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  • Balanced Strategy: Value Funds

    This strategy of quarterly rebalancing the portfolio on the basis of risk parity and relative strength has satisfactory performance in general but here we focus on its application to the baskets containing large, mid and small-cap, mostly value, funds (specific funds used for the study are shown at the end of this post) from a few different families.

    First we summarize the various performance metrics for the strategy applied to the funds. Also shown, for the purpose of comparison, are the corresponding metrics for DFSVX and PRWCX. The latter are by no means the appropriate benchmarks, but are used here mainly because they are well known equity and allocation funds whose performance has been quite attractive during their lifetimes. (As a personal aside, none of these funds is available cost-free to me in my personal accounts, and hence this study.)

    Family/Fund

    CAGR (%)

    Sharpe Ratio (Sortino)

    Max. Drawdown (%)

    Min. Annual Return (%)

    2003-2013

        

    iShares ETFs

    13.8

    1.0 (1.8)

    16.9

    7.2

    Fidelity

    15.6

    1.2 (2.1)

    15.0

    4.6

    Vanguard

    14.0

    1.1 (1.9)

    15.2

    2.6

    T. Row Price

    14.1

    1.1 (2.0)

    15.2

    7.7

    J. P. Morgan

    14.1

    1.1 (2.0)

    15.6

    6.9

    DFSVX

    13.7

    0.6 (1.1)

    61.2

    -36.8

    PRWCX

    10.4

    0.8 (1.2)

    36.6

    -27.2

    2005-2013

        

    American Century

    12.2

    1.0 (1.7)

    14.6

    7.0

    DFSVX

    8.4

    0.4 (0.7)

    61.2

    -36.8

    PRWCX

    8.3

    0.6 (0.9)

    36.6

    -27.2

    2007-2013

        

    Guggenheim ETFs

    14.4

    0.9 (1.5)

    19.8

    1.8

    DFSVX

    6.8

    0.4 (0.6)

    61.2

    -36.8

    PRWCX

    7.7

    0.6 (0.8)

    36.6

    -27.2

    Clearly, inasmuch as the improved relative performance is pervasive across the various fund families considered here, the strategy seems to provide a robust alternative to the buy and hold portfolio of DFSVX or PRWCX. It should be noted, however, that the one and five year returns (for the period ending in 2013) of DFSVX are considerably superior as shown in the following table.

    Family/Fund

    1 Year CAGR (%)

    3 Year CAGR (%)

    5 Year CAGR (%)

    10 Year CAGR (%)

    iShares ETFs

    24.4

    21.0

    16.9

    13.0

    Guggenheim ETFs

    30.9

    22.9

    18.4

     

    Fidelity

    26.4

    22.1

    20.2

    14.0

    Vanguard

    27.6

    22.0

    18.5

    13.0

    Am. Century

    18.9

    17.2

    14.6

     

    T. Row Price

    23.8

    19.2

    17.0

    13.2

    J. P. Morgan

    24.1

    20.8

    17.5

    13.5

    DFSVX

    42.4

    17.0

    22.9

    10.0

    PRWCX

    22.4

    13.2

    17.1

    9.0

    The Method

    The general approach is quite straightforward.

    Select a basket of equity funds, and add to it some fixed income funds (here we have used TLT and EDV for the latter). Use one of the following strategies to rebalance every quarter.

    Aggressive Strategy:

    • On the first trading day of every quarter, select a subset of assets in the basket on the basis of the total returns during the immediately preceding quarter. The number of selected assets should not exceed the number of equity funds in the basket.
    • The weights of the assets in the selected basket are determined on the basis of risk parity allocation that uses the daily returns for the prior quarter.

    With the restriction on the number of selected assets, there would be quarters wherein one is invested only in equity funds, and hence this strategy is characterized as aggressive. However, depending on the market conditions, the hope is that the fixed income assets will be included in the selected basket during the downturns.

    Conservative Strategy:

    On the first trading day of every quarter, select a subset of assets in the basket on the basis of the total returns during the immediately preceding quarter. The number of selected assets must be more than the number of equity funds in the basket.

    The weights of the assets in the selected basket are determined on the basis of risk parity allocation that uses the daily returns for the prior quarter.

    With the restriction on the number of selected assets, a part of the portfolio would always be invested in one or more fixed income assets, and hence this strategy is characterized as conservative. Clearly this strategy is expected to underperform the market, perhaps substantially, during the boom times.

    Moderate Strategy

    Depending upon one's risk tolerance, a fraction of the portfolio is invested in the aggressive strategy, and the rest in the conservative strategy.

    The following equity funds (representing large, mid, and small cap value funds, but in some case not necessarily value funds) were used in this study:

    iShares ETFs: IVE, IJJ, IJS

    Guggenheim ETFs: RPV, RFV, RZV

    Fidelity: FLPSX, FDVLX, FSCRX

    Vanguard: VWNDX, VASVX, VSMAX

    American Century: TWEIX, ACMVX, ASVIX

    T. Rowe Price: TRVLX, PRSVX, TRMCX

    J.P. Morgan: HLQVX, JAMCX, PSOAX

    Further (a) three assets were selected for the aggressive strategy, (b) four were selected for the conservative strategy, and (c) 70% of the portfolio was invested in the aggressive strategy, and 30% in the conservative strategy.

    A typical asset allocation diagram for the Fidelity funds is shown below.

    (click to enlarge)

    The equity curves for the best and worst performing family and the two funds are shown below.

    (click to enlarge)

    Disclosure: I am long IJS.

    Additional disclosure: This is not meant to be investment advice but just a summary of some results that might be of interest.

    Mar 09 5:23 PM | Link | 13 Comments
  • Improving The Performance Of A Portfolio Of DFA Funds

    The funds in the DFA family, recently highlighted in a number of articles on SA, have provided good returns since their inception, but, unfortunately, not without large drawdowns. Here I describe a quarterly rebalancing strategy of a portfolio of DFA funds and VFINX (the S&P 500 fund from Vanguard) that appears to considerably reduce the volatility without effecting the returns.

    To the basket of stock funds: VFINX, DFLVX, DFSTX, DFSVX, and DFREX , I add the bond fund VBMFX, which is based on the Barclay's Aggregate Bond Index.

    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.

    (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 (1997-2013) are better than those for each of the components of the basket.

    Fund

    CAGR (%)

    Standard Deviation (%)

    Max. Draw-down (%)

    Sharpe Ratio

    Sortino Ratio

    VFINX

    7.4

    16.0

    51

    .38

    .60

    DFLVX

    9.4

    18.9

    61

    .45

    .71

    DFSTX

    10.5

    21.3

    55

    .47

    .78

    DFSVX

    12.1

    21.2

    61

    .53

    .88

    DFRESX

    9.2

    21.5

    69

    .41

    .67

    Strategy

    12.9

    11.6

    23

    .90

    1.67

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

    (click to enlarge)(click to enlarge)

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

    Additional disclosure: This is not investment advice in any shape or form.

    Jan 16 3:13 PM | Link | 8 Comments
  • 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)

    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

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

    (click to enlarge)

    (click to enlarge)

    Jan 16 3:08 PM | Link | Comment!
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