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"Defensive" funds?

edited August 2013 in Fund Discussions
I'm not a market timer so I keep my allocations static, rebalancing once or twice a year. However, when I believe the market is at or near a top, I will move a small portion of my equity funds into what I like to call defensive mutual funds. Two that come to mind are YACKX and YAFFX. But when I plot these funds' performance against a domestic equities ETF (let's say VTI), I see that VTI had outperformed both of these mutual funds during a major market downdraft (I use October 1, 2007 to March 9, 2009). If I want to move a portion of my domestic equity funds into "defensive" holdings, should I continue to try to find "defensive" mutual funds or should I just go with an index ETF like VTI? Thanks!


  • edited August 2013
    Charles' ratings can be useful here. Using the PDF version, you can see various funds using the Edit/Find function. Funds whose maximum drawdown happened on 02/09 can be compared:
    GLRBX -17.5
    VWINX -18.8
    MFLDX -22.6
    FPACX -22.8
    YACKX -41
    SP500 -50.9

    You can see why FPACX is frequently mentioned on this board. Note that when comparing funds you need to do so for funds of the same age - 5year vs. 5 year etc. - the exception being maximum drawdown at a specific date.

    I would be careful of balanced funds here, as we may be heading into a situation where both equities and bonds fall together.

    Good luck - let us know what you turn up. Chap
  • edited August 2013

    I do not know where you got the impression that Yacktman's funds were defensive. Both YACKX and YAFFX suffered horrific drawdown in the last bear market, shedding over 50% of their NAV from 2007 through 2008. In fact, I believe they lost more than SPY (the S&P 500 index fund).

    There are numerous defensive mutual funds that lost less than SPY during the 2007 - 2008 bear market but you have to be willing to accept subpar performance on the way up. Funds that immediately come to mind which are defensive yet still give decent performance on the upside are (both balanced funds and pure equity MFs):

    QRSVX: Queens Road Small Cap Value. That said, NO SC fund is truly defensive.
    PVFIX:Pinnacle Value
    FPACX:F P A Crescent
    ICMBX:Intrepid Capital
    FOBAX:Tributary Balanced
    XLP: SPDR Consumer Staples ETF
    XLV: SPDR Health Care ETF

    Finally, I strongly suspect that the new Oakseed Fund SEEDX that David Snowball has introduced to this website will also prove to be defensive in a bear market. I base this guess on their Top 25 holdings and their performance in the last 6-7% swoon.


  • using figures from ezbacktest and betas from yahoo for 5 year period results show:

    FPACX beta 0.92 total return 47.4%
    YACKX beta 0.93 total return 108.3%
    In this case i prefer an OFFENSIVE FUND.
  • Hi, Bitzer!

    If by "defensive" you mean "weakly correlated to the stock market," you might benefit by thinking about how equity-oriented funds minimize their correlation.

    Some choose to short individual stocks, which allows them to maintain an effective (called "net") exposure that might be in the 40-60% range. Representative of such funds is ASTON/River Road Long-Short (ARLSX), LS Opportunity (LSOFX), RiverPark Long-Short Opportunities (RLSFX) and Wasatch Long-Short (FMLSX).

    Some choose to sell options which generate income and rise in value, generally, when volatility is climbing. Representative of such funds is RiverNorth Dynamic Buy-Write (RNBWX), RiverPark Gargolye Hedged Value (RGHVX) and Bridgeway Managed Volatility (BRBPX).

    Some choose to maintain high cash balances when the market does not represent a screaming buy. Representative funds include Bretton Fund (BRTNX), Cook and Bynum (COBYX), Pinnacle Value (PVFIX), all of the F P A funds (including Crescent and International Value), and Tilson Dividend (TILDX).

    Some, of course, have hybrid stock/bond portfolios. I'd be cautious there about anything holding a bond portfolio with a maturity of more than five years. You could do worse than a fund like Greenspring (GRSPX) or Osterweis Strategic Investment (OSTVX).

    Each approach has its special drawbacks and none are pure magic, but any of the strategies might work to help you find a long-term holding that you might choose to enlarge when your anxiety climbs.

    For what it's worth,

  • edited August 2013
    In equity land, I'd look for high-quality portfolios, which are less prone to big drawdowns; some of them accumulate cash when there are no good investments according to those managers' disciplines. GMO, which maintains that they're still undervalued compared to the rest of the market, says high cash flow, profitability over full cycles, and a competitive advantage of some kind are what makes a high quality stock.

    Examples are the FMI funds, VDIGX, PRBLX, and BBTEX (now closed but that shop, BBH, has a new global fund, BBGNX). The Yacktman funds may be in that general category ... I'm not very familiar with them.
  • I recommend the Good Harbor US Tactical Core fund. They have been operating via a managed account since 2003 and recently introduced a mutual fund wrapper.

  • beebee
    edited August 2013
    Reply to @David_Snowball:

    Thanks David for this break down of categories as well as fund choices.

    Funds that choose to have a high cash balance seem interesting to me. I came across another that might worth considering:
    -Hennessy Total Return Investor HDOGX - 49% Cash/ 50% Large Value Equities with a razor thin .08% ER also NTF. An investor is really paying a lot in expenses and fees for this fund to hold cash.

    Could you also chime in on the concept of High Alpha/ Low Beta funds. I own TOLSX which exhibits these two risk measures without the use of high cash, hedging, shorts, puts etc.
  • Reply to @Hrux:

    I'd like to add it has demonstrated a 5 year upside capture of 98% and 5 year downside capture of 42%.
  • What about Robeco Boston Partners L/S, BPLEX? BPRRX is open to new investors
  • SPLV - PowerShares S&P 500 Low Volatility (SPLV)
  • Reply to @Hrux: Very interesting!! Any way to buy this fund with less than $5M without paying 5.75% load?
  • edited August 2013
    Over the years, I have concluded that my most defensive yet profitable pure equity fund is VGHCX. Big, lumbering pharma is a keeper. It's one of the places people go when they're nervous.
  • Reply to @andrei:

    FYI, it is available without a load at Schwab. I have GHUAX. No load no fee
  • Reply to @DlphcOracl:

    In 2007 YAFFX gained 3.46% vs 5.49% for S&P 500.

    In 2008 YAFFX lost 23.48% vs 37% for S&P 500.

    In 2009 YAFFX gained 62.76% vs 26.46% for S&P 500.

    In don't know what devastating disasters y'all talking about!
  • Reply to @Hrux:

    Thank you:)
  • Reply to @Investor:

    You didn't read my post carefully. I stated that the Yacktman funds had a drawdown of over 50% during the 2007 to March 2009 bear market. These are the relevant NAVs for both funds:

    YAFFX: 10/05/07: $17.07
    03/09/09: $7.55
    Maximum drawdown: -55.7%

    YACKX: 10/09/07: $16.81
    03/09/09: $7.21
    Maximum drawdown: -57%

    That is what I am talking about.
  • edited August 2013
    Reply to @DlphcOracl: There is something wrong with your numbers or you are probably not including the dividends.

    YAFFX lost 43.78% from 10/05/07 to 03/09/09
    YACKX lost 46.66% from 10/09/07 to 03/09/09

    Yes these are big losses but

    VFINX lost 55.25% from 10/09/07 to 03/09/07

    (I am using adjusted historical prices from Yahoo finance that takes into consideration the dividends and other distributions)

    Remember this is an equity fund. For an equity fund that is very good. If this is not defensive enough for you. A couple of allocation funds:

    VWINX lost 21.38% from 10/09/07 to 03/09/09
    GLRBX lost 19.45% from 10/09/07 to 03/09/09
    FPACX lost 27.91% from 10/09/07 to 03/09/09

    But these fund had about 40-60% bonds (in particular the first 2 having a lot of treasury bonds) which benefited from safe haven demand and declining interest rates. Obviously, in the next 1 year these funds also did not participate in the rally as much.

    Now, if you are a good forecaster that we are to have a 2008 like drop any time soon, go ahead an invest in extra conservative funds. If you think we might have some garden variety corrections and 2008 like drops are non likely to happen now than invest in something that has more upside while the manager has demonstrated that he has some draw down protection and concern about permanent losses. This creates an asymmetry in upside vs downside which I desire. Even with the occasional large drop, you end up ahead with these type of managers over a full cycle. I think Yacktman is such a manager.

    Now I also do have GLRBX. It is also long term hold. It makes up about 9% of my portfolio and is similar in size to my holding of YAFFX. My goal with this is moderate gain in good times and have a level 2 liquidity reserve to be able to invest more in equities after 2008 like substantial losses. My level 1 liquidity reserve is RPHYX and some cash at this time since I sold other specific bond funds. The size of L1 reserve is around 10% as well at this time.
  • Reply to @Investor:

    The difference in our calculation for the maximum drawdown is indeed due to the dividends, which I did not account for. Your numbers are correct.

    Our "debate" is really a matter of viewpoint ---- is the glass half full or half empty? If you compare the 44-47% drawdowns for the Yacktman funds against the 55% drawdown on an S&P 500 index fund or ETF, I guess one could call it "defensive". However, I am thinking in absolute rather than relative terms and do not consider ANY fund or ETF that loses 45% of its NAV in 18 months as being "defensive".

    One area of agreement ---- if one is looking for a buy-and-hold MF and can ride out these bear market drawdowns, the Yacktman funds are among the best.

    P.S. I have no idea whether another bear market correction of 40 to 55% in the S&P 500 is on the horizon and do not use any prognostications in assembling my portfolio. All of these talking head prognostications are useless.
  • edited August 2013
    Thanks to all for all of the great information posted so far. I have one question and one comment which, I suppose, are primarily directed at DlphcOracl and Investor:

    I noticed that comments made by DlphcOracl and Investor earlier today were not posted in chronological order. In other words, their comments made today were posted earlier in this thread than comments made by others yesterday. Are comments not always posted chronologically here? The only reason I ask is because I always look to the bottom of a thread for the most recent comments and I nearly missed those made earlier today by Dlphc and Investor.

    Although all may not agree on my categories, I maintain static allocations in the following seven areas:

    Alternative (e.g. BPLSX and FMLSX)
    Bonds (mostly domestic [including TIPs and high yield] and some foreign)
    Domestic stocks
    Emerging markets
    Flexible (e.g. PAUIX and SGENX)
    International stocks (e.g. ARTKX)
    Real estate (VNQ)
    Target date funds (Vanguard and T Rowe Price)

    In an earlier post, Investor described my situation exactly: "If you think we might have some garden variety corrections and 2008 like drops are non likely to happen now than invest in something that has more upside while the manager has demonstrated that he has some draw down protection and concern about permanent losses. This creates an asymmetry in upside vs downside which I desire. Even with the occasional large drop, you end up ahead with these type of managers over a full cycle. I think Yacktman is such a manager."

    In other words, I'm looking for a way to find what I would call "defensive" funds within one of my given categories. These would be funds that Investor describes as funds that I would end up ahead with over a full cycle. For example, within my domestic stocks category would the Yacktman funds be defensive or should I just purchase an index fund like VTI?

    Thanks again!

  • beebee
    edited August 2013
    Reply to @Bitzer:

    Hi Bitzer, When threads get long, I agree, it is a chore to find the most recently added comments. There is a system in place to help. Someone can probably explain it better than me, but there are yellow icons that look like this:

    and this.

    Your comment happen to be at the end of the thread since you did not hit the reply button. it also happens to be the last comment. A yellow circle with an "R" is a recent comment and it appears elsewhere since that contributor hit the reply button branching their comments somewhere other than the end of the thread.

    As far as YACKX is conserned, Don Yatchman is less involved in this fund now that he has retired and the fund has been bought by a bigger fish. His son is supposedly still closely involved, but I would watch this fund closely in light of these changes.
  • edited August 2013
    Reply to @Bitzer: Same here, the new comments on threads gets me too. I like the funds listed in your seven areas (could do w/o target funds unless its the only offering in an employee sponsored account). It's not clear what your allocation to TIPs is, but just be mindful they can be sensitive to interest rate risk. A good example is the recent behavior of PCLDX vs. HACMX (or PCRDX); the former invests TIPs while the latter uses short-term income instead.

    Really like your list. It looks like mine:)
  • edited August 2013
    Reply to @Bitzer: If you use the "Reply" in individual posts (all except the opening post of the thread has this), your reply will be posted under that post. It is in a tree structure in a way.

    Look for image in the thread for unread posts. Notice that the icon is going to disappear if you close and re-open the thread. Also image icon indicates Recent posts in the thread. Another icon image is used to indicate latest post in the thread.
  • edited August 2013
    Reply to @bee:
    As far as YACKX is conserned, Don Yatchman is less involved in this fund now that he has retired and the fund has been bought by a bigger fish. His son is supposedly still closely involved, but I would watch this fund closely in light of these changes.
    I am watching for this but not alarmed at all. I personally voted against the transition of funds to AMG. However, it seems that the transition has been handled well and the character has not changed. Yacktman is still providing the advisory and management services and AMG is handling the other administrative tasks.

    Don Yacktman has relinquished the CIO duties to his son Stephen A. Yacktman which was co-portfolio manager for a long time (since 2002) and they have another manager, Jason Subotky since the beginning of 2010. I bet his son was the active one recently and this has formalized it a bit further. Don has not left the firm. He is still involved in the firm and idea generation but not as much as day to day management. With 7% turnover in YACKX and 3% turnover in YAFFX, I do not think there is much daily management going on right now. About 20% cash is waiting for a dip etc. to deploy but even with that cash drag it is doing better than S&P 500 YTD. Obviously, there is no guarantee but I like what I see so far.
  • edited August 2013
    @Investor and bee Thanks. I usually don't login to read posts here, but it looks like I should, to keep track of which threads and posts that I haven't read yet.

    @Tony Thanks for the compliment! For commodities I use PCLDX (just a hunch as to why I chose it over PCRDX, but it has worked out so far), DBC and FSDPX. I know FSDPX isn't really a commodities play, but I like it anyway.

    Yes, I'm aware of the TIPs interest rate risk. That is evident in the recent poor performance of the Swensen-Yale ETF portfolio. For TIPS, I use an ETF and PRAIX. PRAIX was great until it wasn't...another incidence of my getting burned by PIMCO rockstars and their "hocus pocus".

    I do want to say that I spend a fair amount of time managing investments and this is one of the two best forums around. The other is Bogleheads, but anyone who mentions mutual funds there will get flamed.
  • Reply to @David_Snowball: Hi David, i own fpacx, i own grspx, and i own ostvx thanks to your profile a few years ago. i was hesitant about ostvx because of the expense ratio, but they are bringing it down.i am very happy with its performance and I thank you for the profile on it. I just today bought shares in fpivx, which you also profiled. THANKS!!
  • Reply to @ducrow: If you capitalize your mutual fund tickers they can become a clickable link and we can also hover on the link to get the name of the fund. I am posting them capitalized here: FPACX, GRSPX, OSTVX
  • Reply to @Investor: Concur with your assessment on Yacktman funds - solid funds.
  • Reply to @JoeNoEskimo:
    Ha, if only, meaning not as much downside protection as one would have thought and might hope. Anyone who piled into the new (or not so new) min-vol ETFs in March and April, and many did, has been dismayed by their drop and persistence. Cf SPLV and SDY just to get a sense. There have been some good articles explaining the hidden risks (maybe if not so hidden --- if I had had more common sense, maybe I would've figured it out too), but I am having trouble finding them just now. Rekenthaler at M*, I believe, was one good arguer (as always). I am bailing out of most low-vol ETFs, or oding so partially, as soon as they're back to break-even, and like everyone here (only maybe older) shall renew my search for good downside behaviors and ulcer protections.

    Although neither delphic nor oracular I know enough to look *only* at growth-of-10k graphs showing the ancient miracle of compounding and dividends.

    One obvious addition to Snowball's helpful post above is also to look for managers/funds who think and try to choose defensively in the first place and from the getgo, meaning TWEIX, JENSX, GABEX, PRBLX, in addition to the Jameses, Yacktmans and Romick and colleagues. If/when they steeply dive they often have rather faster snapbacks. There are others, of course. M* lets you freely look at upside/downside ratios, Lipper has preservation stars, etc.
  • Reply to @davidrmoran: No vehicle is perfect. SPLV holds a heavy weighting (30%) to utilities, and they had a rough patch. Another 20% is currently allocated to Consumer Defensive, 12% Industrials, and 10% to pharma. Its not "hedged".

    That being said, there are far worse places to invest.


    Top 15 Holdings

    Johnson & Johnson
    NextEra Energy Inc
    DTE Energy Holding Company
    Consolidated Edison, Inc.
    Kellogg Company
    General Mills, Inc.
    Clorox Company
    Dominion Resources Inc
    PepsiCo Inc
    Wisconsin Energy Corporation
    Southern Co
    The Hershey Company
    PPL Corp
    SCANA Corp
    NiSource Inc
  • Reply to @JoeNoEskimo:

    found it:

    Rekenthaler: … I’m suspicious of low-volatility funds because I remember something actually somewhat similar 20 years ago in the early 1990s. Utility funds and other low-volatility funds at the time had the best 10-year track records. They were not only the lowest in volatility. They had the highest returns. They were hogging the Morningstar 5-star ratings as well as any other risk-adjusted returns, and a lot of money flowed into them. And they got whacked in 1994 when interest rates rose.
    … The timing feels bad to me. It feels like 20 years later. Interest had been dropping for a decade. That benefits these low-volatility investments which tend to be interest-rate-sensitive, and they got whacked when rates rose. Now we’ve had a 30-year period basically where rates have come down and maybe they’re starting to rise, and guess what, these strategies are being promoted. So the timing feels wrong to me. I think this is not the time I would be enthusiastic about them.
    … these things tend to have higher-dividend, slower-growing companies, mature companies, so they act more like bonds. It’s less of a growth story. In some cases, when you get into the traditional utilities, they really are surrogate bonds.
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