nature. To really validate their methodology or strategy or whatever they use, large samples need to be carried out and only then, one can see whether the average outcome confirms the prediction.

Of course, as we stated in the previous newsletter, this viewing large samples is almost impossible in the real world as nothing will be exactly the same (even the polling methods change over time). In this case, it’s more useful to understand the underlying methods polls are using and get insights from them. Or for non professionals, take the results with a grain of salt.

This is again similar to investing: just because a strategy or some pundit’s prediction turns out to be right doesn’t automatically validate that strategy. The test lies in many and many historical and future instances (time). Or in the absence of the enough samples (or long enough times), investors are better off to understand a strategy’s fundamental and see whether that at least can pass the smell test.

PIMCO manager won Morningstar Rising Talent award

Morningstar selected Mohit Mittal as the winner of its Rising Talent award in 2020. Mittal is a comanager on both Pimco Investment Grade Credit Bond and Pimco Total Return (PTTAX). Both funds are in the candidate lists of our total return bond portfolios.

Let’s look at the latest performance:

Portfolio Performance Comparison (as of 11/6/2020):

Ticker/Portfolio Name	YTD Return**	1Yr AR	3Yr AR	5Yr AR	10Yr AR	15Yr AR
PBDAX (PIMCO Investment Grade Corp Bd A)	4.7%	5.8%	5.4%	5.9%	5.3%	6.6%
PTTAX (PIMCO Total Return A)	7.6%	7.4%	4.9%	4.4%	3.5%	5.1%
DLTNX (DoubleLine Total Return Bond N)	3.3%	3.7%	3.4%	3.2%	4.1%
MWTRX (Metropolitan West Total Return Bond M)	7.8%	8.2%	5.5%	4.4%	4.3%	5.6%
VBMFX (Vanguard Total Bond Market Index Inv)	6.9%	7.3%	5.1%	4.3%	3.4%	4.5%

10 Year Chart

Observations:

PIMCO Total Return (PTTAX) has recovered since its original manager Bill Gross’s departure. It has outperformed DoubleLine total return (DLTNX) for the past 5 years. DLTNX has had a lackluster performance for the past 1,3 and 5 years.
PIMCO Investment Grade Fund PBDAX has bettered total return bond funds like PTTAX, DLTNX and MWTRX for the past 5, 10 and 15 years. This is not unusual as its mandate is in investment grade corporate bonds that normally outperform total return bond funds in a long period of time. It comes with a cost: higher volatility. For example, it had a large 16.4% drawdown (peak to a trough) this year, compared with VBMFX’s 6.5%.
To have apple to apple comparison, the following table shows its comparison with Vanguard investment grade index fund VFICX and Loomis Sayles Bond fund LSBRX:

Ticker/Portfolio Name	YTD Return**	1Yr AR	3Yr AR	5Yr AR	10Yr AR	15Yr AR
PBDAX (PIMCO Investment Grade Corp Bd A)	4.7%	5.8%	5.4%	5.9%	5.3%	6.6%
VFICX (Vanguard Interm-Term Invmt-Grade Inv)	8.8%	9.4%	6.0%	5.3%	4.5%	5.4%
LSBRX (Loomis Sayles Bond Retail)	-1.7%	0.3%	1.2%	3.2%	3.7%	5.2%

It has done much better than VFICX for the past 15 years (6.6% vs. 5.4% annually). Unfortunately, this fund suffered from larger loss this year (maximum drawdown 16.4% vs. VFICX’s 9.2%). On the other hand, it also handily outperformed the Loomis Sayles fund throughout the past 15 years. As usual, the Loomis Sayles LSBRX incurred bad loss during a downturn such as 2000, 2008 and 2020. This fund has some sizable exposure to high yield corporate bonds. In good times, they help to boost returns. It hasn’t done well for the past 15 years.

Finally, the following table from Morningstar shows PBDAX’s top holdings:

Among them, CDX IG34 and CDX IG33 are Investment Grade bonds futures (derivatives). It also had sizable exposure in foreign sovereign bonds and even Treasury and US agency bonds. It has a leverage 20-30%. Like many funds from PIMCO, this fund uses derivatives and leverages to boost returns.

Market overview

Stocks are propelled higher with some favorable news including the clarify of the US election results, a possible split government (a Democratic president and a Republican controlled Senate), the good news from Pfizer’s Covid-19 vaccine (more than 90% effective rate) and more companies reporting better than expected Q3 earnings. On the other hand, the pandemic cases and the number of hospitalized continue to rise:

It does look like it’s likely this time, the number of hospitalized will reach the first and the second peaks. However, if the second ‘wave’ is of any guide, it does look like we now have much better way to reduce the severity (such as the number of deaths). Hopefully (and very likely), the current wave will not result in more deaths than the first and even the second wave before the vaccines are deployed later this year and early next year. Though we are not out of wood yet, but it’s very encouraging to see that we probably will have this pandemic contained in the coming months.

Regardless, we should recognize that currently, stocks are at historically high valuation and an eventual big correction will be just a matter of when, not if.

Investors shouldn’t be complacent on the markets. As always, we should follow our strategies to navigate through this period:

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 now reached another high. 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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