Lower Risk World And Foreign Funds

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Includes: ACWV, PRSNX, VGWAX, VGYAX, VMNVX, VTABX
by: Charles Bolin
Summary

Ten World and Foreign Funds are selected that are lower risk and have higher risk adjusted returns.

Two Portfolios are created to Maximize the Sharpe Ratio or Maximize Return at 8% Volatility.

The purpose is to identify funds that can be used to diversify a retirement portfolio.

Introduction

For this article, I used Mutual Fund Observer Premium Service to select Global and International funds that are lower risk as measured by Ulcer Index and higher risk-adjusted return as measured by the Martin Ratio. A Model Portfolio was created in Portfolio Visualizer to maximize the Sharpe Ratio of eight mutual funds and 2 Exchange Traded Funds and a second portfolio that maximizes return for 8% volatility.

Morningstar

You can see in the table below of Morningstar data that the funds have a higher return rating than risk rating. Each of the funds has a lower standard deviation than SPY (11.2) while dividend yield is generally higher. The Price to Earnings Ratio is also lower than SPY, in most cases.

Name Ticker Category Risk Return StDev Rtrn 3 Mon Rtrn 12 Mon P/E Trail Div %
Vanguard Total Intl Bd Idx VTABX World Bond Below Avg Above Avg 2.3 2.7 5.1 3.0
T. Rowe Price Glbl Multi-Sect Bd Inv PRSNX World Bond Below Avg Above Avg 3.0 3.1 3.2 3.6
Invesco Blncd-Risk Allc ABRYX World Allc Low Avg 5.9 3.6 0.8 13.2
T. Rowe Price Glbl Allc RPGAX World Allc Avg High 7.2 5.1 -1.3 15.2 1.8
Vanguard Glbl Min Vol VMNVX World Small/Mid Stock Low Above Avg 7.6 3.7 6.6 15.9 2.2
iShares Edge MSCI Min Vol Glbl ACWV World Large Stock Low Above Avg 8.7 3.5 6.1 20.1 2.2
Fidelity® SAI Intl Low Vol FSKLX Foreign Large Blend Low Avg 8.8 3.9 0.2 16.6 2.2
iShares Edge MSCI Min Vol EAFE EFAV Foreign Large Blend Low Above Avg 8.9 3.7 -1.4 17.5 3.1
Vanguard Glbl Wellington VGWAX Allc--50% to 70% Eq 4.2 1.5 14.7 2.3
Vanguard Glbl Wellesley VGYAX Allc--30% to 50% Eq 3.4 1.1 10.9 2.7

Source: Created by the Author based on Morningstar data

Mutual Fund Observer

Below are the metrics from Mutual Fund Observer for the past 12 months. Each of the funds is rated Very Conservative (1) for Risk to Moderate (3).

Symbol LCategory APRvs Peer MaxDD Ulcer Risk Rating Ageyr Exp Ratio Initial Purchase
VTABX Intern Inc 5.6 -0.3 0.1 1 5 5.7 0.1 3,000
PRSNX Global Income 2.5 -1.5 0.9 1 3 10.1 0.6 2,500
VGYAX Mxd-Asst Alloc Consv -0.7 -5.3 2.7 2 2 1.2 0.3 50,000
ABRYX Alt Global Macro 0.4 -8.2 4.3 2 3 9.6 1.1 1,000
VMNVX Global Small-/Mid-Cap 11.8 -8.2 3.3 3 5 5.1 0.2 50,000
ACWV Global Multi-Cap Core 7.8 -6.6 3.5 3 5 7.3 0.2 -
VGWAX Mxd-Asst Alloc Growth 1.3 -7.7 3.9 3 4 1.2 0.4 50,000
FSKLX Intern Multi-Cap Growth 9.4 -8.1 4.4 3 5 3.6 0.2 -
EFAV Intern Multi-Cap Growth 8.4 -8.8 4.4 3 5 7.3 0.2 -
RPGAX Flex Port 0.9 -9.9 4.6 3 4 5.7 1.0 2,500

Source: Mutual Fund Observer

Portfolio Visualizer

I am not advocating creating a portfolio of only World and Foreign Funds, but am using it as a tool to evaluate the funds. I constrained the two portfolios in Portfolio Visualizer to have at least 5% allocation to each of the funds, and also applied maximum allocation constraints. The two Global Portfolios outperformed my baseline fund (VWIAX), but with higher volatility and draw-down. The reason is that allocations to equity is higher. That would have been resolved had I added another bond fund or allowed a higher allocation to the bond funds.

Ticker Name Max Rtn 8% Vol Max Sharpe VWIAX
FSKLX Fidelity SAI Intl Low Vol 10% 10%
EFAV iShares Edge MSCI Min Vol EAFE 5% 5%
RPGAX T. Rowe Price Global Allc 5% 5%
ABRYX Invesco Balanced-Risk Allc 5% 5%
PRSNX T. Rowe Price Global Multi-Sector Bd 5% 15%
VTABX Vanguard Total Intl Bd Idx 20% 15%
ACWV iShares Edge MSCI Min Vol Global 20% 15%
VMNVX Vanguard Global Min Vol 20% 15%
VGWAX Vanguard Global Wellington 5% 10%
VGYAX Vanguard Global Wellesley Inc 5% 5%
Annual Return 3.2% 2.8% 1.9%
Standard Deviation 7.3% 6.8% 5.9%
Maximum Draw Down -4.8% -4.4% -3.5%
Sharpe Ratio 0.20 0.16 0.02
Sortino Ratio 0.29 0.23 0.03
US Stocks 25.5% 21.8% 31.6%
Intl Stocks 37.6% 34.6% 5.3%
US Bonds 12.1% 16.9% 48.3%
Intl Bonds 24.7% 25.8% 12.8%

Source: Created by the Author based on Portfolio Visualizer

The funds that appear to be the least volatile are the two bond funds: PRSNX and VTABX, the two minimum volatility funds: ACWV and VMNVX, and the Global Income Fund: VGYAX.

Source: Created by the Author based on Portfolio Visualizer

The performance of the two model portfolios are compared to the Vanguard Wellesley Income Fund below.

Source: Portfolio Visualizer

The Efficient Frontier is shown below, and the blue ellipsoid captures the funds with the highest returns for the level of volatility.

Source: Portfolio Visualizer

Fund Spotlight: Vanguard Wellesley Vs Global Wellesley

The fund’s [VGYAX] stock holdings are focused on companies that have historically paid a larger-than-average dividend or that have expectations of increasing dividends. This focus may provide a higher quarterly income distribution than non-income-focused balanced funds. Investors with a long-term time horizon who have a goal of steady income and who are willing to accept modest movement in share price may wish to consider this fund. Vanguard

The Vanguard Wellesley Income Fund (MUTF:VWIAX) is my target baseline fund to beat in a risk-averse environment because of its superior long term performance. Below I compare VWIAX to its global version, the Vanguard Global Wellesley (MUTF:VGYAX) for the past 13 months since the market became more volatile.

Performance will be impacted by the strength of the dollar and where other countries are in the business cycle in comparison to the US. Volatility is similar for the two funds, and 43% of VGYAX's equities are US.

VWIAX VGYAX
Average Annual Return 1.9% -0.1%
Standard Deviation 5.9% 5.8%
Yield to Maturity 3.6% 2.8%
Price/Earnings Ratio 17.6 11.7
Max. Draw Down -3.5% -5.3%
Sharpe Ratio 0.02 -0.31
Sortino Ratio 0.03 -0.43

Exposure

US Stocks 32% 16%
Intl Stocks 5% 21%
US Bonds 48% 34%
Intl Bonds 13% 26%
Equity Style
Large Cap 99% 89%
Small/Mid Cap 1% 11%
Sectors
Consumer Cyclical 4% 7%
Financial Services 15% 19%
Consumer Defensive 12% 10%
Healthcare 18% 10%
Utilities 10% 7%
Fixed Income
1-3 Years 18% 15%
7-10 Years 15% 21%
> 10 Years 33% 31%

Source: Table Created by the Author based on Portfolio Visualizer except for Yield to Maturity and Price to Earnings Ratio which are from Morningstar

The chart below shows that at different times VWIAX or VGYAX will outperform.

Source: Table Created by the Author based on Portfolio Visualizer

Technicals

Below is the Moving Average Convergence Divergence momentum indicator for the S&P 500. It is showing that the recent recovery in stock prices is losing momentum. I evaluated the performance of the funds in my portfolio during the recent correction and made a list of those to sell when the market recovered. Since the recent surge over the past two months has lost steam, I feel now is a good time to shift to more conservative funds.

Source: Created by the Author

Benchmark Funds

Below are the benchmark funds that I track, sorted by increasing standard deviation. I am comfortable with a 30% to 40% allocation to stocks at this time.

Ticker Fund Category STDev Rtn 3 Mon Rtn 12 Mon P/E Div Yld
VMMXX Prime Money Market 0.2 0.6 2.2 2.1
MINT Ultrashort Bond 0.3 0.9 2.3 2.4
BND Intermediate-Term Bond 2.9 2.6 3.7 2.8
VTINX Target-Date Retirement 3.7 3.2 1.9 15.5 2.6
AOK Alloc 30% to 50% Equity 4.1 3.2 1.3 16.3 2.6
VWINX Alloc 30% to 50% Equity 4.6 3.5 4.1 15.4 3.0
AOM Alloc 30% to 50% Equity 4.9 3.5 0.7 16.3 2.4
ABRYX World Allocation 5.9 3.4 0.3 13.2 0.0
VTWNX Target-Date 2020 6.1 4.0 0.6 15.5 2.4
GAA World Allocation 6.5 3.8 -2.5 12.4 2.8
AOR Alloc 50% to 70% Equity 6.8 4.1 -0.5 16.3 2.3
VWENX Alloc 50% to 70% Equity 7.1 3.7 3.0 14.5 2.7
SPY Large Blend 11.2 4.8 2.1 19.2 1.8

Source: Morningstar

Summary

As a result of researching these funds, I exchanged a volatile multifactor fund for the Vanguard Global Minimum Volatility Fund and the Vanguard Global Wellesley Fund to reduce risk and provide diversification in my portfolio.

Disclosure: I am/we are long VMNVX, VTABX, VGYAX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am an engineer with an MBA nearing retirement and not an economist nor an investment professional. The information provided is for educational purposes and should not be considered as advice. Investors should do their due diligence research and/or use an investment professional.