Short List Of Defensive Funds

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Charles Bolin
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Summary

  • Seven conservative mutual funds and one exchange-traded fund are evaluated for defensive performance. The shortlist of funds is TMSRX, HSTRX, GAVIX, ADVNX, AEDNX, COTZX, FIXD, and SUBFX.
  • These funds were selected from my last article on Seeking Alpha and shortlisted based on Portfolio Visualizer optimization, Mutual Fund Observer risk-adjusted performance, composition, and recent performance.
  • Top-ranked funds, based on metrics from Mutual Fund Observer, for mutual funds from Charles Schwab, Fidelity, Vanguard, and other companies, exchange-traded funds, and closed-end funds are updated.

In this article, I select seven mutual funds and one exchange-traded fund from the article titled "Fifty Funds To Consider For Defense" to look at in more detail. With new COVID-19 cases rising, high valuations, high deficits, high debt levels, and the markets becoming more volatile, I prefer to remain conservative. I used Portfolio Visualizer and Mutual Fund Observer to select funds that have done well over the past two years, do not have high concentrations of low-quality bonds, and have had modest declines over the past three months. These funds are shown in Chart #1. The S&P 500 (VFINX) is shown as a baseline.

Chart #1: Defensive Fund Shortlist

ChartData by YCharts

These funds are intended to be available to small investors, have low-to-moderate expenses, and sustainable assets under management. The Columbia Thermostat Fund Class A (CTFAX) is now available as a no-load, no transaction fee fund at Fidelity, and the Columbia Thermostat Fund Institutional Class (COTZX) is available through Vanguard. While Columbia thermostat has raised its allocation to stocks and does not offer the same level of downside protection, I like that it adjusts its allocations based on valuations. The KL Allocation Fund Institutional Class (GAVIX) will have its minimum required investment lowered to $5,000 at the beginning of next year. Other defensive funds that I own, such as the Aptus Defined Risk ETF (DRSK), the Amplify BlackSwan Growth & Treasury Core ETF (SWAN), the Cambria Tail Risk ETF (TAIL), and the AGFiQ U.S. Market Neutral Anti-Beta Fund (BTAL) were excluded because of short-term volatility.

I detail the First Trust TCW Opportunistic Fixed Income ETF (FIXD) in this article, but only give it a "Neutral" Rating because of low interest rates in general and returns that have been slightly negative over the past three months. It is on my short list as a longer-term holding in this uncertain environment.

Each month, I rate and rank about a thousand funds using Mutual Fund Observer metrics based on Risk, Risk-Adjusted Returns, Momentum, Quality, and Income. Mutual funds from Charles Schwab, Fidelity, Vanguard, and other fund families, exchange-traded funds, and closed-end funds are included summarized in the final section. The funds are divided into nine buckets for risk, income, global exposure, inflation, and alternatives.

Risk Management with Mutual Fund Observer

Table #1 shows the risk and performance metrics from Mutual Fund Observer over the past two years of a hypothetical portfolio of the funds in the short list. The portfolio would have returned 10% compared to 12% for the S&P 500, with a maximum monthly drawdown of -2% compared to -20% for the S&P 500. Over shorter durations, the portfolio outperforms the S&P 500. Ulcer Index measures the depth and duration of drawdown. MFO Risk is the quintile risk rating of all funds. Martin Ratio is the risk-adjusted return of the funds, with MFO Rating being the quintile of funds. Each of these funds is "Very Conservative" or "Conservative" during this time period, and in the top quintile of risk-adjusted performance. The yield is a low 1.4%, and readers wanting more income can look at the funds at the end of the article.

Table #1: Hypothetical Portfolio of Defensive Funds

(Source: Created by the Author based on Mutual Fund Observer)

Table #2 contains the metrics over the past twelve months and includes percent equity and bonds, along with the maturity and three-month performance.

Table #2: Fund Performance - One Year

(Source: Created by the Author based on Mutual Fund Observer)

Portfolio Construction with Portfolio Visualizer

The funds in the short list were chosen using Portfolio Visualizer using a variety of optimization methods. Fund with higher drawdowns in the past three months were excluded. The link to Portfolio Visualizer is here. The Vanguard LifeStrategy Conservative Growth Fund (VSCGX) is used as a baseline fund, because of its excellent risk-adjusted performance.

Figure #2: Hypothetical Portfolio Performance

(Source: Created by the Author based on Portfolio Visualizer)

Table #3 contains the monthly performance of the funds.

Table #3: Monthly Fund Performance

(Source: Created by the Author based on Portfolio Visualizer)

Table #4 contains the correlation of funds and a comparison to the S&P 500. FIXD is the least coordinated to the S&P 500.

Table #4: Fund Correlations

(Source: Created by the Author based on Portfolio Visualizer)

First Trust TCW Opportunistic Fixed Income ETF

I own four of the funds in the short list. I like FIXD to compliment the funds that I own and as diversification of income. The following profile is from Seeking Alpha:

First Trust Exchange-Traded Fund VIII - First Trust TCW Opportunistic Fixed Income ETF is an exchange traded fund launched and managed by First Trust Advisors L.P. The fund is co-managed by TCW Investment Management Company. It invests in the fixed income markets across the globe. The fund invests in securities of any credit quality including securities issued or guaranteed by the U.S. government or its agencies, instrumentalities or sponsored corporations, Treasury Inflation Protected securities, agency and non-agency residential mortgage-backed securities, agency and non-agency commercial mortgage-backed securities, agency and non-agency asset-backed securities, domestic corporate bonds, fixed income securities issued by foreign corporations and foreign governments, including emerging markets, bank loans, including first lien senior secured floating rate bank loans, municipal bonds, and other debt securities bearing fixed interest rates and with varying maturities.

- FIXD Fund Profile, Seeking Alpha

The Summary Prospectus can be found here.

Table #5: FIXD Details

(Source: Created by the Author based on Mutual Fund Observer)

Highly rated peer multi-sector income funds with higher yields than FIXD are the Columbia Diversified Fixed Income Allocation ETF (DIAL), the SPDR SSGA Fixed Income Sector Rotation ETF (FISR), and the Osterweis Strategic Income Fund No Load (OSTIX).

Top-Ranked Funds

Each month, I rate and rank about a thousand funds extracted from the Lipper Database using MFO screens. I prescreen the funds based on drawdown, assets under management, loads, expenses, and drawdowns, among other criteria. The funds in the next five tables are selected with the highest-ranking fund per bucket for each type of fund. They are sorted from the highest-ranking fund to the lowest for only the highest-rated 20% of funds.

I first search for funds from preferred fund families, but keep an eye on other fund families which tend to have specialties. I also look in ETFs such as those in Table #10. I show a limited number of closed-end funds, because they tend to be more volatile.

Table #6: Vanguard Funds - 1.5 Years

Vanguard
Symbol Name YTD APR Ulcer Index Martin Ratio Yield
VTABX Vanguard Total Intern Bond 3.9 5.7 0.9 5.2 3.2
VSGBX Vanguard Short-Term Fed 4.0 4.4 0.1 66.1 1.5
VWSTX Vanguard Short-Term Tax-Ex 1.5 2.0 0.2 4.2 1.3
VASIX Vanguard LifeStrgy Inc 4.6 7.2 1.1 5.7 2.4
VGCAX Vanguard Global Credit Bond 7.7 9.9 1.6 5.6 3.1
VAIPX Vanguard Inf-Prot Sec 8.5 8.8 0.6 12.6 1.4
VGSTX Vanguard STAR 6.8 10.4 3.7 2.5 1.9

(Source: Created by the Author based on Mutual Fund Observer)

Table #7: Fidelity Funds - 1.5 Years

Fidelity
Symbol Name YTD APR Ulcer Index Martin Ratio Yield
FNSOX Fidelity Short-Term Bond 4.3 4.9 0.1 61.7 1.6
FIKFX Fidelity Freedom Inc 4.3 6.5 0.8 6.6 1.5
FMSFX Fidelity Mort Sec 4.0 5.4 0.0 459.0 2.0
FCVSX Fidelity Conv Sec 17.3 19.2 3.6 5.1 2.0
FCDSX Fidelity Intern Credit 5.2 8.5 2.2 3.4 3.0
FIPDX Fidelity Inf-Prot Bond 8.4 8.8 0.6 12.6 0.3

Source: Created by the Author based on Mutual Fund Observer

Table #8: Charles Schwab Funds - 1.5 Years

Charles Schwab
Symbol Name YTD APR Ulcer Index Martin Ratio Yield
SWRSX Schwab Treas Inf Prot Sec 8.4 8.9 0.7 11.6 1.3
SWLRX Schwab Mnth Inc - Max Pay 2.9 5.8 0.9 5.0 2.4
SWSBX Schwab Short-Term Bond 4.1 4.8 0.0 79.3 1.7
SWYLX Schwab Target 2020 3.2 6.7 2.3 2.4 2.0

(Source: Created by the Author based on Mutual Fund Observer)

Table #9: Mutual Funds From Other Fund Families - 1.5 Years

Other Fund Families
Symbol Name YTD APR Ulcer Index Martin Ratio Yield
COTZX Columbia Thermostat 19.4 18.5 0.7 25.6 1.7
TMSRX T Rowe Price Multi-Strgy Ttl Rtn 9.2 8.4 1.2 6.4 2.4
BSBIX Baird Short-Term Bond 3.6 4.2 0.4 7.3 2.0
BMNIX Baird Core Interm Muni Bond 3.4 4.9 1.1 3.6 2.1
BBNIX BBH Inc 8.0 9.1 1.2 6.5 3.1
PRSNX T Rowe Price Glbl Multi-Sctr Bond 4.5 7.0 2.8 2.1 3.4
PRIPX T Rowe Price Inf Prot Bond 8.5 8.9 0.6 13.3 0.3
JANFX Janus Henderson Flex Bond 8.1 9.7 0.8 10.2 2.5
PRNHX T Rowe Price New Horiz 35.9 31.2 4.2 7.1 -

(Source: Created by the Author based on Mutual Fund Observer)

Table #10: Exchange Traded Funds - 1.5 Years

Exchange-Traded Funds
Symbol Name YTD APR Ulcer Index Martin Ratio Yield
ISTB BlackRock Core 1-5 Year USD Bond 3.9 4.7 0.3 13.3 2.4
EPRF Innovator S&P Invest Grade Prfrd 3.5 7.5 2.8 2.3 5.2
VMBS Vanguard Mort-Backed Sec 3.3 4.9 0.1 57.9 2.1
IAGG BlackRock Core Intern Agg Bond 3.8 5.8 0.8 6.1 2.1
TIPX State Street 1-10 Year TIPS 6.3 7.1 0.6 10.7 1.7
CWB State Street Conv Sec 25.9 21.5 4.5 4.5 2.5
MMIN IQ MacKay Muni Insured 5.0 6.5 1.2 4.6 2.2
JCPB JPMorgan Core Plus Bond 7.3 8.4 0.5 14.5 1.8
UCON First Trust Uncons Plus Bond 4.5 5.3 1.5 2.7 3.2

(Source: Created by the Author based on Mutual Fund Observer)

Table #11: Closed End Funds - 1.5 Years

Closed-End Funds
Symbol Name YTD APR Ulcer Index Martin Ratio Yield
MIN MFS Interm Inc Trust 6.5 7.3 0.5 11.5 8.6
TSI TCW Strategic Inc 2.9 4.8 2.1 1.8 6.0
NXR Nuveen Tax-Free Inc Port 3.2 5.9 2.4 2.0 3.2
NUV Nuveen Muni Value 2.2 4.9 2.7 1.4 3.6

(Source: Created by the Author based on Mutual Fund Observer)

Closing

Over long periods of time, conservative allocations often outperform more aggressive allocations. I believe that we are in such an environment now because of high valuations and high deficits. I don't believe that we have seen the end of COVID-19. Readers may have found some funds suiting their tastes in this article.

Best wishes, and stay safe.

This article was written by

Charles Bolin profile picture
2.5K Followers
I use Mutual Fund Observer MultiSearch as the primary tool to analyze and rank funds based on risk, momentum, quality, income, and consistency factors. I classify nearly 300 funds each month by investment buckets for risk and trends. I began contributing to the MFO monthly newsletter in 2019.I retired in June 2022.  I am an individual investor and retired engineer with an MBA.

Disclosure: I am/we are long HSTRX, GAVAX, COTZX, DRSK, SWAN, TAIL, BTAL, VGSTX, SWRLX, VTABX. 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. In September 2019, I began contributing to the Mutual Fund Observer monthly newsletter.

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