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Two Tri-Annually Updated Portfolios

A simple strategy that updates the portfolios every four months has the potential of yielding high returns for two portfolios considered here.

The two baskets are : (i) a portfolio of seven PIMCO funds: PIXDX, PIPDX, PETDX, PCRDX, PTTDX, PFSDX and PSSDX, and (ii) a basket of energy/energy infrastructure MLPs with the highest capitalization: WPZ, SXL, RNF, PAA, NS, MWE, KMP, EXLP, FGP, DPM, BPL, BBEP, and BWP.

Three times a year (first trading days of January, May and September) invest in the two assets whose performance was the best during the immediately preceding quarter. Since the MLP basket consists of assets which are correlated, for MLPs, one or both of the selected MLP were replaced by TLT if their performance was not as good as TLT during the prior quarter.

The performance of the strategy applied to the two portfolios for the period 2004-2013 is shown in the following table:

Performance Measures

PIMCO Funds

MLP Portfolio

CAGR

25%

32%

Monthly drawdown

16%

20%

Sharpe Ratio

1.17

1.18

Kelly Fraction

.49

.46

Average Annual Return

27%

35%

95% Lower Bound on Annual Return

14.6%

16.7%

Two Factor Alpha (Monthly)

1.7%

2.15%

Two Factor Beta (Monthly)

.27

.38

Two Factor R^2

.07

.05

Although the monthly draw-downs are quite substantial, they are compensated by high returns as reflected in the high values of the estimates of the 95% lower bound on the average annual returns (computed on the basis of the monthly returns). Further, the low betas and high alphas cannot be used as definitive measures of performance as R^2 is quite low.

The asset allocation diagrams and the portfolio curve for the two portfolios are shown in the figures below.

Disclosure: I am long PAA, SXL.