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Coping With The Constraints Of A Workplace Investment Plan

A member of my family has a 403B plan at work that offers a large number of mutual funds - but only mutual funds - for investments. Here I describe a quarterly rebalancing strategy that I have devised for the plan. In backtesting for the period 1995-2013, the strategy performs better than all the funds in the basket that I use to construct it.

From the options that are available I have selected the following stock funds: FLPSX, FDVLX, FOCPX, and FDIVX - all of which have shown good historical performance but with unacceptable yearly drawdowns - and the bond fund FBIDX. The latter is similar in performance to VBMFX that is based on the Barclay's Aggregate Bond Index. I use VBMFX for the calculations as its date of inception precedes the dates of inception of FDIVX, which has been available only since 1995, whereas FBIDX has been available only since 1997.

The basic strategy is described elsewhere ( seekingalpha.com/instablog/709762-varan/... ). It invests in three separate tranches, each with a different pair of evaluation and investment periods, and at the beginning of every quarter the funds are commingled and divided equally among the three tranches.

For each tranche I select the three stock funds that performed the best during the immediately preceding evaluation period, and if any of the funds performed worse that the bond fund, it is replaced by the bond fund. The allocation to each of the selected funds in each tranche is then computed by means of the risk parity algorithm that uses the variance matrix computed from the daily returns during the evaluation period.

The equity curve for the strategy is compared with that of the various stock funds in the following figure (QREB refers to the quarterly rebalancing strategy summarized above).

*(click to enlarge)Click to enlarge

As shown in the figure, and in the table below, the various performance metrics for the strategy for the period under study (1995-2013) are better than those for each of the components of the basket.

Fund

CAGR (%)

Standard Deviation (%)

Max. Draw-down (%)

Sharpe Ratio

Sortino Ratio

FLPSX

13.7

15.3

49

.75

1.2

FDVLX

10.8

18.7

62

.50

.80

FOCPX

11.1

24.3

66

.45

.74

FDIVX

9.7

17.1

57

.47

.74

Strategy

14.4

10.5

17

1.09

2.04

Click to enlarge

The Manhattan asset allocation diagram and the raw allocation diagram are shown in the following figures.

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(click to enlarge)Click to enlarge