So far this year, employers have announced plans to cut 369,832 jobs, a 35.8% increase from the 272,301 cuts announced in the first seven months of last year. It is the highest seven-month total since 2015, when 393,368 cuts were announced.
- 2019 July Job Cut Report: 38,845 Cuts in July Led by Transportation, Industrial, Energy, Challenger, Gray and Christmas, Inc
Total commercial chapter 11 filings during the first six months of the year (Jan. 1-June 30) increased 5 percent to 2,854 from the 2,716 total filings during the same period in 2018.
- Commercial Chapter 11 Filings Increase 5 Percent in First Half over Last Year, Total Filings Nearly Unchanged, American Bankruptcy Institute
Each month I download a couple thousand funds from Mutual Fund Observer and rank them based on Risk as measured by the Ulcer Index, Risk Adjusted Returns as Measured by the Martin Ratio, yield and price trends. I then create a hypothetical million dollar portfolio based on different themes. In this article, I show common baseline funds and the Model Portfolios from the past 15 months.
I wrote my first article on Seeking Alpha about reducing risk in a portfolio over a year ago. There have been many signs that the economy is slowing down. For example, Chart #2 shows that Business Sales are growing as slowly as prior to the 2000 recession and slower than prior to the 2007 recession. The 2015 contraction in sales did not result in a recession.
Chart #1: Total Business Sales
Chart #2 shows that Sales and Reported Earnings Per Share may be topping.
Source: Created by the Author based on S&P Dow Jones
In this environment, I use a risk off approach with the Vanguard Wellesley Income Fund (VWIAX) as a target baseline fund. I seek to have high returns with a higher Sortino Ratio and lower draw down than the Wellesley Income Fund.
Table #1 contains the 3 and 12 month performance and yield from Morningstar for the Baseline Funds, along with the Sortino Ratio (Risk Adjusted Performance) and Maximum Draw Down for the past 18 months from Portfolio Visualizer. The green shaded areas are the funds with the highest risk adjusted performance that have returned at least 7% for the past 12 months. Vanguard Allocation Funds (VASIX and VWINX) and Intermediate Bond Fund (BND) have been the out-performers. The yellow shaded areas contain the runners up with moderate risk adjusted performance and at least 5% return for the past 12 months.
Table #1: Baseline Fund Performance (Max DD and Sortino since Jan 2018)
|Benchmark Funds||Symbol||3 Month||12 Month||Max Draw Down||Sortino||Yield|
|Prime Money Market||VMMXX||0.6||2.4||0.0%||37.8||2.3|
|Alloc--15% to 30% Equ||VASIX||3.4||7.8||-2.2%||1.2||2.7|
|Intermediate Core Bond||BND||4.3||9.1||-2.6%||1.0||2.8|
|Alloc--30% to 50% Eq||VWINX||3.6||8.8||-3.5%||0.9||2.9|
|Alloc--50% to 70% Eq||VBIAX||2.2||6.8||-8.2%||0.8||2.2|
|Alloc--50% to 70% Eq||VWENX||2.7||7.5||-6.8%||0.7||2.6|
|Alloc--30% to 50% Eq||AOK||2.6||6.3||-4.1%||0.6||2.8|
|Alloc--30% to 50% Eq||AOM||2.2||5.6||-5.6%||0.5||2.6|
|Alloc--50% to 70% Eq||AOR||1.1||3.9||-8.5%||0.3||2.5|
Table #2 contains the Model Portfolios with the link to articles describing them on Seeking Alpha. The shading is similar to the baseline funds with green being the funds with highest risk adjusted returns and at least 7% for the past 12 months. The yellow shaded funds are the corresponding portfolios with moderate risk adjusted returns and at least 5% for the past 12 months.
Each Model Portfolio is designed to test a specific theme as shown in the left column. Performance of the portfolios improved as I began using Portfolio Visualizer in about July of 2018 and Mutual Fund Observer in October.
In general, investors tend to be more oriented to either total return or income. My preference is to have a low risk portfolio with high risk adjusted returns and moderate income (green shaded). I added yields to the Ranking System earlier this year, and this can be seen in the performance.
Table #2: Model Portfolios (Max DD and Sortino since Jan 2018)
|Model Portfolios (Theme)||Month||3 Mon||12 Mon||Max Draw Down||Sortino||Yield|
|Boring Bond Funds||Jun-19||3.6||8.5||1.4%||2.1||3.3|
|May 2019 Update||May-19||3.0||8.7||3.1%||1.9||3.0|
|Low Risk Funds for 2019||Jun-19||3.0||9.8||2.5%||1.7||2.7|
|April 2019 Update||Apr-19||2.6||8.4||2.4%||1.7||2.8|
|Simple Bear Market||Feb-19||1.7||6.4||1.5%||1.6||2.3|
|Low Risk Funds for 2019||Dec-18||1.9||5.8||3.3%||1.5||2.4|
|June 2019 Income||Jun-19||3.7||9.2||2.5%||1.4||3.3|
|Great Owl ETF||Dec-18||2.0||5.8||3.6%||1.2||2.8|
|Max Return for Target Volatility||Jul-18||1.9||5.7||8.4%||1.1||2.3|
|Exchange Traded Funds||Mar-19||1.5||4.7||2.1%||0.8||2.7|
|Income and Safety||Jul-19||2.1||7.1||4.6%||0.6||4.2|
Funds Behind the High Performance (since Jan 2018)
Table #3 shows some of the funds that supported the high performance of the Model Portfolios. They were selected to have a Sortino Ratio (Risk adjusted performance) above 1.0, Annual Returns above 5%, and Draw Down below 10%. They are sorted from lowest correlation to the market to highest.
Table #3: Low Risk Funds with High Risk Adjusted Performance
|Ticker||Name||CAGR||Max. Drawdown||Sortino Ratio||US Market Correlation|
|BAB||Invesco Taxable Muni Bd||6%||-3%||1.4||-0.4|
|HWDIX||Hartford World Bond||5%||0%||5.7||-0.3|
|IAGG||iShares Core Intern Aggt Bd||7%||0%||8.4||-0.1|
|BNDX||Vanguard Total Intern Bd||6%||-1%||5.9||-0.1|
|FMB||First Trust Mngd Muni||5%||-1%||1.8||-0.1|
|VTABX||Vanguard Total Intl Bd||7%||0%||7.1||-0.1|
|BIV||Vanguard Interm Bd||7%||-1%||3.7||-0.1|
|BIAEX||Brown Advisory Tax Ex Bd||5%||-1%||3.3||-0.0|
|VFICX||Vanguard Interm Grd||5%||-3%||1.4||0.1|
|PRSNX||T. Rowe Price Glbl Multi-Sect Bd||5%||-2%||2.5||0.2|
|VCSH||Vanguard St-Term Corp Bd||5%||0%||5.8||0.2|
|NXP||Nuveen Tax Free Inc||8%||-4%||1.7||0.2|
|MMD||MainStay MacKay Muni Opport||9%||-4%||2.0||0.3|
|RCS||PIMCO Strategic Inc||14%||-10%||1.4||0.4|
|FXU||First Trust Utilities||9%||-6%||1.1||0.6|
|PGZ||Principal Real Estate Inc||15%||-7%||2.4||0.6|
|FRIFX||Fidelity Real Estate Inc||8%||-4%||1.4||0.6|
|PTNQ||Pacer Trendpilot 100||13%||-10%||1.1||0.7|
|FPHAX||Fidelity Select Pharm Port||11%||-10%||1.0||0.8|
|FHIFX||Fidelity Focused High Inc||5%||-4%||1.3||0.8|
|VWEHX||Vanguard High-Yield Corp||5%||-4%||1.1||0.9|
|YAFFX||AMG Yacktman Focused||9%||-5%||1.2||0.9|
|SPLV||Invesco S&P 500 Low Vol||12%||-7%||1.4||0.9|
|XMLV||Invesco MidCap Low Vol||11%||-8%||1.1||0.9|
|VWIAX||Vanguard Wellesley Inc||8%||-3%||1.8||0.9|
|LGLV||SPDR US Lg Cap Low Vol||15%||-8%||1.7||0.9|
|USMV||iShares Edge MSCI Min Vol||14%||-8%||1.6||0.9|
|VMNVX||Vanguard Global Min Vol||9%||-8%||1.0||0.9|
|PRBLX||Parnassus Core Equity||14%||-10%||1.2||1.0|
|JABAX||Janus Henderson Balanced||9%||-7%||1.2||1.0|
Source: Created by the Author based on Portfolio Visualizer
Chart #3 shows some of the funds in the model portfolios. The Model Portfolios have 50 to 70% allocated to bonds and cash equivalents with a small allocation to trending sectors such as real estate and utilities. Low volatility funds often are included as part of the stock allocation.
Chart #3: Price Performance of Selected Funds
We have been conditioned by the recessions accompanied by high valuations in the Technology Bubble and aggressive Fed prior to the Great Recession to "feel" that stock market declines are near 50% during recessions. These were extreme bear markets. According to J.P. Morgan's Guide to the Markets, there have been 11 recessions during the past 70 years, of which only 3 had market declines of over 40% and 7 had declines of less than 30%. In the current environment, valuations are high but not extreme and commodities are not spiking. current risks are the slowing global economy, possible impact of trade war, and the impact of previous federal funds rate increases. The near term risk of a recession is low. In this late stage of the business cycle with the yield curve still inverted, conservatism is justified.
Chart #4: Commodities
I appreciate the comments and suggestions from readers that have influenced the construction of these portfolios. I invest according to the business cycle by making one or two small trades each month if warranted.
Mutual Fund Observer Premium ($100 per year) allows an investor to find low risk funds with high risk adjusted returns. Portfolio Visualizer (free) assists an investor with allocations and allows the investor to measure the performance of his or her own portfolio. Morningstar Premium ($199 per year) has great metrics for tracking funds and analyzing a portfolio. These are great tools for the small investor.
Disclosure: I am/we are long FHIFX, FRIFX, JABAX, MERFX, PRSNX, SPLV, VMNVX, VTABX, VWIAX, YAFFX. 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.