Performance Of Low Risk Model Portfolios

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Includes: ABRYX, AOK, AOM, AOR, BAB, BIAEX, BIV, BND, BNDX, FAMEX, FHIFX, FMB, FPHAX, FRIFX, FXU, GAA, HWDIX, IAGG, JABAX, LGLV, MERFX, MINT, MMD, NXP, PGZ, PRBLX, PRSNX, PTNQ, RCS, SPLV, SPY, TIP, USMV, VASIX, VBIAX, VCSH, VFICX, VMMXX, VMNVX, VPU, VTABX, VTINX, VTIP, VWEHX, VWENX, VWIAX, VWINX, XMLV, YACKX, YAFFX
by: Charles Bolin
Summary

Risk (Draw Down) and Risk Adjusted Returns (Sortino Ratio) are presented for Baseline Funds.

Performance of portfolios written about in Seeking Alpha are summarized. The majority of portfolios have outperformed the Baseline Funds.

Some of the funds that drove the high performance over the past 19 months are listed along with returns, draw downs, risk adjusted performance and market correlation.

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

Introduction

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

Slowing Economy Source: U.S. Census Bureau, Total Business Sales, retrieved from FRED

Chart #2 shows that Sales and Reported Earnings Per Share may be topping.

Chart #2: Earnings Per Share and Sales Per Share

Source: Created by the Author based on S&P Dow Jones

Baseline Funds

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
Ultrashort Bond MINT 0.8 2.9 0.0% 2.4 2.7
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
Target-Date Retirement VTINX 2.4 6.1 -3.4% 0.8 2.5
Alloc--50% to 70% Eq VWENX 2.7 7.5 -6.8% 0.7 2.6
Large Blend SPY 1.0 5.7 -13.5% 0.7 1.8
Alloc--30% to 50% Eq AOK 2.6 6.3 -4.1% 0.6 2.8
Infl-Protected Bond VTIP 1.7 3.6 -0.7% 0.5 2.1
Infl-Protected Bond TIP 3.9 6.2 -2.5% 0.5 2.3
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

Source: Created by the Author based on Morningstar and Portfolio Visualizer

Model Portfolios

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
Vanguard Funds Mar-19 3.7 8.8 0.3% 24.8 2.5
Managing Risk Feb-19 2.5 11.7 1.7% 2.7 2.4
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
Risk Aversion Mar-19 2.4 8.4 1.9% 1.8 2.7
Low Risk Funds for 2019 Jun-19 3.0 9.8 2.5% 1.7 2.7
Income Apr-19 2.6 9.0 2.5% 1.7 2.9
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 Oct-18 2.7 7.5 3.3% 1.2 2.3
Great Owl ETF Dec-18 2.0 5.8 3.6% 1.2 2.8
Full Cycle Sep-18 3.1 7.1 4.2% 1.2 2.2
Max Return for Target Volatility Jul-18 1.9 5.7 8.4% 1.1 2.3
Bear Market Aug-18 2.6 7.0 7.3% 1.0 2.2
Late Stage Jun-18 1.7 5.3 5.9% 1.0 2.1
Employer Plans Oct-18 2.4 6.6 7.2% 0.9 2.0
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
Reducing Risk May-18 0.5 2.4 8.3% 0.6 1.9

Source: Created by the Author based on Morningstar and Portfolio Visualizer

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
MERFX Merger 7% -1% 2.8 0.3
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
VPU Vanguard Utilities 19% -4% 4.2 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
YACKX AMG Yacktman 9% -5% 1.2 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
FAMEX FAM Equity-Inc 15% -10% 1.4 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

Chart Data by YCharts

Summary

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

Chart Data by YCharts

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.