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Revisiting Defensive Funds

Thanks to Charles Lynn Bolin for his attention over the past year+ to screening and using defensive funds to better position portfolios for this high valuation/low interest rate environment. I’m curious if he and/or others who may have added defensive funds over the past year think of their performance, and what you may have learned. Here are funds I’ve selected a year ago for my defensive sleeve, with some thoughts/questions. Thanks in advance for sharing. I do swap funds occasionally, and slowly, but prefer a more Buy and Hold approach.

CTFAX: I bought it when it was positioned more aggressively, now it is almost a cash sub. Very pleased.
GAVAX: I bought it for its very compelling risk stats. It seems to be rate sensitive? performance so-so. Thoughts currently?
SWAN: It proved itself to me in the downturns. Recent performance has been better, concerned with rate sensitivity with all its Treasuries. I don’t think it should categorized with equities, although it does capture a portion of the S&P returns.
TRSMX: Steady alt, like its safety. Considering adding another alt fund, ARBIX?

I cap my % in any one fund to 10%, so there is some diversification in this sleeve as well. I also have GIBLX as a high quality ballast bond fund, which is rate sensitive. Not sure I might trade for another in the defensive sleeve and continue reducing my bond holdings.

I do hold 40% in equity sleeve, which I reduced from 60% to further position defensively. I am investing for growth, not income, but am considering DIVO, HNDL, JEPI others for their risk/reward profiles…just not sure how to consider these in terms of portfolio allocation, perhaps income bond sleeve (even though income would be reinvested)?

Thanks in advance for sharing,
Rick
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Comments

  • @Rickrmf : Thanks for posting. I appreciate hearing what others are doing at this point in time. I have started a position in TRSMX also. It holds about 2% of my investments & will add more shortly. I would like to have about a 5% allotment.
    Also I have sold off GASFX & sold down two other MFs . It grinds me that Mr. Market continues to grind upward, but so be it, after cutting back a bit !

    Stay Kool, Derf

  • edited July 5
    Lots of ways to slice and dice this one. I did some revamping recently. (Same funds / different way of viewing) - Risk Assets (equity-centric & commodity related) are targeted at 35% of portfolio. Alternatives & Fixed Income are each targeted at 32.5%.

    Truly “defensive” to me would be the fixed income portion. Despite all the talk about rising rates, a diversified income approach concentrated in short to intermediate duration bonds (and maybe some TIPS) stands to loose less during a time of market duress than either equities or alternatives.

    However, @Rickrmf is asking, I suspect, more about the alternative type funds and @Derf seems to confirm that. A lot of people seem to view TMSRX as an “everything or nothing” option. What I do within the alternative sleeve is mandate that at least 40% be in TMSRX. The remaining 60% (or less) is split between PRPFX (which I’ve held for many years) and Invesco’s ABRZX.

    Surprisingly, TMSRX has been around for 3 years already! So throwing together TMSRX’s 3-year performance of 6% at a 40% weighting and than adding equal portions of PRPFX (12.9% for 3 years) and ABRZX (8% for 3 years) I get something in the vicinity of an 8.7% average for the 3 alternative funds working together over the past 3 years. One can look at returns for PRPFX and ABRZX farther out than 3 years, of course, if they wish.

    Like I said earlier, alternatives aren’t necessarily risk-free. But over time they should prove more stable than equity-centric or 60/40 funds. Of course, their return over longer periods should also be lower.


    Footnote: I was curious how my tracking fund PRSIX stacks up against that 8.7% return for the alternatives.

    PRSIX: 3 years +9.5% // 5 years + 8.78% // 10 years +7.7% (close)
  • Thanks hank and derf! Appreciate your responses, and just to clarify the post a bit... I may want to add another alt fund to complement TMSRX, so I’ll check out the ones you mentioned. Also looking for thoughts on GAVAX, especially comparing it to CTFAX. I’m concerned about GIBLX moving forward if rates rise again, but I do like it’s ballast profile. Finally, although I’m not investing for current income, I’m looking for thoughts on the role/portfolio allocation for ETFs I mentioned that seem to have good risk adjusted total returns (DIVO, HNDL, JEPI…), perhaps as alternatives to some fixed income sleeve bond funds?
    Thanks again,
    Rick
  • edited July 5
    @Rickrmf - I don’t know anything about ARBIX (but that’s never stopped me from voicing an opinion).

    M* doesn’t appear to have a rating for it

    It scores very well on Lipper. Be aware their “rating” is actually a reflection of recent performance.

    - Performance 4/5
    - Total Return 4/5
    - Capital Preservation 5/5

    (Lipper does knock it down on expenses giving it just 1/5 in that area.)

    What I think is significant is that the “chainsaw gang” over at Max Funds
    rates it fairly highly by their standards:

    Good +74/100

    What’s really “wild” IMHO is that if you click the “Holdings” tab at Lipper you’ll see that ARBIX has a negative 50% weighting in stocks. That’s some shorting. I’ve never seen anything quite like it.
  • I hold ARBOX at Schwab ntf, lower minimum investment required. I'm hoping this will be a longer term investment that I can add to as needed.
  • @carew388 : What do you see that made you a buyer, if I may ask ?
    Thanks , Derf
  • rick and derf, note typo in your own listings re tmsrx
  • Hi @Rickrmf,

    I have put a lot of time into analyzing defensive funds. My ranking system is based on seven factors applied equally to every fund. After the article last month I now apply the seven factors differently to Mixed-Asset Funds, Uncorreclated Funds, and the remainder of the stock and funds. I also apply them differently to funds by MFO Risk levels. For example, I do want good performance for the Mixed Asset Funds and Uncorrelated Funds, but momentum is not a determining factor in finding these funds.

    Combining these funds can reduce volatility. You asked about GAVIX/GAVIX. It is one of my poorer performing funds in the short term but not the long term. That is the benefit of combing uncorrelated funds. Some will be up while others are down so that they do not all rise and fall at the same time. I thought about selling GAVIX, but now classify it is as an uncorrelated fund and am content with it.

    I also own COTZX/CTFAX, DIVO, ARBIX and TMSRX. You may also want to look at CDC which I also classify as an uncorrelated fund. I am working on an August article which covers this topic.

    We may well be in a year like 1998 or 2007 with good recent performance. However, Federal Debt to GDP is almost as high at during WWII. The federal deficit is also high. The rise in asset prices is due more to massive stimulus than growth. Even conservative Vanguard is estimating very low growth over the next decade due to high valuations.

    For the past 120 years the stock market has returned 6.8% plus inflation. Limiting downside risk in this environment is likely to lead to outperformance as it did following 1998 and 2007. Stimulus has also inflated expectations. Notice how Mr. Buffett always seems to be sitting on cash when the bear market arrives.

    Regards, Lynn Bolin

  • Hi Lynn,
    Thanks so much for your articles that you've posted both here and at Seeking Alpha. Really appreciate it. You brought several funds to light that I was not aware of -- in particular IHDG and HEFA. I've also read David's article on Yacktman Global with interest. The Yacktman funds tend to be defensive in nature with strong long term performance. Do they not make your screens because of their maximum drawdowns? This one was down about 24% last March.
  • derf I was looking for a fund, to invest idle cash, with limited correlation to the stock and bond markets. ARBOX has a 1,000 minimum and didn't require 25k like ARBIX. By investing now, I wished to get in the fund before it closed,etc, as Schwab is notorious for listing funds as open to existing shareholders, restricted, or available for institutional customers only. My annual rate of return goal for idle cash is 50 basis points(Marcus money fund pays this) so if this fund only returns 100 or 200 basis points annually, I'm ok with that.
  • Lynn, thanks so much for sharing your thoughts, especially on GAVAX. I look forward to reading your commentary on non correlated assets. Your articles have really helped me, and I’m using MFO screeners more and more. I feel indebted.

    I struggle with when to swap funds due to shorter term underperformance. I found the analysis on MFO compelling, so I’ve resisted selling as well. Not sure about GIBLX, recent performance is better, but it looks rising rates may hurt it. I’d be interested in a future article on “when to swap or sell funds”.

    Lynn, your writing has been so appreciated!
    Rick

  • edited July 5

    rick and derf, note typo in your own listings re tmsrx

    Nice catch! @davidrmoran

    Thanks
  • @carew88 : Thanks for the reply. If their shorts come through good for you .
    Will think about a toe hold in that fund.
    Derf
  • edited July 5
    Was looking for a HY bond fund that had held up decently ("defensive?") in 1Q 2020. Found EIXIX with a 5.5% SEC Yield. $2,500 min at VGD (TF). May be my newest addition.

    Looked at GAVAX, gave up quickly on that. Sold my SWAN and DRSK. Not sure that TMSRX is going to be a keeper.
    Holding onto my ARBIX and HRSAX.
    Recently bought some SVARX and SFHYX (Fido).
    Will keep adding to CTFAX (a keeper).

    Hiding out in various bond funds (DAAIX, EXCPX, PEGAX, FPFIX, MWFSX, etc) in the hopes equities peel back. Won't hold my breath, though.

    Merger arb is stalling a bit this month, but that sleeve will remain (BALPX, MERFX, HMEAX) intact.

    Still liking HEGD, just wish average daily volume would increase. Will add here.


    D-E-F-E-N-S-E

  • Currently, due to high equity valuations, my portfolio's limited equity exposure is confined to these three defensive funds: CTFAX, JHQAX and VWINX. For the bond portion I use CLMAX, NVHAX and RCTIX, along with the bond-like alternative fund ARBIX. The rest of my portfolio, roughly 15%, is in cash and may find a temporary home in SH, the inverse equity ETF, during the next market crash.

    Since my retirement, I have found the advice of another poster always very helpful: "I don't really need a lot more money - but I certainly don't want to lose a lot. I need to remind myself to err on the side of caution."

    In the current market environment, I am quite satisfied if my annual total return is within a range of 4 to 6%.

    Good luck, and many thanks to Lynn Bolin for his valuable contributions.

    Fred
  • TGHNX lost 6.8 % in 1Q 2020.
  • SFHYX SVARX both available at Ally Invest with 9.99 tf per purchase.
  • carew388 said:

    TGHNX lost 6.8 % in 1Q 2020.

    Thanks, Carew.

  • +1 jd thanks for info on HEGD-seems to compare well with JEPI and PHDG .
  • msf
    edited July 6
    Was looking for a HY bond fund that had held up decently ("defensive?") in 1Q 2020. Found EIXIX with a 5.5% SEC Yield.

    I took only a cursory look at EIXIX so all I've got are lots of questions, not clear statements:
    • What is the average credit rating for this fund? Is it really "high yield" aka "junk"? The annual report says:
      These securities that the Fund invests in are at or near the top of the capital structure, which make them relatively insulated from losses by the deal structure’s credit enhancement (i.e. preference over bonds junior to the respective tranche we are buying)
      It makes it sound like it's investing in the most senior tranches - the ones rated AAA before the GFC.
    • The annual report also says that it "invests primarily in ... non-agency residential mortgage backed securities (RMBS) that were created pre-crisis", i.e. legacy RMBS. By definition they're not issuing more of these. What is the size of that pool? How will the fund invest going forward?
    • What is the average duration of the portfolio? The latest semiannual report seems to show most of the holding having non-fixed rates. That would suggest a very short duration. In addition, both the annual and semiannual report tell of a smattering (< 5%) interest only securities. They have negative duration, further shortening the portfolio's average duration.
    • If most of the holdings are variable rate, which generally trade near par (little interest rate risk), what accounts for the average weighted price being just 82% of par (per M*)? This is why the SEC yield is so high - it's building in an increase in price as bonds approach maturity. (M* notes that "neither TTM nor SEC yields reflect the potential impact of future defaults.")

      Is the credit risk so severe? The annual report suggests that it is: "Legacy non-agency RMBS have measurable credit risk." It reports 18.2% of the underlying loans are 60+ days delinquent.
    I haven't read up on legacy non-agency RBMSs. So all I can do is raise these questions. I don't know which numbers are most meaningful for this type of holding or what sort of risk profile they present. As I said, questions, not answers.

    With respect to the 1Q20 performance, EIXIX had a drawdown of 13.76% between March 5 and March 25 (per M* interactive chart tool). M* provides tabular monthly data, that shows EIXIX losing 8.30% in March. Looking at an entire quarter gives you information about speed of recovery but less insight into the magnitude of risk.
    http://performance.morningstar.com/fund/performance-return.action?t=EIXIX

    For better 1Q20, March 2020, and max drawdown (daily) figures, I might look at MWFSX. It went up in 1Q20 by 1.23% (vs EIXIX dropping 6.79%). It went down in March by 1.92% (vs. EIXIX dropping 8.30%). And it's max drawdown in 2020 was 5.57% between March 5 and March 25.

    All that said, it's fairly similar to EIXIX, and thus suffers from some of the same risk factors. Except that it has much greater transparency (you can find its portfolio statistics here), is more diversified ("only" 2/3 in securitized debt), and is managed by a first rate, well known team.

    Portfolio Visualizer comparison.


  • MikeW said:

    Hi Lynn,
    Thanks so much for your articles that you've posted both here and at Seeking Alpha. Really appreciate it. You brought several funds to light that I was not aware of -- in particular IHDG and HEFA. I've also read David's article on Yacktman Global with interest. The Yacktman funds tend to be defensive in nature with strong long term performance. Do they not make your screens because of their maximum drawdowns? This one was down about 24% last March.

    Hi @MikeW
    I was not tracking MBEAX, but have added to my list. I like the Global Flexible Portfolio Funds. They don't rank well because international funds have under performed, but I expect this to change because of higher valuations in the US. I own the Vanguard Global Wellesley (VGYAX) and Global Wellington (VGWAX) for this reason.
  • edited July 6
    Hi, msf:

    Taking a quick look at MWFSX, I couldn't help but notice that M* reports a rather suspiciously high SEC yield of 8.55%! Just curious how that is possible in today's low interest rate environment? Certainly raises a red flag for me.

    Fred
  • MWFSX : ER is a turn off for me. Wavier will expire the end of July '21 , if I'm reading fees correctly.
    Derf
  • msf
    edited July 6
    fred495 said:

    Taking a quick look at MWFSX, I couldn't help but notice that M* reports a rather suspiciously high SEC yield of 8.55%! Just curious how that is possible in today's low interest rate environment? Certainly raises a red flag for me.

    Derf said:

    MWFSX : ER is a turn off for me. Wavier will expire the end of July '21 , if I'm reading fees correctly.

    I did address these, but tersely, and I concur with the concerns.

    Fees: I suggested MWFSX as an alternative to EIXIX, which has a fee waiver expiring end of Oct '21. Without speculating on the relative likelihood of either waiver being extended, it does not seem to me that this is more of a concern for MWFSX than for EIXIX.

    As stated, the high SEC yield comes from the low average weighted price of the holdings - under 90% of par. Think of YTM for a single bond. The greater the discount, the greater the YTM. The SEC yield of MWFSX is not coming from the coupons, which average 3.52%; that's not much more than EIXIX's 3.26%. EIXIX's SEC yield, while not as stratospheric, is above 5%, which is still rather rare outside of EM bonds and TIPS.

    Long duration bonds can sell at large discounts simply because there are so many below market rate semiannual coupon payments for which the discount must compensate. But when the duration is short and there's still a significant discount, that's a strong indication that you're deep into junk. Indeed, over ¼ of MWFSX's portfolio is below B, while its duration is a modest 2.94 years.

    At least I know that, because Met West (now a TCW subsidiary) is a transparent company. I know that over 60% of the portfolio securities (weighted) have durations under 1 year. I have no idea what the average credit quality or duration is of EIXIX, let alone a bar chart of credit quality or duration for its portfolio holdings. I just have to assume it's in a similar ballpark to MWFSX based on the few data points already described.
  • beebee
    edited July 6
    Has anyone considered defensive equity funds?

    Performance of both cyclical and defensive equity sectors (from @Derf's Schwab link):

    image
  • edited July 6
    “Red flag special” MWFSX

    It’s so new Lipper hasn’t yet created a scorecard for it. 105% in bonds means they’re borrowing to exercise leverage. Yahoo doesn’t show duration or credit quality. But, @msf has indicated 25% below B Yikes!

    Here’s Moody’s rating scale from Wikipedia Hopefully, I got the cut and paste of the chart correct. Not all junk is created equal. Some good income funds (DODIX) dabble in the BB area. Few decent funds want to go below B, although some of their BB will occasionally fall to the B level.

    B2 B B B3 B− B− Highly speculative

    Caa1 CCC+ C CCC C 5 Substantial risks

    Caa2 CCC Extremely speculative

    Caa3 CCC− Default imminent with little prospect for recovery

    Most experienced investors are aware the junk bond market is not very liquid. Even daily pricing is suspect and sometimes inaccurate. During good times a fund like this can sail along posting nice returns. On those rare eventful occasions (2008 and early 2020 come to mind) these funds can submerge literally overnight. Per Warren Buffett: "It's only when the tide goes out that you learn who's been swimming naked."

    One of the better threads we’ve had in a while. Thanks to @lynnbolin2021 for joining in / sharing considerable knowledge and data.
  • beebee
    edited July 6
    I like to look at upside and downside cature ratios of mutual funds to see how defensive a fund is. The Morningstar site provides this data (look in the "risk" tab). When I use Portfolio Visulaizer's data it appears inconsistent with M* (FWIW). You may to constrain PV to the last ten years of data to match M*'s data. PV data can go back to 1985 if the fund is that old.

    One of the best funds for this type of risk/reward is PRMTX. Here's its risk profile (Upside=114 / Downside=65):
    https://morningstar.com/funds/xnas/prmtx/risk

    Some others I hold:
    FSMEX (100/58)...100% of the upside with 58% of the downside
    PRWCX (117/88)
    PRNHX (108/69)
    PRHSX (98/71)
    PRGSX (122/86)

    A fund like CTFAX has a (78 upside cature/13 downside capture) so this fund captures 78% of the upside (reward) while only taking 13% of the downside risk. Pretty good risk/reward.

    SVARX works hard (ER over 3%) to produce an upside of 128 and a downside of (-53). Help me understand the negative downside capture number.

    Some other notables in this thread:
    TGHNX (123/72)

    Explanation of Upside and Downside Capture:
    https://freefincal.com/how-upside-and-downside-capture-ratios-are-calculated/
  • edited July 6
    @msf, thanks for your insights on EIXIX, and the fund's lack of clarity. Its a Legacy bond fund with a short history. I may be reaching a bit for that yummy yield.

    Another defensive play is small cap fund PVCMX, which supposedly held an 80% cash position at 3-31-2021. Palm Valley Capital (Eric Cinnamond) must not be trustful of the waters.
  • '' Palm Valley Capital (Eric Cinnamond) must not be trustful of the waters. "
    No new news there !
    Derf
  • Derf said:

    '' Palm Valley Capital (Eric Cinnamond) must not be trustful of the waters. "
    No new news there !
    Derf

    Well, Hussman is still the king of perma-bears. Does anybody hold any of his mutual funds? Even his defense is questionable, and there is no offense.

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