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, October 24, 2016. You can also find the re-balance calendar for 2016 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.
Fixed Income Investing: Actively Managed Funds vs. Index Funds
We continue our miniseries on active funds vs. index funds. In the previous newsletter September 19, 2016: Stock Investing: Actively Managed Funds vs. Index Funds, we discussed the rationale behind our preference of low cost index stock funds over active stock funds. In this newsletter, we look at fixed income funds.
Unlike in stock investing, in principle, we prefer using a selected list of actively managed fixed income bond funds instead of bond index funds. However, that does not mean we like any actively managed bond funds. In fact, there are only handful of bond funds that qualify as our candidate funds.
Capitalization weighting in a bond index fund is questionable
The very first objection to invest in a bond index fund is that it does not present an intuitive sense to use market value (capitalization) to decide how much an index fund should invest. For example, if a company borrows more, its bonds will have bigger capitalization, thus, its bigger weights in an index fund. Similarly, if government issues more debts, its bonds get more weight. This is exactly what has happened lately as the prices of U.S. Treasury bonds have risen so much. Even John Bogle, the champion of indexing, has voiced concerns on this.
The other surprising fact for the most popular bond index Barclays U.S. Aggregate bond index (the index the biggest bond fund Vanguard total bond index fund VBMFX, ETFs AGG and BND are based upon) is that it has no or very little (less than 1%) exposure in high yield bonds as shown in this Morningstar’s article:
It’s also true that the total aggregate bond index has no exposure in municipal bonds and foreign bonds. Municipal bonds, though mostly used for taxable accounts, actually can outperform even taxable funds from time to time even before tax. They deserve to have a place. See April 25, 2016: Tax Free Municipal Bond Funds & Portfolios on municipal bond funds based portfolios.
Notice the criticism of less exposure in high yields and other sectors can be remedied by investing in index funds in those sectors. However, the capitalization weighting is certainly something hard to be corrected in a normal index fund.
Some actively managed bond funds can outperform index funds more consistently
What’s more important, is that, unlike in stock investing, there exist a few of actively managed bond funds that have outperformed general bond index funds in a long period of time. The following table shows the 15 year performance of the list of candidate funds used in our fixed income portfolios listed on Brokerage Investors page.
Ticker/Portfolio Name | YTD Return** |
1Yr AR | 3Yr AR | 5Yr AR | 10Yr AR | 15 Yr AR |
---|---|---|---|---|---|---|
TGMNX (TCW Total Return Bond N) | 4.4% | 4.1% | 4.1% | 4.6% | 6.5% | 6.1% |
DLTNX (DoubleLine Total Return Bond N) | 3.7% | 3.4% | 4.1% | 4.2% | ||
WABRX (Western Asset Core Bond R) | 6.4% | 6.0% | 4.7% | |||
LSBRX (Loomis Sayles Bond Retail) | 9.4% | 7.8% | 2.8% | 5.5% | 5.9% | 8.4% |
DODIX (Dodge & Cox Income) | 6.8% | 6.6% | 4.3% | 4.2% | 5.4% | 5.5% |
MWTRX (Metropolitan West Total Return Bond M) | 5.1% | 4.9% | 3.9% | 4.5% | 6.3% | 5.6% |
PTTDX (PIMCO Total Return D) | 4.5% | 4.8% | 3.2% | 3.7% | 5.7% | 5.5% |
VBMFX (Vanguard Total Bond Market Index Inv) | 5.6% | 5.3% | 3.9% | 2.8% | 4.7% | 4.6% |
*: NOT annualized
**YTD: Year to Date
See detailed year by year comparison >>
Unlike stock funds, these bond funds have consistently outperformed bond market index fund such as VBMFX (Vanguard total bond market index fund). In fact, not only they have done better for the past 15 years (for those that have data), each of them has outperformed VBMFX since its inception respectively.
Take PIMCO total return bond fund (PTTDX) as an example, this fund was a consistent winner before 2014. After its star manager Bill Gross left PIMCO, the fund suffered and thus it has worse 1 and 3 year returns than VBMFX. However, it still betters VBMFX by 1% in its 10 year annualized return. Another example is LSBRX (Loomis Sayles Bond Retail) that is the most aggressive one among this set of total return bond funds. It tends to take over sized high yield bond exposure to boost its return. That has helped its performance, though it was badly hurt in both 2008 and 2015 when low quality bonds (high yield bonds) had difficulty. However, this fund has a long outstanding performance record. Since its inception from 1997, its annualized return 7.6% is 2.2% higher than VBMFX’s 5.4%!
A similar but more conservative fund is DODIX (Dodge & Cox Income). It takes opportunistic bets on corporate bonds. It outperformed VBMFX by a smaller margin but with much smaller risk.
In general, we believe that because of the relatively stable trends in bond market, it’s easier for a manager to take advantage of the intermediate term strength of bond segments (such as high yield, long corporate bonds etc.).
More importantly it’s possible to pick a winning total return bond fund periodically
At MyPlanIQ, we have shown that a portfolio that periodically picks the best total return bond fund from a set of funds with solid long term record can outperform the bond index fund by some big margin. We recommend readers the following articles on these portfolios:
- April 25, 2016: Tax Free Municipal Bond Funds & Portfolios
- October 26, 2015: Total Return Bond Fund Review
- June 15, 2015: Giving Up Bonds?
- September 22, 2014: Why Total Return Bond Funds?
- June 3, 2013: Total Return Bond Fund Portfolios For Major Brokerages
Ticker/Portfolio Name | YTD Return** |
1Yr AR | 3Yr AR | 5Yr AR | 10Yr AR | Since 7/30/2000 |
---|---|---|---|---|---|---|
P Bond Funds Momentum Based on Upgrading Fixed Income Managers of the Year`s Funds Monthly | 8.2% | 8.5% | 5.8% | 6.5% | 7.8% | 9.4% |
P Bond Funds Momentum Based on Upgrading Fixed Income Managers of the Year Quarterly | 8.1% | 7.8% | 4.8% | 6.2% | 7.5% | 8.9% |
VBMFX (Vanguard Total Bond Market Index Inv) | 5.6% | 5.3% | 3.9% | 2.8% | 4.7% | 5.2% |
**YTD: Year to Date
The two portfolios have had a more than 3.7% extra annualized return over VBMFX in the last 16 years. The outstanding performance (and ongoing) is the best testimony to our claim that it’s possible to utilize actively managed bond funds to achieve very reasonable return without much risk.
Conclusions
Though we state in the above that it’s easier for an active bond fund to outperform its benchmark, such a claim is mostly limited to intermediate bond funds that have freedom to invest in various bond segments (though with certain limits such as maximum allocation to risky bond segments such as high yield or emerging market bonds). For other bond funds, it becomes more problematic. This is especially true for international/emerging market bond funds that can be affected greatly by currency exchange rates as well as sovereign credit quality. Long term bonds can also behave violently.
Market Overview
Stocks are again wobbling. Investors are now expecting much higher earnings improvement. This adds to a long list of possible factors that can derail the elevated markets. Though this process has been on and on for quite some time, investors should not abandon a well designed strategy and be swayed away from some other theories, being bullish or bearish. A strategy is not a strategy if one does not allow time to play it out. For now, we should not be complacent nor be too proactively predicting the market direction.
For more detailed asset trend scores, please refer to 360° Market Overview.
We would like to remind our readers that since the financial crisis in 2008-2009, we have not seen substantial structural change in the U.S., European and emerging market economies. Economies have heavily relied on low interest debts. Capital might be misallocated to unproductive investments and consumption. U.S. stock valuation is at a historically high level. It is thus not a good time to take excessive risk. However, we remain optimistic on 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.
Latest Articles
- September 19, 2016: Stock Investing: Actively Managed Funds vs. Index Funds
- September 12, 2016: Newsletter Update
- September 5, 2016: Overvalued Markets And Long Term Timing Strategies
- August 29, 2016: Your 401K Finally Draws Attention
- August 22, 2016: Inflation Protected Securities TIPS For Current Overvalued Markets
- August 15, 2016: Risk On: Emerging Market Stocks And Small Cap Stocks
- August 8, 2016: Portfolio Construction Using Stock ETFs And Bond Mutual Funds
- August 1, 2016: Adding Value To Your Own Investments
- July 25, 2016: Tactical Asset Allocation Funds Review
- July 18, 2016: Strategic Asset Allocation & Lazy Portfolio Review
- July 11, 2016: Asset Trend Review
- June 27, 2016: Secular Cycles For Tactical And Strategic Investment Strategies
- June 20, 2016: A World of Debt
- June 13, 2016: Managed Futures For Portfolio Building
- June 6, 2016: Newsletter Summary
- May 30, 2016: Swensen Portfolio And Permanent Portfolios
- May 23, 2016: AAII Article And Some Web Changes
- May 16, 2016: The PIMCO (Dis)Advantages
- May 9, 2016: Boost Your Dull Summer Investments
- May 2, 2016: Low Cost Index Fund Investing
- April 25, 2016: Tax Free Municipal Bond Funds & Portfolios
- April 18, 2016: Asset Class Trend Review
- April 11, 2016: Construction of Sound And Conservative Portfolios
- March 28, 2016: Total Return Bond ETFs Review
- March 21, 2016: Small And Large Company Stock Performance In Different Economic Expansion Cycles
- March 14, 2016: Are Tactical And Timing Strategies Losing Steam?
- March 7, 2016: Defined Maturity Bond Fund Analysis
- February 29, 2016: Smart Strategic Asset Allocation Rebalance When Market Trend Changes
- February 22, 2016: Be Cash Smart
- February 15, 2016: Bond ETF Portfolios
- February 8, 2016: Newsletter Collection Update
- February 1, 2016: Total Return Bond Fund Portfolios In A Volatile Period
- January 25, 2016: Alternative Portfolios Review
- January 18, 2016: Strategic Asset Allocation: A Cautious Outlook
- January 11, 2016: Review Of Trend Following Tactical Asset Allocation
- January 4, 2016: What Worked And Didn’t In 2015
- December 21, 2015: Distressed Assets
- December 14, 2015: High Yield Bonds And Their Correlation With Stocks
- December 7, 2015: Diversification And Global Allocation
- November 30, 2015: Investors and Speculators Combined
- November 23, 2015: Active Stock Fund Performance Consistency
- November 16, 2015: Permanent, Risk Parity And Alternative Portfolios Review
- November 9, 2015: Broad Base Core Mutual Fund Review
- November 2, 2015: Broad Base Index Core ETFs Review
- October 26, 2015: Total Return Bond Fund Review
- October 19, 2015: Advanced Portfolio Review
- October 12, 2015: What About Commodities?
- October 5, 2015: Core Satellite Portfolios In A 401k Account
- September 28, 2015: Risk Managed Strategic Asset Allocation Portfolios Revisited
- September 21, 2015: Quest For The Best Investment Strategy
- September 14, 2015: Core Satellite Portfolios In Market Turmoil
- September 7, 2015: Market Rout Creates An Opportunity to Reposition Your Portfolios
- August 31, 2015: Review of Asset Allocation Funds and Portfolios
- August 24, 2015: Market Rout And Your Portfolios
- August 17, 2015: ETF or Mutual Fund Based Portfolios
- August 10, 2015: Updated Newsletter Collection
- August 3, 2015: Slippery Asset Trends
- July 27, 2015: Performance Dispersion Among Momentum Based Portfolios
- July 20, 2015: Global Balanced Portfolio Benchmarks
- July 13, 2015: Pain in Tactical Portfolios
- July 6, 2015: Fixed Income Total Return Bond Funds In Strategic Asset Allocation Portfolios
- June 29, 2015: Core ETF Commission Free Portfolios
- June 22, 2015: Secular Asset Trends
- June 15, 2015: Giving Up Bonds?
- June 1, 2015: Summer Blues?
- May 26, 2015: Cash, Bonds and Stocks In A Rising Rate Environment
- May 18, 2015: Portfolio Update
- May 11, 2015: Pain in Fixed Income?
- May 4, 2015: The Balanced Stock and Long Term Treasury Bond Portfolios
- April 27, 2015: Long Term Treasury Bond Behavior
- April 20, 2015: 529 College Savings Plan Rebalance Policy Change
- April 13, 2015: Total Return Bond Funds As Smart Cash
- April 6, 2015: The Low Return Environment
- March 30, 2015: Brokerage Specific Core Mutual Fund Portfolios 2
- March 23, 2015: Investment Arithmetic for Long Term Investments
- March 16, 2015: Brokerage Specific Core Mutual Fund Portfolios
- March 9, 2015: Newsletter Collection Update
- March 2, 2015: Total Return Bond ETFs
- February 23, 2015: Why Is Global Tactical Asset Allocation Not Popular?
- February 16, 2015: Where Are Permanent Portfolios Going?
- February 9, 2015: How Have Asset Allocation Funds Done?
- February 2, 2015: Risk Management Everywhere
- January 26, 2015: Composite Portfolios Review
- January 19, 2015: Fixed Income Investing Review
- January 12, 2015: How Does Trend Following Tactical Asset Allocation Strategy Deliver Returns
- January 5, 2015: When Forecast Fails
- December 22, 2014: Long Term Asset Returns: How Long Is Long?
- December 15, 2014: Beaten Down Assets
- December 8, 2014: Implementing Core Asset Portfolios In a Brokerage
- December 1, 2014: Two Key Issues of Investment Strategies
- November 24, 2014: Holiday Readings
- November 17, 2014: Retirement Spending Portfolios Update
- November 10, 2014: Fixed Income Or Cash
- November 3, 2014: Asset Trend Review
- October 27, 2014: Investment Loss, Mistakes And Market Cycles
- October 20, 2014: Strategic Portfolios With Managed Volatility
- October 13, 2014: Embrace Volatility
- October 6, 2014: Tips For 401k Open Enrollment
- September 29, 2014: What Can We Learn From Bill Gross’ Departure From PIMCO?
- September 22, 2014: Why Total Return Bond Funds?
- September 15, 2014: Equity And Total Return Bond Fund Composite Portfolios
- September 8, 2014: Momentum Based Portfolios Review
- September 1, 2014: Risk & Diversification: Mint.com Interview
- August 25, 2014: Remember Risk
- August 18, 2014: Consistency, The Most Important Edge In Investing: Tactical Case
- August 11, 2014: What To Do In Overvalued Stock Markets
- August 4, 2014: Is This The Peak Or Correction?
- July 28, 2014: Stock Musings
- July 21, 2014: Permanent Portfolios & Four Pillar Foundation Based Framework
- July 14, 2014: Composite Portfolios Review
- July 7, 2014: Portfolio Behavior During Market Corrections
- June 30, 2014: Half Year Brokerage ETF and Mutual Fund Portfolios Review
- June 23, 2014: Newsletter Collection Update
- June 16, 2014: There Are Always Lottery Winners
- June 9, 2014: The Arithmetic of Investment Mistakes
- June 2, 2014: Tips On Portfolio Rebalance
- May 26, 2014: In Praise Of Low Cost Core Asset Class Based Portfolios
- May 19, 2014: Consistency, The Most Important Edge In Investing: Strategic Case
- May 12, 2014: How To Handle An Elevated Overvalued Market
- May 5, 2014: Asset Allocation Funds Review
- April 28, 2014: Now The Economy Backs To The ‘Old Normal’, Should Our Investments Too?
- April 21, 2014: Total Return Bond Investing In The Current Market Environment
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