Portfolios For The Risk Averse

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Includes: ACWV, EFIPX, FSDIX, FSUTX, FTSM, IAGG, RYU, SMDV, SPLV, TOTL, VMNVX, VTABX, VTINX, VWIAX, VWINX, XMLV, YACKX
by: Charles Bolin
Summary

Mutual Fund Observer is used to screen funds with lower risk, higher risk-adjusted returns, and higher 3-month momentum.

I use Morningstar to reduce the funds based on ratings, returns and assets, among other criteria.

Portfolio Visualizer is used to select 10 funds to be in three portfolios with allocations to stock of 35%, 45%, and 55%.

Introduction

My strategy is to invest appropriately for a late stage in the business cycle, and currently am analyzing funds based on risk (Ulcer Index, Draw Down, P/E ratio), risk-adjusted returns (Martin, Sortino, Sharpe ratios) and three-month trends. Nearly two thousand funds are screened and ranked to create a list of nearly 70 funds in 33 Lipper categories. These are reviewed in Morningstar to reduce the funds to about 40 which are tested in Portfolio Visualizer. The end result is to create three portfolios which have varying allocations to 10 funds.

Morningstar

Below are the 10 funds selected for the March Risk Adverse Model Portfolio. Note that the Risk and Return ratings are by Morningstar category.

Ticker Category Rating Risk Return Rtn 3 Mon Rtn 12 Mon

STDev

Yield
FTSM Ultrashort Bond 3 Below Average Average 0.9 2.3 0.2 2.3
EFIPX Short-Term Bond 4 High Above Average 2.2 3.4 1.4 2.3
TOTL Interm-Term Bond 3 Below Average Average 2.7 4.0 2.1 3.4
IAGG World Bond 3 Below Average Average 2.5 4.7 2.5 3.3
YACKX Large Value 5 Below Average High 4.8 8.9 7.1 1.8
ACWV World Large Stock 4 Low Above Average 6.3 7.0 8.7 2.2
SPLV Large Blend 4 Low Above Average 7.9 12.5 9.9 2.0
XMLV Mid-Cap Value 5 Low High 6.7 12.1 10.7 1.9
RYU Utilities 4 Average Above Average 3.1 22.3 11.2 2.9
SMDV Small Value 5 Low Above Average 4.7 10.5 12.4 1.8

Source: Created by the Author Based on Morningstar, Standard Deviation is for the past 3 years

Mutual Fund Observer

I use the Mutual Fund Observer Premium Service to rate and rank the funds using Great Owl Classification, Risk, Rating, and Martin Ratio (risk-adjusted returns). Top Lipper categories are ranked based on low risk (Ulcer Index), high risk-adjusted return (Martin Ratio) and three-month trend. The metrics in the table are for the past 12 months. The Risk Classification is part of my Bucket Strategy to ensure that funds meet cash flow needs for retirement.

Symbol Lipper Category Risk Rating MAXDD Ulcer Martin
FTSM Short-Intmdt Invest Grade Debt 1 5 0.0 0.0
EFIPX Short-Intmdt Invest Grade Debt 1 5 -0.2 0.1 8.9
TOTL Multi-Sector Income 1 4 -0.8 0.3 3.3
IAGG International Income 1 5 -0.3 0.1 26.3
RYU Utility 2 5 -3.6 1.1 17.7
YACKX Large-Cap Value 3 5 -4.9 1.6 4.5
ACWV Global Multi-Cap Core 3 5 -6.6 2.5 2.0
SPLV Multi-Cap Core 4 5 -6.9 2.2 4.9
XMLV Mid-Cap Core 4 5 -8.4 2.9 4.4
SMDV Small-Cap Core 4 5 -8.5 3.1 4.4

Source: Created by the Author Based on Mutual Fund Observer

Efficient Frontier

The Efficient Frontier shows the returns of the funds for the past three years compared to standard deviation (volatility).

Source: Portfolio Visualizer

Three Portfolios

I used the options in Portfolio Visualizer to Maximize Sortino Ratio (risk adjusted returns), Return at 5% Volatility, and Sharpe Ratio (volatility adjusted returns) for the past 14 months when the stock market was volatile. I applied constraints to limit allocations to avoid concentrating the portfolio and tweaked the results to vary the allocations to 35%, 45% and 55% stocks. The link is provided here.

Ticker Name 55% Stock 45% Stock 35% Stock
FTSM First Trust Enhanced Short Maturity 10% 15% 16%
EFIPX Fidelity Advisor Limited Term Bond 10% 15% 16%
TOTL SPDR DoubleLine Total Return Tactical 10% 10% 16%
IAGG iShares Core International Aggregate Bond 10% 10% 12%
YACKX AMG Yacktman I 15% 15% 15%
ACWV iShares Edge MSCI Min Vol Global 15% 7% 6%
SPLV Invesco S&P 500 Low Volatility 15% 15% 8%
XMLV Invesco S&P MidCap Low Volatility 5% 5% 3%
RYU Invesco S&P 500 Equal Weight Utilities 5% 5% 5%
SMDV ProShares Russell 2000 Div Growers 5% 3% 3%

Source: Created by the Author

The performance of the three model portfolios are compared to the Vanguard Wellesley Income Fund (VWIAX) which I use as a baseline in a Business Cycle Late Stage Portfolio. Three thousand dollars per month are withdrawn from the portfolios each month.

Source: Portfolio Visualizer

Portfolio Analysis

The following metrics reflect my preferences for lower volatility and higher quality bonds. The metrics shown below are for the past 14 months.

Portfolio Metrics

Metric 55% Stock 45% Stock 35% Stock VWIAX
Start Balance $1,000,000 $1,000,000 $1,000,000 $1,000,000
End Balance $1,023,737 $1,019,047 $1,011,292 $977,773
Average Growth 2.0% 1.6% 1.0% -1.9%
Internal Rate of Return 5.8% 5.4% 4.7% 1.8%
Standard Deviation 6.5% 5.5% 4.3% 5.9%
Max. Drawdown -3.7% -3.1% -2.4% -6.4%
Sharpe Ratio 0.62 0.65 0.67 0.02
Sortino Ratio 0.93 1.00 1.06 0.03

Source: Created by the Author Based on Portfolio Visualizer

Portfolio Exposures

Category 55% Stock 45% Stock 35% Stock
US Stocks 46.4% 39.8% 30.4%
Intl Stocks 8.9% 5.5% 5.0%
US Bonds 21.8% 28.2% 34.6%
Intl Bonds 12.9% 14.1% 16.8%
Other 0.1% 0.1% 0.1%
Cash 9.9% 12.2% 13.1%
Large Cap 65.6% 65.6% 67.4%
Mid Cap 25.8% 27.5% 24.3%
Small Cap 8.7% 7.0% 8.4%

Source: Created by the Author Based on Portfolio Visualizer

Portfolio Equity Sectors

Category 55% Stock 45% Stock 35% Stock
Basic Materials 2.4% 2.1% 2.0%
Consumer Cyclical 7.2% 7.1% 7.4%
Financial Services 15.7% 15.6% 13.8%
Real Estate 10.2% 10.6% 8.3%
Consumer Defensive 13.5% 13.5% 15.0%
Healthcare 7.4% 6.6% 6.9%
Utilities 21.6% 23.8% 24.5%
Communication Services 3.4% 2.6% 2.5%
Energy 1.3% 1.4% 1.5%
Industrials 9.1% 7.8% 7.7%
Technology 8.3% 9.0% 10.5%

Source: Created by the Author Based on Portfolio Visualizer

Portfolio Bond Style

Category 55% Stock 45% Stock 35% Stock
AAA 32.5% 29.8% 33.1%
AA 11.0% 10.0% 9.7%
A 27.8% 30.4% 27.9%
BBB 22.2% 24.1% 22.5%
Non-Investment Grade 4.6% 3.9% 4.9%
Not Rated 1.9% 1.9% 2.0%
Category 55% Stock 45% Stock 35% Stock
Under 1 Year 9.0% 11.0% 10.6%
1-3 Years 24.4% 28.2% 26.3%
3-5 Years 30.4% 28.4% 26.4%
5-7 Years 9.0% 8.1% 8.6%
7-10 Years 5.7% 5.1% 5.8%
10-15 Years 2.3% 2.1% 2.3%
15-20 Years 2.7% 2.4% 2.8%
20-30 Years 14.9% 13.3% 15.5%
Over 30 Years 1.7% 1.6% 1.7%

Source: Created by the Author Based on Portfolio Visualizer

More Great Funds with Higher Risk Adjusted Returns

The table below represents the Lipper categories and funds from the Selection and Ranking System that also cleared the Morningstar review. Interested readers can substitute funds based on their preferences.

CATEGORY ETF VANGUARD FIDELITY OTHER
BOND
1) Short Invest Grade Debt IBDK VFSTX FYBTX BBBMX
2) International Income IAGG VTABX
3) Short-Intmdt Invest Grade Debt FTSM EFIPX
4) Multi-Sector Income TOTL
MUNICIPAL BOND
2) Muni Short-Intmdt Debt VMLTX FSTFX GTCMX
ALTERNATIVE
2) Alt. Multi-Strategy DRRIX
3) Alt. Managed Futures WTMF
MIXED ASSET
1) Mxd-Ast Target Today VTINX FIKFX
2) Mxd-Ast Target Consv AOK VWINX FASIX
4) Flexible Portfolio INKM FAYZX
US EQUITY
1) Equity Income TWEIX
2) Small-Cap Core SMDV
3) Large-Cap Value FSDIX YACKX
4) Multi-Cap Core SPLV
5) Mid-Cap Core XMLV
GLOBAL EQUITY
1) Global Multi-Cap Core ACWV MVGIX
4) Global Small-/Mid-Cap VMNVX
INTERNATIONAL EQUITY
1) Intern Multi-Cap Core IDLV
2) Intern Multi-Cap Growth EFAV
SECTOR EQUITY
1) Utility RYU FSUTX
2) Global Real Estate MGLIX
4) Real Estate REM

Summary

I believe that risks for a recession are rising for 2020 or 2021 and expect the market to be volatile until then. As a result of writing this article, I made no changes to my portfolio as it is similar in style to the 35% Stock Model Portfolio. I utilize more mixed asset funds in my portfolio, and also own some health care and real estate funds. I consider this portfolio to be well suited for a volatile, yet not bearish environment.

Disclosure: I am/we are long SPLV, YACKX, VTABX, VWIAX, FSDIX, VMNVX, FSUTX, VTINX. 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.