Some Thoughts For February 2021

Summary

• High yield municipal bond funds did well in January. The momentums of high yield corporate bond funds and senior bank loan funds seem to be waning.
• Non-agency RMBS fund IOFAX continued its very profitable run that started in April 2020 after the March meltdown. There were two large one-day gains (~1% each) in January.
• My Schwab accounts (3/4 of my money) returned +1.5% in January, while my Vanguard accounts gained 0.7%. Overall, a decent month with relatively low volatility.

Give a portion to seven, or even to eight

for you know not what disaster may happen on earth. (Ecc. 11:2)

2021 has started off with a bang with the Biden regime taking over power and promising to spend money as if it was growing on trees. The end-of-the-year stimulus and the promise of a $1.9 trillion stimulus coming soon has spurred the market higher for the short-term, and long-term treasury rates continue to increase as the market anticipates higher inflation. However, I think there will be a large market correction sometime this year, sooner rather than later, and then a longer period of underwhelming returns. And there will probably be an opportunity to record substantial gains from holding long-term treasuries. But at the present time, I am avoiding long-term treasuries, and I even hold a little TBF in anticipation of the long-term treasury rates continuing their upward trend for awhile. 

Other bond assets have shown good momentum and have provided really nice returns over the past three months, including January. These assets include high yield municipal bonds, high yield corporate bonds, and senior bank loans, although the momentums of the latter two categories seem to be waning at the present time. After recovering from the March 2020 meltdown, non-agency RMBS fund IOFAX continues its upward trend with almost no negative days.

Links for 2021 Strategies

Here is my list (and links) of strategies that I use as guides, along with their current selections:

Weekly MDBS_MF: I have modified this strategy. Please see the comments from last month's post for more discussion of this strategy. This strategy now selects three funds each week. The three selections at the present time are NHMAX, LSFAX and WHIYX (in that order, with LSFAX and WHIYX essentially tied for second). However, the momentums, especially the short-term momentums, of LSFAX and WHIYX, are turning negative. The strategy held all three assets through the month of January. The returns for the month (including EOM distributions) were: NHMAX = +2.04%, LSFAX = +1.12%, and WHIYX = +0.83%. 

If you select only one asset each week, it gives higher return but it also carries a little higher risk. The top-ranked asset at this time is NHMAX (by far). The second-ranked asset is virtually a tie between LSFAX and WHIYX. Personally, I will only be holding NHMAX at this time. I recently sold WHIYX, and will sell LSFAX on Monday.

Other funds can be substituted for NHMAX, LSFAX, and WHIYX. For Schwab accounts, LHYAX and MWHYX are good substitutes for WHIYX, MMHAX and MMHYX are good substitutes for NHMAX, and EAFAX and AFRAX are good substitutes for LSFAX. You might need to use these alternate funds to avoid frequent trading issues for this weekly-updated strategy.

Weekly MDBS_ETF: Currently this strategy selects HYD. This strategy is somewhat similar to MDBS_MF except it utilizes ETFs instead of mutual funds, and selects only one ETF each week. There are no frequent trading limitations or trading costs on the ETFs; however the volatility of bond ETFs is higher than the volatility of bond mutual funds, so there is a higher probability of false indications and whipsaw for this strategy (compared to weekly MDBS_MF). For those investors outside the U.S., this ETF version is probably the only version you can use.

This strategy returned +1.83% in January.

Eric Basmajian's (EPB Macro Research) Tactical Strategy. This strategy starts from Ray Dalio's Permanent All-Weather Strategy and updates the allocations on a monthly basis. The strategy tries to control beta by using a form of risk parity, and then tries to gain alpha by underweighting/overweighting the allocations based on short-term and long-term macro economic trends. The allocations in Eric's strategy are proprietary. The strategy lost 0.73% in January. I like the research that Eric provides based on macro economic conditions, and I make some of my choices of assets based on his research.

Permanent Portfolio Combined With Downside Volatility Targeting. I developed a low volatility permanent portfolio model that has the following allocations: 17.5% QQQ, 17.5% IHI, 25% TLT, 7.5% SGOL, 7.5% UUP, and 25% MINT. My objectives for the permanent portfolio were 8-10% CAGR and a monthly MaxDD of -6.0% or better. I met these objectives in backtesting from 2010 to present (see the above Portfolio Visualizer link, buy & hold results).

I then inserted these allocations into Portfolio Visualizer's volatility targeting model, and set a 2.8% downside volatility target. The out-of-market asset was set to SHY. By including volatility targeting as an add-on submodel, the monthly MaxDD was improved to -3.7% while the CAGR decreased to 8.2%. The monthly win rate was 73.5% and the annualized volatility was 4.3%.

To make sure this model could survive back to 1988, I substituted mutual funds with long histories for the ETFs. Here are the proxies: FSCSX for QQQ, FSPHX for IHI, WHOSX for TLT, ^GOLD for GLD, and FFXSX for MINT and SHY. There was no substitute for UUP, so I just increased gold's percentage to 15% and removed UUP. Correlations between the proxies and the ETFs were between 0.9 and 1.0 for all assets. Here is the mutual fund version in Portfolio Visualizer that backtests to 1988. It can be seen that this strategy is viable back to 1988, with CAGR = 8.6% and MaxDD = -5.6%. There is only one small negative year (worst year = -0.16%), and the monthly win rate is 69%. The annualized volatility is 5.1%.

The allocations for February are: 11.3% QQQ, 11.3% IHI, 16.2% TLT, 4.9% SGOL, 4.9% UUP, 16.2% MINT, and 35.2% SHY. I have switched the SHY allocation to MINT (making MINT's allocation = 51.4%). I will use the MINT Strategy (see below) to determine whether I will invest in MINT or SHY in this strategy. The MINT strategy says to invest in MINT at the present time.

This strategy was down 0.43% in January, caused mainly by the large loss of TLT (down 3.63% for the month).

Weekly IOFAX Strategy: Currently selects IOFAX. This strategy was up 2.98% in January with no down days. There were two days when there were extra large returns: January 14th (0.91%) and January 21st (1.16%). We never know when these large one-day gains will come, but are always glad to see them.

TrendXplorer VAA-G4 Strategy: Currently risk-off; selects SHY (100%) for February. This strategy was risk-on in January and gained 1.21% in January and 25.8% in the past 12 months. Wow! Although this strategy has performed well since I started tracking it (since mid-2019 I think), I am not currently investing in this strategy. Maybe I should reconsider!

Allocate Smartly GPM Daily Allocations: For the month of February, this strategy selects CASH 16.7%, DBC 27.8%, EWJ 27.8%, and QQQ 27.8%. This strategy returned -2.69% in January. The daily allocations can be found at Allocate Smartly at the above link (using its free subscription service). Or you can go to the TrendXplorer website and see the allocations. This strategy has also done well since I started tracking it (though not this month), but I am not currently investing in this strategy either.

Weekly MINT Strategy. I have started using this strategy to improve my return on some of my cash holdings. Currently, it says to own MINT. This strategy will respond quickly if MINT loses its momentum (and switch to SHY or cash). This strategy (that owned MINT all month) was up 0.08% in January.

I don't strictly follow these strategies, but I review them at least weekly and base most of my holdings on them.

My Holdings at Beginning of February

I will hold the following bond assets at the start of February: NHMAX, NVHAX, and MMHAX (high yield municipal bond funds), and BDKAX, IOFAX, and HOBEX (RMBS funds). All are mutual funds.

I am investing in my permanent portfolio with downside volatility targeting, although I have made some modifications to the allocations because I am so risk-adversed. I also want to mention that I purchased TBF in January to gain from long-term treasury rates continuing to rise. For January, TBF returned +3.17%.

And finally, I am investing in Eric Basmajian's strategy (subscription required), although I have made modifications in his allocations too. For instance, I don't own TLT that he recommends in his balanced allocations. 

Final Remarks

Overall, I was up 1.5% in my Schwab accounts (3/4 of my portfolio) in January. In my Vanguard accounts (1/4 of my portfolio), I gained 0.7% in January. It was a good month of returns with very low volatility. I hope you had a good month too.

Hopefully, all of the numbers in this post are accurate, but there may be errors.

Soli Deo Gloria