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A Portfolio Of Mutual Funds

A Mutual Fund Portfolio

This is an extension of the basic portfolio described elsewhere (http://seekingalpha.com/instablog/709762-varan/1726201-x01the-basic-portfolio ).

The main purpose here is to show the results for a longer period - in this case 1991-2013, and, consequently, instead of ETFs, some mutual funds have been used.

For the equity portion of the portfolio we use FDVLX and VFINX, which are approximate proxies for mid-cap value and SP500, respectively. For the fixed income assets in the basket, the following funds, mostly from Fidelity, have been used:

FGMNX FGOVX PTTDX FNMIX FTHRX FSICX FAGIX VFITX VUSTX.

Components of the basket are selected for investment at the beginning of every quarter according to the method described in detail in the earlier post. Note that since the update period is three months, the transaction costs are essentially zero if, for practical implementation, IEF and TLT are used instead of the corresponding treasury funds VFITX and VUSTX, and SPY or IVV is used instead of VFINX. (Fidelity also has an SP500 fund inexplicably named as FUSEX, but its date of inception is much later than 1991.)

As described in the post referenced above, once the basket of assets is chosen, the only parameter that needs to be specified in this strategy is the number of assets selected on the basis of the prior performance in each tranch. Since there are only two equity like assets in the basket, as the number of selected assets increases from two, the number of fixed-income assets in the portfolio also increases, thus resulting in lower returns, accompanied, one hopes, by lower volatility as well. This expectation is borne out in the equity growth curves for the various cases as shown in the following figure:

Note that the cumulative return for the worst case is better than the returns for either FDVLX or VFINX. Further, the cumulative returns at any time during the period 1991-2013 for the best case (with two assets selected in each tranch, thus leading to the possibility of a 100% equity portfolio during some periods), are for the most part better than the cumulative returns of either FDVLX or VFINX.

The table below summarizes all the results. Clearly, just with a handful of mutual funds, it is possible to achieve relatively greater returns without too much volatility with the approach used here.

 

2

3

4

5

VFINX

FDVLX

CAGR

14.5%

12.9%

12.2%

11.8%

9.4%

11.6%

Number of Yearly Losses (Max. Loss)

1

(-.25%)

2

(-1.6%)

2

(-1.5%)

1

(-1.8%)

4

(-37%)

3

(-46.5%)

Sharpe

1.09

.97

1.0

1.05

.36

.44

Drawdown

12.9%

12.9%

10.4%

8.2%

51%

62%

The following figures show the asset allocation diagram for the case when three assets are selected in each tranch and the history of the number of funds in which the strategy is invested. As noted in the earlier post, the strategy is quite responsive to the market conditions inasmuch as it changes the allocation to equity and fixed income assets quite rapidly with the evolution of the market.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.