In two prior SA articles (here) and (here) I presented information on a number of closed-end funds [CEFs] and mutual funds that have the potential to outperform during severe corrections and/or bear markets.
Thanks to Callan Associates, I believe that I have uncovered one new alternative for consideration. Callan is an investment consulting firm headquartered in San Francisco. Each year, they publish "The Callan Periodic Table of Investment Returns". The most recent table covers the period 1993 - 2012 and depicts the annual return of a wide range of investment alternatives, including various domestic stock classes, bonds, emerging market indices etc.
I spent time over the past weekend investigating how each of these asset classes performed in the two most recent bear markets - particularly the most severe periods (2002 and 2008). One stood out - far above the others.
The Barclays Aggregate Bond Index (formerly the Lehman Brothers Aggregate Bond Index) was the only investment of those covered by the Callan Periodic Table that generated a positive return in the bear markets of both 2002, 2008, and in the correction-dominated year of 2011.
For the year 2002, as the Lehman Aggregate Bond Index the return was 10.26 percent, and in 2008 as the Barclays Aggregate Bond Index the return was 5.24 percent. The return for 2011 was 7.84 percent. No other investment vehicle tracked in the Periodic Table had a positive return for either 2002 or 2008.
The Barclays Aggregate Bond Index (LAG) basically measures performance of investment grade bonds in the United States. It consists of over 8,000 fixed income issues and is valued at well over $16 trillion, and represents close to 50 percent of the U.S. bondmarket. It includes treasuries, government securities, corporate bonds, agency mortgage-backed pass-throughs, commercial mortgage-backed securities and consumer asset-backed securities.
LAG has had a positive return in 32 of its 33 years of existence. The highest one year return was 32.65 percent, the lowest one year return was -2.92 percent, and the average annual return for 33 years has been 8.8 percent.
I checked its performance for both the entire bear market of 10/9/2007 through 3/9/2009, and for the year 2008 specifically. Here are the results:
On 10/9/2007, LAG was $52.74, and at the close of the bear market on 3/9/2009 the share price was $52.58. Total dividends paid during this period were $3.68. The total return for the bear market was 7.0 percent, not exceptional, but much better than just about anything except for riskier bear market mutual funds.
For the year 2008, the January 2 opening price was $53.76 and on December 31 it closed at $55.64. Dividends paid during 2008 came to $2.45.
While I believe the returns are nothing less than sensational for a 33 year period (and in bear markets), the caveat here is that in today's markets we hear almost on a daily basis that bonds are about to get clobbered. This assessment might be a correct one - for the answer we shall have to wait and see. That being said, one cannot overlook positive returns for 32 of 33 years, and the performance of this fund during the absolute worst of time.
Additional disclosure: This article does not constitute a recommendation to either buy or sell (LAG).