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Allocation/Balanced Funds, Past & Future - MFO 5/1/22

A lot has been written on allocation/balanced portfolios/funds. They have been declared dead and/or born again. This year has been especially difficult as both stocks and bonds have suffered (some bonds have suffered more than some stocks). If you have held them, options include tax-swaps in taxable accounts (for recent purchases) and/or adding to them little bit knowing that the worst may not be over. A recent development is the multi-asset funds that add some alternatives into the mix, so they become stock-bond-alternatives funds (example FMSDX, etc); the stocks are more aggressive, bonds have more HYs and/or EMs, and alternatives may include commodities and/or hedge-fund like strategies.

Well, @Devo has done a deep dive into the history of typical 60-40 portfolios and has some future ideas on them in MFO 5/1/22. There are several interesting tables but they are not images that can be linked here with the Image-tool, so you will have to check them out in the link blow.
https://www.mutualfundobserver.com/2022/05/to-win-today-embrace-powerlessness-and-dive-deep-into-the-portfolio/

Good compilation again, @David_Snowball. https://www.mutualfundobserver.com/issue/may-2022/
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Comments

  • Thank you and glad you found this useful.
  • Just finished reading it. I also recommend reading all of his articles since he came on board.

    I don't have much in bonds. But I am still under -10% YTD due to long time positions in dividend payers, dividend growers, value, infrastructure, utilities, and consumer defensive.
  • edited May 6
    Bonds and stocks are falling at the same time. Both are down 9-11%. No protection from bonds in this rising rate environment. Energy, commodities, real asset, pm, and alternatives are doing better but they are volatile.

    This week the Fed is meeting and will hike the rate again. Most likely it will be 50 bps.
  • As of Thursday evening/Monday morning, the Calendar year total return drawdown for the 60/40 is about -13%

    The Vanguard Wellington down about -12% as of last night, in line with 60/40 give or take.
  • Looks like we have crossed the 15% loss mark for diversified portfolios ytd as of this morning.
  • EDOW has outperformed this year, but still lags FBALX over the 3 year period.
  • Looks like we have crossed the 15% loss mark for diversified portfolios ytd as of this morning.
    Sign!
  • A look at some multi-asset and moderate-allocation funds YTD (charts may default to 1 yr; max 5 tickers per chart).

    Multi-Asset, YTD
    VPGDX -8.44% (it had 9 lives but hopefully in final form now; a recent addition for me)
    BAICX -9.94%
    FMSDX -12.12% (a favorite)

    Moderate-Allocation, YTD
    JABAX -15.41%
    FBALX -15.10%
    VWELX -14.41% (bad timing to tilt to growth)
    VBINX -14.10% (sort of MA index)
    PRWCX -12.12%
    BALFX -11.15%
    DODBX -7.67% (beginner's luck with shorting? otherwise, among the most aggressive)

    It seems that moderate-allocation funds with growth tilt have decline more.

    Multi-asset & moderate-allocation https://stockcharts.com/h-perf/ui?s=FMSDX&compare=VPGDX,BAICX,VWELX,PRWCX&id=p34103650330

    Moderate-allocation https://stockcharts.com/h-perf/ui?s=BALFX&compare=DODBX,FBALX,JABAX,VBINX&id=p03435143469
  • thank you for posting all these multi asset and moderate allocation funds YTD returns. there is a lot to learn but not sure which of those lessons to carry forward. "Know thy risk appetite" (and then half it by 50% seems to be one).
  • ....Can't help myself:
  • edited May 10
    :)
  • For market historians I have a question. Have the first five months of 2022 been the worst start to any year for moderate and conservative allocation funds? Seems like a perfect storm. Is this time really different? Maybe.
  • I agree that nothing feels like business as usual. It's different for sure. Portfolio returns depend on *some* assets doing well. Nothing is.

    On the other question about the worst start to any year, I have read things to that effect, but don't have the long term intra-month data to substantiate that. (not that I am a market historian).
  • edited May 11
    I will look up the old data. I think that 1965-80 was a real stinker stretch for allocation/balanced funds and truly horrible for VWELX (it was a different kind of fund then). Only a few were around then - VWELX, FPURX, DODBX, LOMMX.
  • edited May 11
    Here are 2 charts for 1/1/65-12/31/80; unfortunately, M* removed the ability to put multiple tickers in these OLD charts. IMO 1974 was an UGLY start for anything.

    VWELX 1/1/65-12/31/80

    FPURX 1/1/65-12/31/80
  • The crash of 2008 and early 2009 was also tough for many balanced funds, particularly those that had sizable holdings in bonds other than treasuries.
  • Have the first five months of 2022 been the worst start to any year for moderate and conservative allocation funds?
    ISTM that while using calendar year boundaries for losses may make sense from a tax perspective, the market doesn't have that same level of respect for the calendar.

    That said, there's an obvious period to look at, albeit one very different from today: the 1930s.

    According to M* (old chart), VWELX lost 29.18% from 12/31/1931 through 5/31/1932. Keep in mind that M*'s data for this period seems to be monthly.

    So one should set the dates to show five steps, at the end of Jan, Feb, Mar, April, and May. For the old chart, that means using a start date of 1/1/1932, while the new interactive chart works with 12/31/1931 as the start date. Either way, 5/31/1932 is the end date.

    1974 was indeed an ugly year, but it took nine months to reach its nadir. Wellington was only off 9% by the end of May. Both 1932 and 1974 differ from 2022 in that our current market decline started this year, while the market had been declining for at least a year prior in the other periods. Our current decline may and probably does have longer to run.

    Wellington declined from the beginning of 1973 through Sept 1974. And it declined from its inception in mid-1929 through the middle of 1932. The former period was a deep recession; the latter the beginning of the Great Depression. The US has yet to enter a recession now.

    While those eras and in particular those years were significantly different from 2022, differences in Wellington then and now are less clear:

    Bogle said that "Wellington Fund has followed the same balanced approach to investing ever since it began operations in mid-1929." And it has paid quarterly divs since 1930.
  • edited May 11
    There are several differences between the OLD VWELX and NEW VWELX.

    OLD VWELX:

    ...was a LOAD fund. After the disaster in the 1970s. Bogle got fired from Wellington Management and started Vanguard. A new era began for funds.

    ...had a managed-distribution policy, whether earned or not. In those days, funds could make distributions from unrealized CGs without disclosing that those were really the ROCs. Rules were changed later. Now, mutual funds/OEFs typically don't use ROC distributions (although they could) but many CEFs do that.

    Bogle of course liked to say that it was the same old VWELX since 1929 but that was not the whole story, or as late PH used to say, there is that "rest of the story". Sure, from the sky/cloud level, it has followed the same balanced approach.

    http://johncbogle.com/speeches/JCB_WMC1203.pdf


  • Using the FPURX 1/1/65-12/31/80 chart from Yogi's post, I shrunk it to start 2/1/1970 and FPURX nearly tripled in the next eleven years and handily beat SPY. Not sure what conclusions one can make without digging deeper as to the workings of FPURX at that time that allowed that type of performance. Even if we know the answers, how can we use those answers to invest now?
  • edited May 11
    @BaluBalu, in the heady days of allocation/balanced funds, some even touted their performance beating SP500 with one hand tied in the back (i.e. 30-40% in bonds). Of course, that claim couldn't be sustained.

    FPURX now is also much different from the past. It used to have value tilt for equities but the new FPURX has been quite growthy for years (VWELX is going through that shift now but it chose a bad time for that). For the time period you looked at, there was no magic but FPURX lost much less than SP500 by 1974 - i.e. it came out way ahead by not losing that much in that bear stretch (1972-74).
  • edited May 11
    If so, then did bonds perform some usefulness? With rates already up quite a bit and the central banks around the world showing hyper sensitivity to inflation, may be now is not the time to abandon allocation funds category - hopefully, MOFO members get lucky to position themselves in the right funds.

    As an example, PRWCX, not withstanding its growth equity bias and higher P/E ratio compared to VWELX, FBALX, & FPURX, has performed well YTD relative to other allocation funds and SPY. A manager can pull different levers to come out ahead.
  • There are several differences between the OLD VWELX and NEW VWELX

    Most assuredly, as documented in the notes to the Bogle speech I cited. But rarely did those differences have any significant impact on total return performance then and now. It would be different if the fund had changed, say, from a 20/80 to a 60/40 fund over time. But it didn't.

    Loads: For many decades, funds with loads generally charged front end loads, and occasionally back end loads. These are not included in total return calculations. The loads that are included are annual fees used as loads, usually classified as 12b-1 charges. Those didn't exist prior to 1980. One might argue that loads made funds somewhat sticky, and this affected how the funds were managed. That's possible, but a bit of a stretch.

    What might be more significant is that expenses today are lower than they were in the past. As Bogle states in Postscript #1, Wellington's ER in 1951 was 0.55% and virtually the same (0.56%) in the mid 1970s. Today it is 0.24%. A real, quantifiable difference, but minuscule compared to the current 14% YTD loss.

    Managed payouts: Like front end loads, these don't directly affect total return figures, because return calculations assume all divs are reinvested, regardless of the source. Arguably they have both positive and negative indirect impacts albeit small on fund performance.

    The higher the payout, the more cash the fund must raise quarterly (forced sales?). OTOH, in Bogle's Postscript #2, competitors were infuriated at Wellington hiding ROC in divs. One infers they felt they were at a competitive disadvantage, i.e. Wellington's managed payouts made the fund more attractive (drew in more money). Presumably that would have helped Wellington with its cash needs for divs.

    All in all, managed payouts is not a difference between old and new that would have a significant impact on total returns then and now. Especially since Bogle noted that in 1950, when required to break down the div components, just 3¢ out of 90¢ in divs were from ROC.

    There is a difference that is significant. Not between old and new, but a difference unique to 1932 performance. In 1931, Wellington became defensive raising its cash allocation from 3% to 28% at year end (p. 6 of the Bogle speech). This cash drag going into 1932 slowed the losses. Had the fund been managed as "usual", it might have sustained losses much greater than the 29.18% it lost through May of 1932.

    And now you know ...
  • Thanks everyone for sharing your knowledge.

    LB
  • https://www.barrons.com/articles/the-60-40-portfolio-is-having-its-worst-year-ever-what-to-buy-instead-51652394644?mod=bol-social-tw

    "(Bold for YBB emphasis) The heyday of the 60/40 portfolio, an allocation of 60% stocks and 40% bonds, is over. According to Bank of America Securities, the popular investment strategy is having its worst year ever .....“Sustained weakness across bond and equity markets further supports the ‘end of 60/40′ thesis,” BofA analysts said in a report. “Adjusting for inflation, a 60/40 portfolio is on pace to lose 49% this year, which would be the worst annual return on record. The correlation between stocks and bonds turned positive in March and is now the highest in a quarter-century.”....."
  • Where is a safe haven when the asset class correlation between stocks and bonds break down and they move in the same direction? Cash in short term is okay but it lost its value to inflation at 7%. Energy and commodities are few sectors that are positive this year.
  • msf
    edited May 13
    BofA Securities, the same firm saying in 2019 that the 60/40 portfolio was dead. Imagine if you'd gone to cash then (as the Barron's article suggests) instead of earning double digit returns in 2020 and 2021.

    Admittedly that's an ad hominem remark; we should instead look at the numbers. Unfortunately the piece doesn't indicate the assumptions BofA made or the actual numbers it used. Instead, the piece presents general numbers (e.g. AGG loss of 10%) to give the reader the sense that the bottom line figure (49% projected loss) is correct. So I rolled my own.

    Here are some YTD numbers (through May 12, 2022, data from M*):
    50%-70% allocation category average: -12.44%
    VWELX (actively managed): -14.79
    VBIAX (index, 60/40): -15.01%

    Portfolio visualizer, using a 60/40 mix of VTSAX and AGG reports a -12.10% return through the end of April (rebalanced monthly), vs. a -12.20% return for VBIAX. Since VBIAX shows the worst return YTD anyway, we can use it as our metric. I took the -15.01% YTD figure and projected it out for the year.

    I used actual day count (7 days/week, 365 days) to get the fraction of the year so far. The Excel expression used was: YEARFRAC(DATE(2021,12,31),DATE(2022,5,12),1). The fraction of the year so far is 0.361644.

    To compute an annualized (extrapolated) return, one takes (1 + YTD) return and raises it to 1/fraction-of-year power. For example, if we were halfway through the year and had lost 1/3 of value, the projected value at the end of the year would be 2/3 x 2/3 = 4/9 of the original value.
    That's just (1 + YTD) to the power 1/½

    Here, the projected YE value is 84.99% raised to the 1/0.361644 power = 0.63781, or 63.78% of the starting value.

    Finally, we need to incorporate the effect of inflation. Here's the formula:
    image

    Solving for the 2022 inflation rate gives 25%. That is the annual inflation rate that BofA is assuming for Dec 31, 2021 through Dec 31, 2022. Does this pass the laugh test?

    This is so absurd that I did a streamlined sanity check. Please correct if anything looks wrong:

    YTD, down 15% in a bit over 4 months. Annualizing (three thirds of a year): 85% x 85% x 85% = 61.4%

    End of year real value: 61.4%/1.25% (for inflation) = 49%, i.e. a 51% loss of real value.
    Pretty close to the 49% projected.

    Edit: I've been trying to guess how BofA could possibly have come up with a 25% inflation rate. I finally came up with a possibility, though it is astoundingly stupid:

    8.3% (annualized) inflation rate in April x 3 (since Jan-April is 1/3 of the year) ≈ 25%
  • The future unveils itself one day at a time to everyone. I find little value in listening to extreme bullish or bearish analysts. They know nothing more than you
  • Safe haven : when the markets are no walk in the park, go for an actual walk in the park.
  • edited May 13
    I've read numerous stories about the imminent death of the 60/40 portfolio during the past decade.
    All these prognosticators were wrong.
    I realize there has been much turmoil in both the stock and bond markets recently.
    So, perhaps 'this time is different?' ¹
    Although I don't expect spectacular performance for the 60/40 portfolio over the next decade,
    what are viable alternatives for typical investors?
    Peter Bernstein suggested a 75/25 portfolio of stocks/cash equivalents as an alternative to the 60/40 portfolio. Ben Carlson wrote a recent article about this portfolio.
    Link



    ¹ "The four most costly words in the annals of investing" according to John Templeton.
  • Peter Bernstein suggested a 75/25 portfolio of stocks/cash equivalents

    Not much different from Buffett's suggestion to skip bonds (2013 Berkshire Hathaway letter), except that Buffett felt 10% in cash equivalents (short term bonds) was sufficient.
    My money, I should add, is where my mouth is: What I advise here is essentially identical to certain instructions I’ve laid out in my will. One bequest provides that cash will be delivered to a trustee for my wife’s benefit. (I have to use cash for individual bequests, because all of my Berkshire shares will be fully distributed to certain philanthropic organizations over the ten years following the closing of my estate.) My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers.
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