Seeking Alpha

Low Risk Fund Portfolios In A High Risk Environment

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Includes: EXDAX, FIKFX, SWLRX, SWRSX, TMSRX
by: Charles Bolin
Charles Bolin
Medium-term horizon, Macro, portfolio strategy, ETF investing
Summary

With the uncertainty of the economy and markets, investors should remain conservative.

Mutual Fund Observer is used to update Top Fund and Category Performance.

A "Very Conservative" Model Portfolio is created for short term funds in addition to the three Conservative Model Portfolios.

Introduction

According to the National Bureau of Economic Research, the U.S. economy entered a recession in February of this year. The S&P 500 is down about 5 percent for both the week and year to date. I don't believe that the full impact of the slowdown or continuing risk of COVID-19 is fully priced into the markets. There are plenty of potential disruptions in the near term including the political rhetoric associated with the election. This article describes a conservative investment approach using Mutual Fund Observer to measure risk (Ulcer Index) and Risk Adjusted Return (Martin Ratio) using the author's Ranking System.

Chart #1: S&P 500 Late Stage of the Business Cycle Performance (Volatility)

Chart
Data by YCharts

Don’t trust your own opinion and back your judgment until the action of the market itself confirms your opinion. – Jesse Livermore

Rules Based Investing

I use an Investment Model as shown below to determine how much risk to take in investments following the philosophy of Howard Marks. The solid blue line is a theoretical stock to bond allocation with a minimum allocation of 20% along the guidelines of Benjamin Graham (who used a minimum allocation of 25%). The Model started to show improvement in late 2019 prior to the impact of COVID-19 on the markets. The red line shows the percent of the indicators that are negative and the downturn in the economy is wide spread.

Chart #2: Investment Model

Source: Created by the Author

Chart #3 shows the total return performance of the S&P 500 (green), Vanguard Wellington (red) which represents a traditional 60/40 stock to bond allocation, the Vanguard Wellesley (blue) which is a more conservative 40/60 stock to bond allocation, and the Fidelity Japan Fund (orange) for the past 22 years. For someone nearing retirement, this time period represents an approximate average life expectancy for a 65 year old. I expect a conservative allocation to perform as well or better than more aggressive allocations over the next decade or two due to slower population growth, aging population, current recession, and high debt and deficits, among other reasons. Much of the gain over the past decade is the result of quantitative easing. I show the Fidelity Japan Fund as a market which has had similar problems.

Chart #3: Twenty Year Baseline Fund Performance

Source: Portfolio Visualizer

Table #1 shows the performance for the base line funds in the previous chart. As someone nearing retirement, managing risk is more important than higher returns. The Sortino Ratio which measures the risk free return divided by the downside deviation is one measure of risk-adjusted returns. As shown below, when adjusted for risk, the Vanguard Wellesley Income Fund has had the highest return compared to the risk taken.

Table #1: Fund Performance since 1998

Portfolio

Return

Max. Drawdown

Sortino Ratio

Vanguard Wellesley

7.0%

-18.8%

1.3

Vanguard Wellington

7.7%

-32.5%

0.9

Fidelity Japan

4.7%

-63.8%

0.4

Vanguard 500

7.1%

-51.0%

0.6

Source: Portfolio Visualizer

Risk Managed Portfolio

I have been using Mutual Fund Observer Premium Services for the past year or two to build risk adjusted portfolios in my own accounts. Earlier this year, I built three model portfolios to use as guidance to build low turnover portfolios that I would be content to hold through recessions with few adjustments. The two year return of these portfolios are shown as red triangles compared to the risk taken as measured by the Ulcer Index which measures the depth and length of drawdowns. The blue circles are baseline funds. A small account is held in a Charles Schwab Intelligent Portfolio which is a Robo-Adviser account. Schwab makes periodic adjustments to these portfolios so it is not a fair comparison to say the Intelligent Portfolio would have been static for the past two years. I used two years because it is the age of the youngest fund in my portfolios. The Fidelity Conservative and Moderate Portfolios are higher performers on a risk adjusted basis.

Chart #4: Return vs Risk (Two Years)

Source: Created by the Author Using Mutual Fund Observer

The Model Portfolios are shown in Table #2 for the past two years along with the performance year to date. The green shaded funds good baseline funds. The blue shaded funds are lower risk funds that I included in a new "Very Conservative" portfolio. I just created it with funds that I want available within 2 or 3 years. Martin Ratio is my preferred measure of risk adjusted returns. APR refers to the average annual return over the past two years.

For anyone interested in the funds and allocations in the model portfolios they are available in this Excel spreadsheet, Seeking_Alpha_May_2020_Portfolios.

Table #2: Baseline Funds and Model Portfolio Performance (2 Years & YTD).

Source: Created by the Author Using Mutual Fund Observer

Each month, I download about a thousand mutual funds, exchange trade funds, and closed end funds available to individual investors through Charles Schwab, Fidelity, and/or Vanguard. I rank these based on risk, return, momentum, income, and quality. Bear refers to the average performance during the past three bear markets. I select the top fund for each of nine buckets as shown in Table #3. These are also available in Seeking_Alpha_May_2020_Portfolios.

Table #3: Top Ranked Categories - 2.5 Years

Source: Created by the Author Using Mutual Fund Observer

Table #4 contains the top ranked funds for each of the top ranked categories above. These are a good place to start to look for funds to add to a portfolio.

Table #4: Top Ranked Funds in Top Categories

Bucket 1: Safety

Vanguard

Fidelity

Schwab

CEF

ETF

1. U.S. Gov Gen

FGOVX

AGZ

2. U.S. Gov Intermediate

CPTNX

VGIT

3. U.S. Gov Short-Intermediate

FSTGX

4. Core Bond

VCOBX

DODIX

SWAGX

SCHZ

Bucket 2: 1 to 2 Years

1. Corp Debt A Rated

VWESX

QLTA

2. U.S. Treasury Gen

VFITX

FUTBX

PRTIX

SCHR

3. Mxd-Ast Target Today

VTINX

FIKFX

TRRIX

4. Core Plus Bond

PTTFX

BOND

Bucket 3: 3 to 4 Years

1. Convertible Securities

FCVSX

CWB

2. Mxd-Ast Target 2020

VTWNX

FPIFX

SWYLX

3. Mxd-Ast Target 2025

VTTVX

FQIFX

SWYDX

4. Mxd-Ast Trgt Alloc Growth

VGSTX

FBALX

PRWCX

AOR

Bucket 4: 4 to 5 Years

1. S&P 500 Index

VFINX

FXAIX

SWPPX

IVV

2. Telecom

PRMTX

FCOM

3. Science & Technology

PRSCX

VGT

4. Health Biotech

PRHSX

VHT

Inflation Resistant

1. Inflation Protected Bond

VIPSX

FIPDX

SWRSX

TIPX

2. Commodities Specialty

UGL

3. Basic Materials

RTM

Yield

1. U.S. Mortgage

FMSFX

VMBS

2. Gen Bond

MMT

IUSB

3. Corp Debt BBB-Rated

FCBFX

PRPIX

MGF

IGIB

Global & International Bonds

1. Global Income

FGBFX

PRSNX

2. International Income

VTABX

RPIBX

3. Emer Mrkts Hard Crncy Debt

VEMBX

FNMIX

TRECX

VWOB

Global & International Equity

1. Global Large-Cap Value

IOO

2. Global Health Biotech

VGHCX

FPHAX

IXJ

3. Global Multi-Cap Growth

VHGEX

BGAFX

PRGSX

Defensive

1. Commodities Precious Metals

SGOL

2. Alt Equity Market Neutral

BTAL

3. Precious Metals Equity

QGLDX

RING

Source: Created by the Author Using Mutual Fund Observer

Table #5 contains the categories with the highest three month trends. I look for changes in leadership. Currently, I believe that we are in a bear market rally and the funds with the highest three month trend are mostly those that are recovering from the 2020 bear market.

Table #5: Trending Categories

Trending

Rank

Ulcer

MaxDD

Martin

Yield

RTN 3 Months

APR

Bear

1. Precious Metals Equity

39

10.8

-24.6

1.5

2.4

25.0

17.3

7.4

2. Mid-Cap Growth

51

6.1

-20.8

2.0

0.4

8.5

13.6

-22.3

3. Science & Technology

61

6.0

-17.6

3.0

0.7

13.0

19.7

-29.4

4. Small-Cap Growth

32

8.1

-24.5

1.1

0.6

5.2

10.0

-20.0

5. Global Small/Mid-Cap

28

7.0

-23.4

0.4

3.1

2.3

4.8

-27.2

6. Absolute Return

62

12.0

-22.7

1.1

0.6

25.0

15.1

43.1

7. Multi-Cap Growth

51

5.6

-17.3

2.3

0.5

10.7

14.6

-23.3

8. Global Science Technology

49

6.2

-18.1

2.6

1.0

11.5

17.1

-28.8

9. Consumer Services

53

6.2

-20.4

1.7

1.2

8.2

11.6

-18.4

10. Global Multi-Cap Growth

62

5.7

-17.7

2.1

0.6

9.7

13.5

-20.2

11. Global Large-Cap Growth

39

6.0

-17.8

1.7

1.0

9.1

11.3

-25.8

12. Large-Cap Growth

53

5.4

-16.3

2.5

0.6

10.9

15.1

-22.3

13. Telecom

63

5.0

-15.2

2.4

1.0

9.2

13.2

-23.8

14. Sector Equity

70

6.6

-16.7

1.9

5.5

13.2

13.0

-14.2

15. Industrials

22

8.3

-24.3

0.5

1.1

1.9

5.5

-24.5

16. Health Biotech

53

6.4

-15.6

1.8

0.8

13.7

12.7

-13.2

Source: Created by the Author Using Mutual Fund Observer

Very Conservative Portfolio

Due to some changes, I created another Model Portfolio for a Very Conservative Portfolio. It contains funds from a couple accounts that I want available in 1 to 3 years so I want it to be very safe. MFO gives it a Risk Rank of 1 (Very Conservative) for the past two years. Year to date through the end of May, it has returned 1.9 percent.

I was introduced to T. Rowe Price Multi-Strategy Total Return (TMSRX) by David Snowball in his Mutual Fund Observer June 2020 newsletter. I purchased it, Schwab Monthly Income Maximum Payout (SWLRX), Manning & Napier Pro-Blend Conservative Term (EXDAX) funds, money market funds, and short term bond funds for diversification and safety.

Table #6: Very Conservative Portfolio

Very Conservative Portfolio (Two Year Metrics + YTD)
Symbol Name Weight YTD MAX DD Ulcer Index MFO Risk Martin Ratio MFO Rating Yield
SWVXX Schwab Value Adv Money 20 0.4 - - 1 - - 1.5
SPAXX Fidelity Gov MM 18 0.3 - - 1 - - 1.2
FIKFX Fidelity Freedom Inc 15 2.1 (3.1) 0.9 2 4.15 5 1.9
FUMBX Fidelity Short-Term Treasury 15 4.2 (0.4) 0.1 1 25.3 5 1.7
SWLRX Schwab Monthly Inc Max Payout 8 1.5 (3.7) 1 2 3.48 5 2.6
TMSRX T Rowe Price Multi-Strat Tot Return 8 3.2 (4.7) 1.9 2 0.61 4 2.5
EXDAX Manning & Napier Pro-Blend Cons 8 1.8 (5.9) 1.5 2 2.66 5 1.6
SWSBX Schwab Short-Term Bond 8 3.5 (0.2) 0.1 1 38.9 5 2.2
Portfolio 100 1.9 (1.2) 0.3 1 5.9 - 1.8

Source: Created by the Author Using Mutual Fund Observer

Closing

Always keep a good part of your capital in a cash reserve. Never invest all your funds. – Bernard Baruch

Rules Based Investing

I am cautiously optimistic, but remain conservative until my opinion is confirmed by the markets.

Disclosure: I am/we are long TMSRX, SWLRX, EXDAX. 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. I am long all of the funds in the Model Portfolios. 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. In September 2019, I began contributing to the Mutual Fund Observer monthly newsletter.