November 2020 IssueLong scroll reading

Searching for Yield in the Coming Lost Decade

By Charles Lynn Bolin

In this article, I look at Janus Henderson Flexible Bond (JANFX), BlackRock iShares Aaa – A Rated Corporate Bond ETF (QLTA), Carillon Reams Unconstrained Bond (SUBFX), BBH Income (BBNIX), T Rowe Price Multi-Strategy Total Return (TMSRX), Advisory Research Strategic Income (ADVNX), and Vanguard LifeStrategy Income Inv (VASIX) as potential income funds to own during a lost decade that starts with high valuations and low interest rates. The second section looks at why I expect the next decade to have low returns for equity and bonds. The third section looks at Risk to Reward comparisons for income funds from 2007 to 2019, followed by the same comparison for the past twelve months. The final section looks at other top income funds that should be suitable for most investors.

The criteria that I used for selecting the funds in this article are long term performance of Lipper Category, low drawdown, a minimum yield of 2%, and very conservative or conservative MFO Risk classification. I also included performance during the past six months when bonds were not benefiting from falling rates. The starting point was my Fund Ranking system, which is based on MFO metrics.

As a quick update on funds from previous articles, Columbia Thermostat Fund (CTFAX) is now available as a no-load, no transaction fee fund at Fidelity, and (COTZX) is available through Vanguard. KL Allocation Fund Institutional Class (GAVIX) will have its minimum required investment lowered to $5,000 at the beginning of next year.

Top Low Risk Income Funds

The following funds are selected to be the finalist funds for this article and are now on my shopping list. VASIX is used as a baseline fund in the following figures. Note that the funds are from different Lipper Categories for comparison purposes. All funds are available at Charles Schwab, and all funds except BBNIX and TMSRX have inception dates older than seven years.

Table #1: Finalist Funds

Source: Mutual Fund Observer

Table #2 shows that all five funds have great long term performance and lower risk.

Table #2: Finalist Funds Composite Ratings

Source: Mutual Fund Observer

Table #3 shows that all funds, with the exception of TMSRX, will tend to rise when the S&P 500 falls and to be more volatile than the bond market.

Table #3: Finalist Funds Capture Metrics

Source: Mutual Fund Observer

Figure #1 shows the long term performance of Janus Henderson Flexible Bond (JANFX), Carillon Reams Unconstrained Bond (SUBFX), Advisory Research Strategic Income (ADVNX), and Vanguard LifeStrategy Income Inv (VASIX). VASIX and ADVNX have comparable performance and both have about 15% allocated to stocks.

Figure #1: Finalist Funds Long Term Performance

Source: Created by the Author Using Portfolio Visualizer

Figure #2 shows the best performing Finalist Funds for the past two years. ADVNX had comparable performance but is not shown. The link to Portfolio Visualizer is here, and you may substitute your own selection of funds.

Figure #2: Finalist Funds Short Term Performance

Source: Created by the Author Using Portfolio Visualizer

The Coming Lost Decade

Lost decades come from many circumstances, and we now have high valuations and low-interest rates which is a common setting for lost decades. This is a perfect storm. Vanguard writes in The New Age of Uncertainty that it estimates US equity returns to be in the mid-single digits over the coming decade. GMO 7-Year Asset Class Forecast: 2Q 2020 describes that 7-year equity returns will be negative, as well as John Hussman in Herd Mentality who estimates negative returns over the next 12 years. The reason is simple: high valuations in a low growth environment. This is best explained by Ed Easterling, from Crestmont Research as shown in Figure #3. Long periods of high increases in valuations (green bars) are followed by long periods of declining valuations (red bars). Secondly, note that dividend yields (brown bars) and earnings growth (blue bars) are near historical lows. Compound this pessimistic situation with rising COVID infections.

Figure #3: Valuations, Yield and Earnings Growth

Source: Crestmont Research

Figure #4 shows the 1960’s and 70’s as an example when stocks (blue line) did not keep pace with inflation (green line), and rising interest rates (blue line) lowered the market value of bonds. Here we are 40 years later with most yields at or below inflation.  

Figure #4: Secular Bear Market of the 1960’s and 1970’s 

Source: Created by the Author Based on the St. Louis Federal Reserve FRED database.

Historical Bond Fund Performance (2007 – 2019)

Figure #5 shows the average annualized return of over three hundred bond funds in twenty Lipper Categories plus the S&P 500 as a baseline compared to Risk as measured by the Ulcer Index for the 12 years from 2007 through 2019. The size of the bubble is proportional to the yield.

Figure #5: Risk vs Reward of Income Funds (2007 to 2019)

Source: Created By the Author Based On Mutual Fund Observer

Table #4 contains the metrics for the Lipper Categories sorted from highest Yield to Ulcer Ratio to the lowest. The Categories at the top paid the highest yield for the risk taken for this time period.

Table #4: Twelve Year Metrics of Income Funds

  #Funds Return Ulcer Yield Yield/Ulcer
U.S. Mortgage 8 4.1 0.9 2.5 2.9
GNMA 11 3.7 0.9 2.2 2.4
Short Invest Grade Debt 27 2.7 1.0 2.2 2.1
Short-Intmdt Invest Grade Debt 16 3.7 1.4 2.4 1.7
Core Plus Bond 15 5.4 1.8 2.4 1.3
Core Bond 50 4.1 1.8 2.3 1.3
Alt Credit Focus 3 2.9 2.4 2.9 1.2
Intern Income 5 4.3 3.9 4.8 1.2
Muni Gen & Ins Debt 47 4.4 2.6 2.6 1.0
Abs Return Bond 2 4.5 2.5 2.5 1.0
Corp Debt BBB-Rated 22 5.7 3.0 2.9 1.0
Corp Debt A Rated 6 6.6 3.7 3.1 0.8
Multi-Sector Inc 19 5.4 4.1 3.4 0.8
Flexible Income 4 4.9 9.6 4.9 0.5
Global Income 7 3.6 3.5 1.6 0.4
Mxd-Ast Target Consv 34 4.9 5.3 2.3 0.4
Mxd-Ast Today 5 4.7 5.4 1.9 0.3
Alt Global Macro 9 3.9 7.7 2.5 0.3
Flexible Portfolio 23 5.8 8.4 1.5 0.2
Alt Multi-Strategy 2 1.2 8.3 1.4 0.2
S&P 500 1 8.4 14.7 1.69 0.1

Source: Created By the Author Based On Mutual Fund Observer

COVID Induced Recession Metrics (12 Months)

Figure #6 represents 57 top funds for the past 12 months from the same Lipper Categories. The funds that I am most interested in are in the upper left-hand corner representing higher return, lower risk categories. While I own funds in many of the categories, I am looking for funds in the upper left-hand corner representing low risk income funds with higher returns. One caution worth noting is that some categories have benefited from the recovery from the correction earlier this year.

Figure #6: Performance of Top, Low Risk Income Funds

Source: Created By the Author Based On Mutual Fund Observer

Table #5 contains the metrics for the funds in the previous figure. The green shaded cells are the 12 best categories for the column.

Table #5: Top Lipper Categories Income – 12 Months

Source: Created By the Author Based On Mutual Fund Observer

Other Top Low Risk Income Funds

The following 35 funds are a subset of those used to create the previous table. They were chosen because they have annualized six-month returns when interest rates were not falling off 2% or more, maximum drawdowns of 5% or less, among a few other criteria. They are sorted from with the highest yield to Ulcer Index Ratio to the lowest. This provides an estimate of how much risk the fund took over the past year for the yield paid. The first two are closed-end funds. The fund names shaded green are 10 years old or older. The names shaded in yellow are less than 5 years of age.

Table #6: Top Low Risk Income Funds

Symbol Name  Rtn 1 Yr Ulcer Index Martin Ratio  Yield
MGF MFS Government Mrkts Inc Trust  7.1 0.3 19.1  7.3
MIN MFS Interm Inc Trust  7.0 0.7 9.6  8.6
ISTB BlackRock Core 1-5 Year USD Bond  4.6 0.3 11.5  2.4
SPAB State Street Port Agg Bond  6.8 0.4 15.0  2.6
SCHZ Schwab US Agg Bond  7.0 0.4 17.0  2.5
SWAGX Schwab US Agg Bond  6.8 0.4 17.0  2.5
VCOBX Vanguard Core Bond  9.1 0.4 21.0  2.1
FNDSX Fidelity Sustainability Bond  7.1 0.4 17.7  2.1
FIXD First Trust TCW Opportunity Fixed Inc  8.2 0.4 19.9  2.0
PFORX PIMCO Intern Bond (US Dollar-Hedged)  3.3 1.2 2.1  5.9
VTBIX Vanguard Tot Bond Market  6.6 0.5 12.4  2.3
IUSB BlackRock Core Tot USD Bond Market  6.7 0.6 9.4  2.7
VNLA Janus Henderson Short Dur Inc  3.0 0.5 4.3  2.2
BNDC Northern Trust Core Select Bond  7.4 0.5 12.2  2.2
PBDIX T Rowe Price US Bond Enh  7.3 0.6 11.7  2.4
SHAG WisdomTree Yld Enh US Sht-Term Agg Bond  4.6 0.6 6.4  2.3
FBNDX Fidelity Invest Grade Bond  8.9 0.6 13.7  2.1
FTHRX Fidelity Intermediate Bond  6.5 0.7 7.8  2.2
DODIX Dodge & Cox Inc  7.7 0.9 7.6  2.6
PMZIX PIMCO Mort Opportunity and Bond  4.4 1.6 2.3  4.4
VFSTX Vanguard Short-Term Invest-Grade  4.8 0.9 4.4  2.4
SUBFX Carillon Reams Unconstrained Bond  8.5 0.9 8.9  2.4
PRWBX T Rowe Price Short-Term Bond  4.3 0.8 4.3  2.1
JANFX Janus Henderson Flexible Bond  9.0 1.0 8.3  2.5
TRBUX T Rowe Price Ultra Short-Term Bond  3.1 0.8 3.1  2.0
ADVNX Advisory Research Strategic Inc  8.3 1.0 7.7  2.5
SWLRX Schwab Monthly Inc — Max Payout  5.0 1.1 3.9  2.4
BSCN Invesco BltShrs 2023 Corp Bond  5.4 1.2 4.1  2.6
BBNIX BBH Inc  8.3 1.5 5.1  3.0
QLTA BlackRock Aaa – A Rated Corp Bond  8.4 1.3 5.9  2.5
EXCPX Manning & Napier Unconstrained Bond  5.8 1.5 3.3  2.6
TMSRX T Rowe Price Multi-Strat Total Return  10.3 1.4 6.9  2.4
MMIN IQ MacKay Muni Ins  6.0 1.4 3.8  2.3
VWITX Vanguard Interm-Term Tax-Ex  4.1 1.6 2.1  2.4
TFI State Street Muni Bond  4.5 1.5 2.5  2.0

Source: Created By the Author Based On Mutual Fund Observer

Wishing You a Safe Holiday Season

I look forward to the holiday season and wish all readers a safe and pleasant holiday season. Stay safe and be well.

Disclaimer

I am not an economist nor an investment professional. I became interested in economic forecasting and modeling in 2007 when a mortgage loan officer told me that there was a huge financial crisis coming. There were signs of financial stress if you knew where to look. I have read dozens of books on business cycles since then. Discovering the rich database at the St. Louis Federal Reserve (FRED) provides most of the data to create an Investment Model. The tools at Mutual Fund Observer provide the means for implementing and validating the Investment Model.