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Schwab NL/NTF Roth Portfolio

edited December 2011 in Fund Discussions
I was a regular contributor to FundAlarm 1999-2002 but had to put investing on hold since entering seminary in August 2002. It’s great to see so many familiar names from those days! Looks like I missed an interesting time in the markets from 2003 until now. No? Gone is any trace of irrational exuberance from my expectations going forward. My wife and I are debt free other than a reasonable mortgage at 5.25% and a smallish student loan at 3.25% interest. We will be able to fully fund 403bs at TIAA-CREF and Fidelity soon. We also have an inherited IRA invested in Windhaven’s ETF managed moderate portfolio at Charles Schwab. The below proposed portfolio will be in our Schwab Roth IRAs and will only be invested in no-load, NTF mutual funds, rebalanced every January. Our time horizon is at least 10 years. We will dollar cost averaging into cash in these Roths beginning January 2013 making appropriate rebalances every January going forward. At least that’s the plan. Any input from MFO, particularly regarding VAFGX v FVALX and WTIFX v GPIOX, would be appreciated. For any other options I’ve most certainly overlooked, please feel free to advise. I’m not interested in sector plays at least for this initial return to investing. I’ll let the active managers make those calls because that’s what they’re paid to do. I have a glass half full perspective and don’t think the sky is falling. Some may say I’m a dreamer…but I’m not the only one. Jonas Ferris at MaxFunds really spoke for me last October. Anyway, thanks in advance for the input. Rick, the glampig

http://www.maxfunds.com/?q=node/602

20% MVPFX-Marathon Value Portfolio
10% RWGFX-RiverPark/Wedgewood Retail
10% WSCVX-Walthausen Small Cap Value
10% VAFGX-Valley Forge
or FVALX-Forester Value N

10% HLMNX-Harding Loevner International Eq Inv
05% WTIFX-Westcore International Small Cap
or GPIOX-Grandeur Peak Intl Opportunities Inv

20% MWTRX-Metropolitan West Total Return Bond M
10% LSGLX-Loomis Sayles Global Bond Retail
05% RPHYX-RiverPark Short Term High Yield Retail

Comments

  • Rick,
    Are you kidding me? It's been 10 years!? Oh wow, suddenly I feel ancient. I would like to help you with your portfolio but to be honest with you from my days of running with 25-30 funds I am out save for 7. I jst don't follow them like I used to because frankly I felt I did better investing in individual equities on my own. Not bragging, my returns are just better. But that's a different topic.

    About a year or two ago there was a poster 'Fundmental' who did a great job disecting the fund world and pulling together a reasonably balanced risk/reward portfolio. If I can find my notes I will throw that up here for your consideration.

    Congratulations and good to hear from you.

    Mark
  • Howdy glampig/Mark,

    This is "Fundmentals" MakeMore/LoseLess MMLL write from Nov/Dec 2009:

    Two parts are required, as the text body exceeds the limits of this web site.

    Regards,
    Catch

    PART 1


    Posted by: Fundmentals
    Date: November/December 2009
    Subject line: Model portfolio design


    Body of post:

    I am sure many of you have come across the situation of a friend or a family member clueless about investing ask you to help them with a stash of money. The real-life requirements are usually "simple":

    1. "Want your help to make some money. I can lose money all by myself"

    2. "I can put it in the market for 5 years. Can leave it there longer if it is making money but not if it is losing money"

    3. "Don't ask me to do anything more than once a year"

    The following portfolio is designed specifically for people that are not

    (a)expecting to beat the market

    (b)don't want the portfolio to go down much (likely to panic and sell at the bottom if they went down 10% or more)

    (c) would like some decent gains - more than what they can get with money market funds, CDs or even just bond funds without which they will not take the risk of investing at all and

    (d) don't want to fiddle with it more than once a year.

    The Portfolio


    Domestic Equity:
    5% Forester Value (FVALX) - Large Value
    5% Amana Trust Growth (AMAGX) - Large Growth
    5% Queens Road Small Cap Value (QRSVX) - Small Value
    International/Global equity:
    10% Forester Discovery (INTLX) - World Allocation
    10% Matthews Asia Dividend (MAPIX) - Diversified Asia/Pacific
    Alternate investments:
    10% Robeco Long/Short Eq Inv (BPLEX) - Long/short equity
    10% Arbitrage Fund (ARBFX) - Merger/arbitrage
    15% Hussman Total Return (HSTRX) - Conservative allocation
    Bonds
    7.5% Managers Intermediate Govt (MGIDX) - Mortgage securities/Govt
    7.5% PIMCO Total Return D (PTTDX) - Intermediate Investment Grade Bond
    7.5% Weitz Short-Interm Income (WEFIX) - Short-Intermediate Term Investment Grade Bond
    7.5% PIMCO GNMA D (PGNDX) - GNMA

    Backtested performance
    If portfolio invested on 1/1/2008, results as of 11/13/2009:
    Total return: +15.05%;
    2008 Performance: -4.79%
    2009 YTD: 20.84%
    Portfolio X-Ray:
    Stocks 52.3%; Bonds 38.1%; Cash 9.6%
    Stocks US 56.00%; International 44.00%
    US equities
    Large cap 27.4%; Mid cap 22.8%; Small Cap 49.8%
    US equities
    Value 36.9%; Blend 53.0%; Growth 10.1%
    International equities
    Europe 24.1%; Pacific 38.5%; Canada 18.9%; Emerging Markets 18.5%
    Bonds
    Taxable 78.70%; Uncategorized 21.30%
    Credit quality High 78.7%; Uncategorized 21.30%
    Duration Medium 20.2% Low 58.5% Uncategorized 21.3%
    Costs: Portfolio average 1.72%

    Portfolio construction notes:

    The portfolio is constructed to solve a basic flaw in traditional portfolio construction. Diversification using high volatility equity funds (even index funds with market volatility) results in deep losses during bear markets as most such equities become correlated and go down together.

    Just depending on bond allocation to reduce losses requires primarily allocation to Treasuries as it is the only type of asset that can be depended on to show negative correlation with equities in bear markets. But unlike in the past, Treasuries starting with the current situation of low interest rates cannot be expected to provide much gains going forward so the portfolio may turn out to be too conservative or too aggressive based on what happens in the market regardless of how much is allocated to Treasuries.

    As a solution, portfolio picks only funds designed with a strategy to reduce/minimize losses during long bear markets and has some capital protection goals in place. The overall volatility is reduced by depending on each fund to reduce its own volatility rather than depend on lack of correlation to reduce the volatility.

    Note that this is not the same thing as picking funds with the highest returns in either bear or bull markets or both. Nor are the returns attributable to some fantastic market timing in picking which stocks to buy and when to sell.

    In fact, most of these funds will likely not consistently appear in the top 10% of their class except occasionally. But all of them will have shown the ability to limit losses by reacting to long-drawn down market conditions and make decent gains in long-drawn up market conditions.

    In other words, the only market timing they will show will be in recognizing long bear markets as in recognizing the difference between 2008 and 2009, not what happens month to month. None of them try to time tops and bottoms.

    Methodology

    Portfolio Requirements:

    1. Capital protection and lack of volatility extremely important. No long periods of losses. No "wait for 10-20 years or more" excuse for losses.

    2. Asymmetric behavior - as much of the upside as possible, as little of the downside as possible

    3. Simple portfolio with high quality no-load funds widely available in the main brokerages

    4. Only annual tune-ups

    5. Total return more important than income

    6. No assumption of bull/bear markets for the portfolio as a whole, no forecasted assumptions of economy or any other indicators, doom/gloom predictions, etc.

    Concrete requirements:

    1. Not more than 12 funds.

    2. No single fund with less than 5% allocation or more than 15% allocation

    3. Portfolio must be diversified but not necessary to cover all asset/fund classes. Only asset classes that have shown consistent returns without long loss periods and small drawdowns. Riskier assets only within risk-managed funds.

    4. No assumptions of correlation or lack of correlation between asset classes going forward but no gross overlaps between funds. Some overlap is fine.

  • PART 2


    Screening criterion for funds:

    1. No-load, ER less than or equal to category average, been in existence for at least 5 years.

    2. No losses in 3, 5 or 10 yr (if available) rolling periods (amazing how many asset classes or funds drop out here)

    3. Manager has been around for at least the category average

    4. Minimum initial purchase not more than $3000 (i.e., minimum not more than $60k portfolio)

    5. Best 3 month performance must be better than worst 3 month performance over its lifetime (amazing how many funds you lose with this criterion)

    6. Best volatility-adjusted performance (3-yr and 5-yr) in class, not necessarily the best returns.

    7. Volatility of each fund on its own must not exceed 10% of total stock market index, total bond index or balanced index as appropriate.

    8. Lowest volatility to break a tie all else remaining the same.

    9. No bias towards active or passive funds as long as the above criterion are satisfied

    10. Allocation percentages based entirely on relative volatility-adjusted returns (3-yr and 5-yr), no ad hoc allocation decisions. Individual fund notes:

    FVALX, INTLX: These Forester funds have demonstrated the ability to limit losses by going to cash when conditions so indicate and they do so without worrying about whether they will fully participate in the recovery. Hence they fit the goals of this portfolio well. Forester was so successful with this simple strategy that FVALX became the only equity fund to have positive (albeit close to zero) returns in 2008.

    Unfortunately, this brings in people who look at the rankings, see this fund at the top in 2008 and invest and get disappointed when the fund lags in a bull market.

    This fund is chosen for the very strategy (that was incidentally vindicated in 2008) with the full knowledge that it will not necessarily be anywhere near the top in bull markets or even beat the index.

    Alternative to FVALX is Amana Income AMANX which does not provide as much downside protection but has done well using a very conservative approach in value investing and keeping the volatility low but it will be slightly more volatile than FVALX. Another slightly higher volatile alternative is Yacktman fund (YACKX)

    Alternative to INTLX is Sextant International SSIFX (coincidentally managed by the manager of AMANX) for similar reasons.

    AMAGX: A very well managed Large Cap growth fund with a long history of good performance. The downside protection is also reasonable within its class even though there does not appear to be any capital protection strategies in place.

    QRSVX: Not a well known fund but is one of the very few funds that is widely available without a transaction fee, has at least a 5 year history and has managed to limit downside in the bear market in the small cap category. The volatility is also kept low.

    A better known substitute is Royce Special Equity (RYSEX) if available without a transaction fee. Newer Intrepid Small Cap (ICMAX) has done very well although its short history may be a concern as well as Pinnacle Value (PVFIX) if available without a transaction fee. Both ICMAX and PVFIX are low volatility funds and have capital protection as a goal of the fund to fit the goals of this portfolio well.

    MAPIX: The only selection without a 5 year history but comes with a very strong pedigree from Matthews Asia that specializes in Asian funds. This fund has extremely low volatility, even lower than most domestic equities and has managed to deliver very good total returns with a combination of stocks, convertibles and preferred shares.

    Alternatives would be either Matthews Asia Pacific (MPACX) at higher volatility with good downside protection or Matthews Asian Growth and Income (MACSX) at lower volatility but can potentially lose more money in bear markets.

    BPLEX: An alternative investment fund that tries to get good returns in both bull and bear markets. A long-short fund that can be mistaken for another performance chasing choice because of its recent performance. But this would be a good choice even if its performance in 2009 was just average or even below average.

    Looking under the hood shows this fund to be quite different from other long-short funds that try to use both long and short depending on the stock valuations. This fund seems to switch between a primarily long fund (but with short positions to hedge) with good stock selection or a primarily short fund (with long positions to hedge) depending on the macro market conditions thus minimizing individual stock market timing risks.

    This is not different in strategy from Forester's philosophy except that its uses shorting rather than just go to cash and uses small caps rather than large caps.

    So it does very well in longer bear or bull market years and lags during transitions but without losing much money. Unfortunately, none of the alternatives for this fund come anywhere close to it in performance as they primarily seem to depend on picking the right stocks to go long or short across all conditions rather than acting like a good long fund or a good hedged fund depending on macro conditions. It is a unique standout.

    ARBFX: Another alternative investment fund which depends on arbitraging mergers and acquisitions by buying a company that is being acquired and often shorting the company acquiring. The risks for such funds come only if the M&A does not go through. The earlier you get on as soon as an M&A is announced, the riskier. This fund takes very little risks by waiting to get on and arbitraging just the last few months before an M&A. This keeps the volatility very low and the gains low as well.

    An alternative is the similar Merger fund (MERFX) which has a disadvantage because of its size and so may not be able to move quickly in and out.

    HSTRX: Hussman's conservative allocation fund is managed in a risk-managed fashion where the portfolio is continually and pro-actively positioned to address the current risk evaluation of the market. Unlike his strategic growth fund, this fund does not take any significant bets on equities and so any incorrect decisions in his strategy does not have as much of a downside impact unlike the other fund. This has allowed HSTRX to show very consistent and impressive performance over a long period of time with very little volatility.

    MGIDX: Intermediate duration mortgage securities fund that manages to keep volatility low with good performance and uses shorting/options to achieve this. The ability to short or use options will make this fund able to provide downside protection and manage credit and interest risks, a good idea when mortgage rates are likely to rise in the future.

    Alternative is PTMDX - PIMCO Mortgage-Backed Securities D which shorts even more aggressively.

    PGNDX: A GNMA fund that manages risk via shorting while preserving the upside of a GNMA fund. Good due to the same reasons as MGIDX above.

    Alternatives are non-shorting GNMA funds such as USGNX from USAA, VFIIX from Vanguard or BGNMX from American Century which may have more losses if the mortgage rates were to rise rapidly.

    PTTDX: An intermediate investment grade fund that also manages risk via shorting and useful in an expected interest rate rising environment in the future. Low volatility.

    Alternatives are non-shorting funds with low volatility THOPX Thompson Plumb Bond or CPTNX American Century Government Bond Inv WEFIX: A fund with the ability to move between short and intermediate durations based on market conditions and hence able to take advantage of the conditions better than a strictly short term fund. Does not use shorting.

    Alternatives are USSBX from USAA, WEFIX Weitz Short-Intermediate Income, VFISX Vanguard Short-Term Treasury, PLDDX PIMCO Low Duration D. The last one from PIMCO does use shorting.
  • Reply to @catch22: Thanks a bunch catch, that sure saved me a lot of time. BTW - have you been tracking that portfolio?
  • edited December 2011
    Howdy Mark,

    You are most welcome.....and glad that I had his/her post in an easy to find location.

    I have not tracked Fundmental's MMLL portfolio; but indeed should take some time to run the funds and the % allocations for all of 2010 and this year.

    The only fund I do monitor from Fundmental's list is, HSTRX. I watch this fund as it positioned by type, similar to our style; although the actual holdings surely are not similar.

    I recall when Fundmental also placed his/her weekly portfolio and returns at FA; that his/her challenge to me was to beat or match HSTRX. We are ahead, so far this year; by 1/2%.

    Stashed away in a file somewhere on this pc is Fundmentals last post; if I recall correctly was the end of May/first of June of 2010.

    Take care,
    Catch
  • Reply to @catch22: OK then and before I forget Happy and Prosperous New Year.

    I set up a hypothetical $100K portfolio of the MMLL Conservative and MMLL Agressive offerings on January 4, 2010. To date the Conservative portfolio had gained 7.39% although it was down in 2011 by (1.48)%. The Aggressive portfolio has gained 6.85% overall and was up in 2011 by 1.52%.

    All dividends were reinvested in both cases.
  • Thanks so much for the responses, Mark and Catch22. Fundamentals was obviously a deep data driller who took the time to develop a portfolio for someone with my needs. Since Fundamentals posted his MM/LL in November/ December 2009, 2 funds (BPLEX & ARBFX) closed and 2 funds (HSTRX & WEFIX) have TFs at Schwab. WEFIX also has a $100k buy in that is too rich for these Roths. I’m currently researching alternatives for those funds, including MERFX which, as Fundamentals noted, is possibly a bit too fat to be as effective as ARBFX. Fundamentals was gracious enough to provide a list of other choices so I’ll start there. Again, thanks for ferreting this. I regret being so late in returning to investing that I missed the opportunity to get to know Fundamentals before his passing. At least through FA/MFO, his contribution continues to live on. PS, Mark, my wife received an iPad 2 for Christmas…remembering you as an Apple fan. Happy New Year! Rick, the glampig
  • Howdy glampig,

    Fidelity indicates $25K minimum for WEFIX, and they too have a $75 TF. Gotta like the ticker though.....

    Not knowing where you're headed with investments; but also take a peek at VWINX for a conservative blend.

    Regards,
    Catch
  • Reply to @glampig: Your wife is a lucky woman, I picked up one as well. My challange is trying to get it back from my 2-yr old grandson at the end of the day. He works it way better than I do. BTW - to the best of my knowledge Fundmental (note: no 'a') stopped posting much to the detriment of this board. In my worthless opinion this individual provided a lot of valuable work and input. If nothing else, the thought that went into constructing the portfolio caused me to seriously evaluate what I was holding and why, leading me to cut over 15 funds from my own portfolio. I haven't missed any of them. Best of the new year to you as well.
    Mark
  • Reply to @glampig: Why bother with WEFIX. Just get BND or AGG or SCHZ which follow the Barclays US bond index. Or if you prefer mutual fund VBMFX, FBIDX, SWLBX.

    The bond index itself has better 1, 3, 5, 10 and 15 year record than WEFIX. And it did perform better in 2008.
  • Reply to @Investor: Thanks for your comments. Please pardon my tardy response. I’m very slowly learning how to use the MFO board. Maybe with the new posting structure being proposed I’ll get better at this.

    Poking around Schwab’s site I did find a Weitz new alternative to WEFIX short intermediate fund: WSHNX. But Fundaments’ pick of PTTDX looks like a better choice for my needs than WSHNX and I really prefer MWTRX to PTTDX. The aggregate index SWLBX and even lower cost ETF alternative SCHZ look great especially since I can trade that ETF for zip. Schwab has a transaction fee for VBMFX and FBIDX so those won’t work for these Roths.
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