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Revisiting Defensive Funds

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  • edited July 6
    Great thread. Personally though, playing O-F-F-E-N-S-E at the moment given the recent start of the rotation back into big tech. To wit, bought AMZN last week. UP a very quick 7% on the heels of today's 5% pop.
  • edited July 6
    bee said:



    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.

    Explanation of Upside and Downside Capture:
    https://freefincal.com/how-upside-and-downside-capture-ratios-are-calculated/


    SVARX is currently my largest bond fund holding so was curious about this. The answer is kind of what I expected:
    In principle, it is possible to see a negative downside capture ratio. In that case, it means that the manager has a negative beta on average, i.e. the manager went up when markets went down. This, of course, is very hard to achieve consistently.
    Upside downside capture - Breaking Down Finance
  • edited July 6
    JD_co said:

    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.

    He’s done somewhat better recently. But for 10 years you’d still be underwater. Wonder what they’d say if you phoned and asked them why that’s the case. I did something like that once years ago with a different fund. The response was: “Our manager has been positioning himself.”

    HSGFX 10-Year Chart from Lipper (shaded dark blue.)

    image
  • Yes, great comments everyone! Thanks! SVARX looks interesting, will do more research.

    I have an offense equity sleeve, into which I add during sell offs. But I feel my bond and alt allocations are not the place for risk holdings. Being defensive with non-equities, for me means higher quality issues, shorter duration, good liquidity, and history of modest drawdowns.
    Best regards,
    Rick
  • Rickrmf said:

    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.

    Rick, Here is what I started doing. I divide my funds into three groups 1) Mixed Asset, 2) Uncorrelated, and 3) the tactical sleeve. The first two categories are buy and hold and as long as the quality of the fund is intact, I don't worry about performance. For the tactical funds, I track the previous month return, three month trend, and flows. If they are negative, I have to ask myself why? Is the fund peaking or is it blip.

    On GAVIX/GAVAX, which is an uncorrelated fund, see below. The Ulcer Index is about half of the S&P 500 meaning half as risky. The average three year return is 7.4% which is good for a conservative fund. The Composite MFO Rating is 2 which is below average (3). It is not very consistent, which is not a major flaw, and it's capital preservation is good. The one month return is down as is the three month trend, and money is flowing out. The yield is 2.2%. What I like is that the correlation to the S&P 500 is only 0.58 which is low, and the downside capture is only 9.7 which is why it has a good capital preservation rating of 4.

    APR 7.4
    Ulcer Index 2.9
    Martin Ratio 2.13
    Composite Rating 2
    Consistency 1
    Preservation 4
    1 Month -1.87
    Trend -0.6
    Flow -1.8
    Yield 2.24
    Correlation SP500 0.58
    Down Cap S&P 500 9.7

    The stats are good for GAVIX. I track 81 uncorrelated funds, and GAVIX rates 58. The composite rating of 2 is the only thing that I don't like. For my next MFO article, I identify six potential uncorrelated funds to own. These are COTZX, ARBIX, DEVDX, RLSIX, SPEDX, and SUBFX. I am still researching these, but already own COTZX and ARBIX.
  • @lynnbolin2021 : Thanks for that explanation. Thinking I will take another look at this fund for some cash that is waiting for a place to land.
    Stay Kool, Derf
  • >> The Ulcer Index is about half of the S&P 500 meaning half as risky.

    Is that what UI means / is supposed to mean?
  • The Ulcer Index measures the length and duration of the maximum drawdown over a period of time which in this case was three years including the 2020 bear market.

    Each bear market is unique, but I believe that it is a great relative risk indicator. Over the past three years the S&P 500 had an UI of 5.2.
  • tnx

    There has been no little discussion here in the past of risk, relative risk, and volatility (is this what you meant by defining UI as 'length and duration of the maximum drawdown over a period of time'), perhaps some of it already including you.

    Maybe it would be a good time to revisit the differences, which others have noted strenuously. Some of us deeply care about it but do not care so much about volatility. Maybe risk is vol/ time, as your def implies. Your thoughts?
  • @JD_co re Hussy...crazy how his commentary makes so much sense and I believe we know he is correct but his results have been shall we say less than stellar...where he went off the rails and missed the boat is with the Central Bank balance sheet expansion...although he makes the argument this in itself does not prop up the markets...it is the investors belief that it does that props it up...so...combo of mob psychology and greed, no?

    Call me crazee but everytime I see a knock on Hussy, I step in and buy a few sheckles worth....kind of a contrary signal

    ...note some sharpies starting to get a tad nervous surrounding negative divergences re Accumulation/Distribution lines in major markets...change in price trends signify whamo down or who knows??

    I'm still buying VLSAX Virtus Kar Long Short and ramping up VVPLX, Vulcan Value partners funds...into stocks that have outstanding free cash flow....considering purchasing PTIAX....

    Saw Mr Grantham on Wealthtrack....gets my attn when the wise elders are sounding the alarm..

    Who knows, I for certain do not....

    Good Luck to All,

    Baseball Fan
  • @Baseball_Fan.... To be nice, I'll mention that Hussman's Total Return fund (HSTRX) only had 2 down calendar years out of 18, with a +5% average return over the life of the fund.

    Not sure which of his funds you dabble with. His newer Allocation fund (HSAFX) has done kinda ok so far.

    But yeah, he missed the Fed boat completely, and he never corrected/adjusted appropriately. Stubborn.
  • Hi @davidmoran
    Sure, I can provide some clarity to some of the risk metrics. There is a nice tab in MFO Premium with the definition of most metrics. Here is a summary of a few:

    STANDARD DEVIATION indicates the typical percentage variation above or below average return a fund has experienced in a year’s time.

    Where standard deviation has limited value is that it does not measure direction. For example, the S&P 500 (SPY) will have a standard deviation that is very close to the inverse S&P 500 (SH).

    DOWNSIDE DEVIATION measures a fund’s return below the risk-free rate of return, which is the 90-day T-Bill rate (aka cash).

    DOWNSIDE CAPTURE compares the negative return of a fund, comprised of its negative month ending returns, to one of four indexes, over evaluation period specified, measured in percentage. So, compared to SP500, a Downside Capture of 80% means the fund retuned or "captured" only 80% of downside that the SP500 over the evaluation period specified.

    ULCER INDEX measures both magnitude and duration of drawdowns in value. A fund with high Ulcer Index means it has experienced deep or extended declines, or both. Ulcer Index for money market funds is typically zero. Here is a link to a a good description of the Ulcer Index which also explains the flaws with using standard deviation (volatility) to measure risk.

    MINIMUM ONE YEAR ROLLING RETURN: One of the metrics that I use are the rolling averages, specifically one or three year rolling minimum returns over the period. What this provides is the minimum return earned during the rolling time period. It is useful for comparing how well a fund recovered from some event such as the 2020 bear market.

    For more information, please see:

    https://www.tangotools.com/ui/ui.htm

    https://www.mutualfundobserver.com/2017/10/rolling-averages-finally/

    https://www.mutualfundobserver.com/2013/01/a-look-at-risk-adjusted-returns/

    I hope this helps.
    Regards, Lynn
  • >> The Ulcer Index is about half of the S&P 500 meaning half as risky.

    Is that what UI means / is supposed to mean?

    IMHO the answers are: no (it doesn't mean this) and yes (it is supposed to mean this).

    Leaving aside what "risk" even means, I've never been a fan of using second moments (roughly, squares) to compute numeric values that supposedly quantify risk. (For anyone who has taken Physics I and forgotten second moments, here's a refresher on moment of inertia.)

    Why square the drawdowns (retracements) before summing? The original writing defining ulcer index gives this explanation:
    A better method [than merely summing] is to add the squares of the retracements, in order to penalize large retracements proportionately more than small ones.
    If drawdown A is twice that of drawdown B, it is already being penalized twice as much by simply using its magnitude. Squaring that figure distorts this. And what is magical about squaring, as opposed to, say cubing, or taking the retracements to the 1.5 power? (These are all positive numbers we're using.) Why is squaring the appropriate "penalty"?

    Over a four month period, consider a fund that loses 10% in the first month, but immediately recovers in month 2 and is flat for the remaining two months. Compare that with a fund that loses 5% in the first month, but stays down 5% over the full four month period.

    These funds have the same ulcer index, but do they have the same "risk"?

    image

    In the calculation below, I dropped month 0 that established the maxprice for simplicity.
    SQRT[(10^2 + 0 + 0 + 0)/4] = 5 = SQRT [ (5 ^ 2 + 5^ 2 + 5^2 + 5*2)/4]

    The first fund had twice the drawdown, but for only 1/4 of the time. We can debate whether it presents exactly half the risk (twice as deep, 1/4 as wide). But ISTM that this fund presents less risk than the second fund, where you're sure to lose money no matter when you sell during this four month period. The amount at risk (i.e. risk of loss) is only half as much, so we do have to account for that as well.

    Next, consider two funds, each of which recovers 1%/month. One has a 10% drawdown (so it takes 10 months to recover); the other has a 5% drawdown (taking 5 months to recover). The first fund plunges twice as deep and takes twice as long to recover.

    My intuition or if you prefer, sense of risk, consequently says that the risk of the first fund is 4x the risk of the second. We can see this geometrically.

    Think about it as triangles, where height is the drawdown and the horizontal axis is the month.
    imageimage

    One triangle has a height of 10 (initial drawdown) and takes 10 months to decline to zero. The other triangle has a height of 5 (initial drawdown) and takes 5 months to decline to zero, after which the fund's performance is zero (flat).

    I'm guessing that this is somewhat similar to what @lynnbolin2021 had in mind when writing:
    The Ulcer Index measures the length and duration of the maximum drawdown over a period of time

    But I could simply be projecting my own interpretation on top of this writing.

    ("Maximum" drawdown may have been a misstatement since UI uses actual drawdowns, not maximum. The original writing on UI offers this comment: "Some investors prefer to use the maximum retracement rather than an average. This reveals the worst experience over the test period, but it emphasizes a single event to the exclusion of all others.")

    If one is familiar with the Gini coefficient, one is familiar with another metric that is calculated using area. Here, the cumulative amount of inequality is graphed. and the measure of societal inequality is taken as the area between perfect equality (the green line in the graph below) and the actual cumulative disparity (the blue line). Computationally similar to measuring the area of the triangles above - the area between the ideal (no drawdown) and the actual drawdown month by month.
    image
  • beebee
    edited July 8
    @msf, amazing work. Thanks.

    In the brain of an investor (me)... I would add that comparative math can ease or ulcerate the nerves.

    If I am willing to take investment risk I often assess risk based on comparisons...to others...to the market.

    I maybe incorrect, but my sense of upside capture and downside capture include this comparative data. How are my investments and portfolio doing compared to the market...compared to other funds I could choose? I look back historically (at past performance data) to infer what the future may hold. Will the data persist? Will future market conditions change enough to make past data obsolete? All of this is clear historically, but fuzzy when casting it's predictability into the future.

    Portfolio Visualizer lets me collectively look at all of my holding as one risk much like an asset allocation fund. If you own more than one fund your portfolio is a "fund of funds". It is helpful to have individual fund data that @lynnbolin2021 often references, but it is maybe more important to run one's entire portfolio as a single risk profile.

    PV's "metric" tabs lets one do this.

    https://portfoliovisualizer.com/backtest-portfolio


  • @msf and @davidmoran
    Wow! Impressive answer. I will have to take a closer look at it when I get more time. Thank you. I did not know that pictures could be posted either.
  • @msf is operating on a different level here.

    Also, I was told there would be no math.

    It looked like the market might test our defensive funds a bit today, but buyers are materializing once again. Added a couple of shares of HEGD.

  • edited July 8
    @msf, ty again. I think I will stop using UI quite as casually and decisively as I have been.

    I suppose sleep-at-night is UI wrt one's personal psychology / anxiety.

    I concur in the first example. I have to think further about second example; my eyes start to jiggle when I reread this in terms of volatility analysis only.

    Area under the curve is always helpful.

    Again, I do hope you have a blog going, even if private.
  • Yes, another good thread!
  • Woh @msf impressive. Interestingly my son likes talking to me about GINI coefficients. I should listen to him!
  • edited July 10
    JD_co said:

    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.

    Seeing that you have the Rational options fund, fyi, they have a non-ag'y mortgage fund too, RFXIX I shares, which is relatively new but has about the same total return profile so far as EIXIX. Just found it so no due diligence dive into it yet on my part.

    Availability prob'ly varies; at Fidelity the I shares are, with low minimum and a tf.

    Cheers, AJ
  • edited July 12
    Thanks for the HY suggestion, AJ.

    I now want to focus on a safe allocation fund with low fees for my taxable account, and I've settled on VTMFX which is roughly 50/50. It will be my core. No more procrastinating.

    I can DCA into VTMFX and let the markets do what they may. Bonds are not alluring and equities are not either, so why not split the difference with a 50/ 50 -ish fund? Its not the most DEFENSIVE fund, but there are no guarantees anywhere out there. Can't just sit in cash with inflation running up.

    Side note: Frontline has a report airing tomorrow night on the Fed, just before Powell gives updates this Weds/Thursday. I don't think the report will be flattering.
  • JD_co said:

    Thanks for the HY suggestion, AJ.

    I now want to focus on a safe allocation fund with low fees for my taxable account, and I've settled on VTMFX which is roughly 50/50. It will be my core. No more procrastinating.

    I can DCA into VTMFX and let the markets do what they may. Bonds are not alluring and equities are not either, so why not split the difference with a 50/ 50 -ish fund? Its not the most DEFENSIVE fund, but there are no guarantees anywhere out there. Can't just sit in cash with inflation running up.

    Side note: Frontline has a report airing tomorrow night on the Fed, just before Powell gives updates this Weds/Thursday. I don't think the report will be flattering.

    Great choice! Tax free/advantaged and solid returns. What's not to like?
  • beebee
    edited July 13
    @JD_co USAA has USBLX similar but a slightly higher ER. I also believe Vanguard has a Small cap Tax managed fund (VTMSX) that might be a nice addition to VTMFX.

    Click here -
    Allocating VTMFX with VTMSX
  • edited July 14
    bee said:

    @JD_co USAA has USBLX similar but a slightly higher ER. I also believe Vanguard has a Small cap Tax managed fund (VTMSX) that might be a nice addition to VTMFX.

    Click here -
    Allocating VTMFX with VTMSX

    Good call. VTMSX would be a nice addition to VTMFX.
    The equity portion of VTMFX is very similar to VTCLX.
    VTCLX is essentially the Russell 1000 index managed for tax efficiency.
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