"How would this strategy have performed during prolonged bull markets, like the one we have been in since the closing low on March 9, 2009, when the S&P 500 closed at 677?"
The implosion of the fund/s run by Andrew Lo (from the article below: "The idea what that Dr. Lo, perhaps one of the most brilliant quantitative scientists and academicians in finance (MIT, Harvard, all kinds of awards, PhDs out the ass, etc), would be incorporating a variety of approaches to manage the fund using all asset classes, derivatives and trading methodologies that he and his team saw fit to apply. You would write Dr. Lo a check ten seconds after seeing him speak somewhere, trust me.") are, I think, an excellent summary of one aspect of why these funds haven't worked.
A summary of the Lo situation:
http://www.thereformedbroker.com/2014/05/28/brokers-liquid-alts-and-the-fund-that-never-goes-up/
I think you have funds that are effectively quant funds run by very intelligent people who have a set of various rules and indicators who have done terribly in recent years because QE and ZIRP have effectively invalidated many of their rules that the investment decisions of these funds are based off of. These funds are black boxes, but as opaque as they are, there is highly likely a lengthy list of rules (and probably highly complex ones) that the fund operates with and uses to make its investment decisions.
So you have a fund going long and short based on what brilliant people think should work and they would have been better off just going long (and the more heavily shorted companies, the better) for the last 5 years or so.

SEQUX has been great in recent years (from late 2009) until this year. As far as I know the problem is Valeant which is the largest position I think(till a few years ago the largest position was Berkshire)Since Feb. Valeant ,which has been in the news alot, is down about 20%
By the way can you get into the fund? They closed it late last year to most people.
As of December 10th, 2013, we have adopted a harder close for Sequoia. The Fund is closed to new investors, except for new accounts opened with us directly by existing shareholders of the Fund or existing clients of our firm, or members of their families. The Fund remains open to contributions from existing shareholders, though we reserve the right to reject any order to purchase Fund shares.

@Bitzer: "If I recall correctly, Bill Gross make a similar prediction some time ago and was flat out wrong"
I know for a fact [because I either heard him say it or read it in his monthly Outlook that he writes] that Bill Gross did say something to the effect that "the long-term bull market in bonds, which began in 1982, is over." I don't recall exactly when he said it, but IIRC, it was a few years ago.
I think Bill Gross is a super smart guy and an astute bond expert, but I also recall many years ago when he made a bold prediction about the stock market falling a LOT, which turned out to be completely wrong.
@expatsp: "Overall I did well, but it was too correlated with the equity markets for what I want in a bond fund"
There's a lot of interest in Kathleen Gaffney here at MFO, and I'm quite interested too. But I wonder about the 18.59% of her fund in stocks, and is that going to as you mentioned with respect to Loomis Sayles, will that make Gaffney's fund too correlated with the stock market to serve the needs of bond fund investors.
Seems to me that it would not serve the need of a stock heavy investor to diversify, but would serve the needs of a bond heavy investor to diversify! So if my portfolio was say 100% bond funds, it would serve me very well to have these aggressive bond funds that have junk bonds, emerging market bonds, and even some stocks in them. But if my portfolio had 80% stock funds and I wanted a mellow diversifier, I'd probably go towards Treasuries, or at a minimum investment grade bond funds.
@sven: "I do think their view on low future returns on bonds is realistic. This will pose considerable challenges for those who depends on bonds for income."
I agree that it is realistic, and has already been causing major problems for the income investor, retirees who always depended on safe certificates of deposit in banks and Treasury bonds. And probably will continue to do so in the future.
And of course many say that the stock markets are way overvalued, and will have poor returns over the next 5-10 years, e.g., Jeremy Grantham/GMO most recent 7-year forecast, posted on MFO.
If both the stock market and the bond market are way overvalued and will have poor returns going forward for the next 5-7 years, we are really in investment trouble!

Just my personal opinion.
I like the managers and analysts at Sequoia. I think the two managers are excellent, and they have a team of excellent analysts.
They have an investor day every year, and the document that comes out of it is always very informative regarding the analysts and managers.
http://www.sequoiafund.com/Reports/Transcript13.pdf
I think they are a highly experienced group of stock pickers, whom I trust. And very dedicated. With a storied tradition and history.
If I'm not mistaken, I believe that one of their analysts was or perhaps is seriously considered for the job to take over the main investing role at Berkshire Hathaway after Warren Buffett passes on. [In addition to the 2 former hedge fund managers that Berkshire Hathaway currently has].
Take a look at that Investor Day PDF referenced above. I'm extremely impressed with the depth of the analyst team, and how thoroughly they study the companies they invest in.
I own the fund both in a taxable account and an IRA.
I owned FAIRX for about 11 years. FAIRX is a one man show. It's the Bruce show. Night and day from SEQUX, which is a large team of analysts, each doing work and putting together the efforts in aggregate.
Berkowitz is obviously very smart and talented, but I gave up on him when I wasn't convinced my money was being managed with proper risk management.
When I saw over 50% in one stock [AIG, which is no longer over 50%, but still 42.8%], and generally the most concentrated stock portfolio of any stock mutual fund that I encountered, that concerned me. I was also concerned about Sears, St. Joe, Fannie and Freddie whose fate is in the hands of Congress.....a huge concentration in financials.....I lost my confidence in Berkowitz, and exited.
Also, I read a bunch of articles about Bruce Berkowitz, the sum total of which made me lack confidence in the person I was handing my money to, in FAIRX. Don't know if this is a super rock star mutual fund manager on an ego trip, but didn't want to take the risk, and I suspected it.
I was not making a forecast on the future performance of FAIRX, as that future performance will never be predictable. Warren Buffett suggested to 'keep your eyes on the players, not the scoreboard'. So although the scoreboard of FAIRX was good, I had my eyes on the player, and decided to make a sideways move to another fund.
Finally, although I do like the SEQUX team a lot, their performance over 1, 3 and 5 years is nothing to brag about.....although when I look at it by each calendar year, it looks better to me. Their YTD performance is awful, but who knows, this could be a great time to buy in........or maybe not.
I've been quite impressed by the benefits of just buying a stock index fund, where you don't have performance issues......you just get the market return minus the expenses [plus or minus a tiny tracking differential.] I like VTI and VTSAX.
Warren Buffett prefers a low cost S&P 500 index fund, like VFIAX, and has in his will that his wife's portfolio will be invested 90% in a low cost S&P 500 index fund, and 10% in short term government bonds
Any thoughts?

"The Federal Reserve has spent five years buying Treasury bonds in an effort to keep yields throughout the bond market low enough to encourage investors to loosen their white-knuckled grip on these "safe" investments and move into stocks
I question the above statement, which is the opening statement of the article.
Can they prove that statement to be true?
It says the Fed has kept bond yields low IN ORDER TO encourage investors to buy stocks.
Is that so?
I thought the Fed has done this to increase the money supply. To lower the cost of capital. To encourage borrowing and spending, to stimulate the economy, to facilitate the recovery of home buying and the real estate market.
I don't see the Fed sitting down and having planned a method for investors to move into stocks.
OK, I can play devil's advocate and say the Fed wanted this to happen, because when people's stock portfolios are higher in value, they feel more confident to spend money and stimulate the economy. But I don't think this was the primary intent. I think the primary intent was to stimulate the economy by lowering the cost of capital, the cost of borrowing money, by increasing the money supply. Not to raise stock prices.
MFOers, please opine......

And I will confess that in 1973 I slammed the drawer shut and didn't open it for two years :)

Actually, the newer variation is "Strategery" - coined during a SNL parody of former President George W. Bush by comedian Will Ferrell. Here's the Wikipedia story.
http://en.m.wikipedia.org/wiki/Strategery
In the investment world I think "strategic" can mean about anything they want. But it may carry an underlying connotation that they are smarter and know more than you do. To me it's a little like some of the go-anywhere funds. You pay a manager a little extra to guess which way various market components (stocks, commodities, Treasuries, etc.) will move in the future.
One problem with that approach is that most of us have become very short-term focused nowadays. So, a manager might be "strategically" correct looking 5-10 years ahead and yet see investors flee his fund well before than if it doesn't produce solid near term returns - especially in comparison to whatever market segment(s) are currently hot.

@rjb112,
Here is an interview with Dan Fuss who shared his investment process.
morningstar.com/cover/videocenter.aspx?id=643979
Dan and his co-managers have been saying that few opportunities exist in high yield bonds, i.e. expensive. I do think their view on low future returns on bonds is realistic. This will pose considerable challenges for those who depends on bonds for income. I respect and have invested in all three bond managers you mentioned. Over time, I moved on elsewhere from Bill Gross because I lost faith on his investment process and the needless appearance at CNBC, while his fund lagged his peers for several years. With regard to Jeffrey Gundlach, I can live without his ego, but his calls have been spot on and his Total Return fund is doing well since its launch. In the meantime, I am watching Kathleen Gaffney's EVBAX closely to see if she is taking any changes.

Our buddy, Vintage Freak, paints a dismally dark and uncompromisingly bleak portrait of the “Average Investor’s” investment acumen. Initially, his representative caricature has a moderately conservative investment approach. Unfortunately, he abandons his good intentions and does not stay the course. He fails the persistence and the patience tests.
Actually, quite to the contrary. I am castigating all the a-holes who screw up the life of the average investor. I am trying to explain that in the imaginary world of "if you had invested 100k in year X and held on for Y years you would have earned much more" people forget that a person has needs that make that impossible and he only contributes to his portfolio over a period of time.
I am very skeptical of fund returns vs investor returns published by various sources. I don't think they are capturing the problem properly. When you buy vs what you buy is always important for average investor to outperform. That determines over various periods of time whether at any given point of time ones portfolio is positive. As long as it is, that investor holds and continues to invest and not otherwise. Even if that position is cash or short term bond funds.
So quite to the contrary dear MJG I am not criticizing the investor at all. I am simply tired of reading articles mouthing the same thing again and again. Authors need to fulfill their writing quotas wi other topics. Maybe there will be Another mad off like scandal or something soon. I know Marilyn Monroe cannot die all over again to drive conspiracy theory articles. Seems to me after an extended bull market run, the average investor is now fair game.
Finally, we cannot nitpick time periods. from 1995 to 2000, DCA was a suckers game. Whether one wants to admit or not, what I stated tongue in cheek is exactly what happened. Let's not kid ourself everyone was diversified. Even those that thought they were were screwed by their fund managers all owning growth / tech stocks on the equity side and high yield bonds on the income side. Hindsight is always 20/20. However sincenyounhave the ability, is it possible for you to run your calculations for 20 years in prior period? Or even rolling 20 year periods? I think you will agree that would be a more sound way to conclude whether average investor sucks or not.

The Board of Directors should not only close this one, they should also liquidate it. I see no reason for this sub-par fund to exist. All compensation to management and directors should be clawed back for the last ten years and added to net asset value of the funds and distributed to shareholders. Good bye and good riddance to this terrible fund.

FWIW, I forewent (if that's a word) the annuity and still have the TIAA real estate fund in my 403b at a prior university employer (St Louis U). Perhaps they think I'll roll over eventually into an annuity, but I didn't have that understanding. In fact, as I rolled my money out of the annuity portion of my funds, I rolled it into the real estate fund. I had left that university for the private world temporarily, so that may have allowed this maneuver. As I recall,the transfer occurred at 10%/yr, so they tried to protect their participants.
A few years back that institution negotiated a good array of funds from other fund companies generally with the lowest ER each offered. My current employer offers TIAA, but only the usual choices, and I haven't chosen to play. TIAA apparently will yield to pressure if the institution is big enough, but I have no idea how this was accomplished.
I agree with those recommending the lowest cost index funds she can find. While bond funds may make one feel a bit better in the crashes, I don't see the point at 27, regardless of experts' recommendations. Start balancing 15 years (or 10) before retirement by changing the choices in your automatic investments.

This may be a good companion fund to pair with MAINX for more world wide E M fixed income exposure. At present Ms. Padilla and team are nearly 85% invested in various Latin American issues with a longer average maturity .I own both.
DLENX July 31 fact sheet
http://www.doublelinefunds.com/pdf/EM_Fact_Sheet_Monthly_Update.pdf
Excerpts:
Team continues to actively manage
duration
At year end 2012, DBLEX had a duration of 4.4 years compared to the 2013
year end duration of 6.6 years. This shorter duration absorbed most of the impact from rising rates in 2013. The higher duration at the end of 2013 has contributed to out performance so far this year.
We believe 10 year UST rates should remain range bound between 2.20-2.80%
Top country allocations: Brazil, Mexico, Peru, and Guatemala all up double digits
No local currency exposure in the fund, although the team continues to monitor opportunities
DBLEX duration is 5.93 years; this is a result of positioning the portfolio
in BB rated space where new issues have appeared to be
attractively priced. These securities tend to have a shorter duration
49% of portfolio is allocated to Investment Grade bonds
Top sectors: Banking, telecommunications, consumer products, mining &
oil, all of which are strategic sectors for an EM economy
Consumer products aim to take advantage of rising income levels in EM countries

Are these people really serious?
Remind me to check in 5 years to see if either fund is still in existence.

+1 ...I don't know much about the other two vendors, but the the Real Estate account is unique and makes TIAA_CREF a worthy option.

TIAA-CREF would be my recommendation. Their programs come in many flavors, not all of which offer the same combination of retirement class funds and annuities. As a general matter, they have a nice series of target-date funds that are built purely around index funds. And their Real Estate account is, literally, in a class by itself. It invests directly in real estate rather than just in real estate securities. It utterly crashed in the 2008 market crisis; that was one disastrous 24 months period sandwiched by 18 years of remarkably steady returns.
David

>>>>It does take learning, patience, and persistence. And some painful losing, and a ton of reading.<<<<<
Of all that you have posted, much I have agreed with, while some vehemently disagreed with ( i.e. your fixation with intelligence, math, and statistics) the above we could not agree more. I may have posted this before, but at one time I had a library of around 500 books on the stock market (now culled to around 250) In fact, one of those, Rogues To Riches by Murray Teigh Bloom begins its first chapter with an interview of your aforementioned Alfred Cowles. And a really fascinating interview at that. In fact, it was one of the many books I read that reinforced my belief in the power of momentum investing. Mr Cowles said in that interview that the only positive finding he uncovered while conducting his research on the futility of the forecasters was how you could make a lot of money in following what he called the "inertia" principle. On a side note, I spoke with Mr. Bloom a couple years after his book's publication and found him very welcoming and gracious.
Alfred Cowles also mentioned in his interview with Mr Bloom that " the element of luck is terribly important in the market." Amen to that!! I am the poster boy for luck in the markets - and PERSISTENCE since I spent my first 19 market years just spinning my wheels. Of course I have mentioned before that one of my top five books of all time is Max Gunther's The Luck Factor and primarily Part IV of that book on the five luck adjustment theories.

When GMO refers to 7-year forecasts, they are definitely not suggesting that this change will happen for seven years in a row. On the contrary, they are very clear that they never make short-term forecasts.
So what they are saying is that seven years from now, after accounting for 2.2% inflation, the value of each of these asset classes will be as if it had risen/fallen by this percent each of the seven years. They don't claim to know if it will do this in a straight line or on a roller-coaster.

Certainly.
It's an annualized real return forecast over 7 years.
So if they are correct, then 7 years from now we would find the average annualized 7 year return figures to be close to what they stated. No need to even look at it for 7 years, because nothing is implied for this year or next year or the next.

Hi Junkster,
I suspect you are either being too generous or too naïve in our assessment of individual investor performance.. Given your past postings I gage the odds of you being too naïve as nearly zero, so I guess you are being overly liberal in your appraisal.
Overall, investors are not that talented, and often do not take the time to measure their successes against a proper benchmark. Even professionals share this very common failure.
Your post reminded me of several stories that appear in Peter Bernstein’s classic “Capital Ideas” book. As recently as the 1960s, Bill Sharpe reported to Bernstein that professional advisors and institutional agents did not keep proper score. They assumed they were dong well, but did not document their records. In general, those records were uniformly miserable. Alfred Crowles 3rd documented how badly these pros did in their inept forecasting as early as the mid-1930s.
The performance statistics are at least reasonably accurate although they are not perfect. They need not be perfect since the percentages are in continuous change. There are periods when both the amateur ranks and the professionals do extremely well. But a conservation of profits law dictates that the average investor (both institutional and amateurs) must on average earn less than the overall market because of fee and cost leakage that subtracts from the total market rewards.
Also note that the investor population itself is in constant flux. Poor performers drop out. Today’s investors are not the same group that was underperforming 20 years ago. The survival rate of mutual funds is a staggeringly low percentage. Losers do disappear from the investment scene.
Like you, I do believe that long-term MFO participants are likely near the top in terms of returns. But many exceptions exist, and the membership of MFO is dynamic. That’s one reason why I try to introduce members (especially new ones) to the organizing magic of statistical analyses.
On a personal note, I have been investing for almost 60 years. I did not do well in my earlier years and was victimized by the industry touts. I did finally learn. It does take learning, patience, and persistence. And some painful losing, and a ton of reading.
Thank you for your comments.
Best Wishes.

I dollar cost averaged my whole investment lifespan. It began with $25 a month through Twentieth Century and at least once a year I would revisit that number and increase or stay put. As time went on I was putting in several hundred dollars a month. This meant of course that I was frugal in my social life. I didn't forgo a social life per se, but I didn't throw money away either. It was this discipline that got me to where I am now.
If I had been making only 2% all those years I would have been discouraged for sure. I had my losing investments as well as my home runs. I certainly made more than 2% so this article like so much of the Marketwatch stuff is just drivel to me.
What I find fascinating now is investing this money on my own after years of 403b. I rolled it over to my own account and am testing what I have learned over years. I think I have done well so far but knock on wood. At least I know who to blame if things don't go right.

Keep in mind, that's real-return, so they are assuming something like 2.5% inflation. Which means something around -1.5 to -2% a year going forward.

Still need substantially sized cajones to make the call ANY mainstream asset class is going to on average yield negative returns for 7 years. I don't think even Hussman is saying that, and he is already in the dog house for the rest of this century!
My point, we need to applaud the true visionaries and/or need to verify if Grantham is also a BS artist. 7 years. I hope to be alive. I hope to remember to check.

Hello,
I think you really meant "cojones" :)
Anyway, I don't think they mean uniformly but on average or compounded. We will see. I am not going to make any changes based on these predictions. I take these predictions with a grain of salt.
What is more interesting to me is the timber. It has the highest expected return. Now, if timber is in such a demand and everybody gets into timber business we can get another real estate like bubble or timber mania (like tulip bubble). For timber to be so much in demand we should either have a construction boom again.

The inhabitants of this board who have been around the investment game for the past 20 years must be *above* average investors. That's because I can't imagine any of them
earning a mere 2% to 3% per annum over that time frame. In fact, I can't imagine any investor sticking it out over 20 years with those type of returns. It would appear the *average* investor referred to in these types of studies are a composite of hypothetical creatures.
Edit: As an aside, the nice thing about accumulating wealth in the investment/trading game is it doesn't require a high intelligence or any knowledge whatsoever of math and statistics.