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I bought FSRRX for my Catastrophe Portfolio after reading Bolin's outstanding commentary. I don't see how we can avoid inflation. I don't see anything going down in price. The Fed has kept interest low, but labor rates and shortages are not going away.
The Fund seeks real return consistent with reasonable investment risk. The Fund allocates its assets among four investment categories:
inflation-protected debt securities,
commodity-linked notes and related investments, and
real estate investment trusts and other real estate related investments.
How does it compare to PIMCO’s PCRAX? That fund was a darling in the early 2000s, but as I recall, then ran afoul of the regulator.
Here are FSRRX stats (source Portfolio Visualizer):
FSRRX has had no clear advantage over a conservatively allocated fund similar to VWINX.
It's almost 32% draw down in July of 2008 took over 2 years to dig out of. It Real return (after inflation) is barely 2% over the last 15 years. I believe Fidelity offers MM Mutual funds that might achieve this.
As a hedge against bad outcomes what about PRPFX..not perfect but better at dealing with equity market catastrophes.
Should inflation pick up (OP: " I don't see how we can avoid inflation"), this could all flip. Unfortunately, what appears to be the granddaddy of inflation friendly funds, PRPFX, goes back only to 1982, after inflation started receding. So one can't look easily to historical data.
Here's a recent M* column suggesting 22 funds that could be considered diversified real asset funds designed to handle bouts of inflation:
Now's the Time to Consider These Inflation Protection Strategies
I can't disagree with the view that inflation seems inevitable (starting with wage inflation because of the difficulty hiring these days)...but OTOH I can recall commentators throwing darts at VWINX for at least a decade over the same concern (granted, with minimal inflation headwinds over that stretch). It's navigated pretty well, including this year. Gun to head, VWINX still beats real asset funds over the next decade, even if inflation pans out to a foreseeable extent. My personal strategy is to hold VWINX as a core holding, never sold a share, but supplement with GUNR when opportunity permits.
¹This is not unusual for traditional 40/60 funds. Only 4 out of 120 (30%-50% allocation) funds have portfolios that are in growth style boxes (per M* screener).
The writer speaks in sweeping generalities without substantiation:
Speaking of the late 70s and inverted yield curves, banks (notably S&Ls) took a beating, as they lent out long term money at lower rates while borrowing short term money (via deposit accounts) at higher rates. SA notes that VWINX concentrates on financials, but doesn't break it down further. (According to its latest semiannual report, about half of the fund's financial sector holdings are in banks: JPM, BAC, MS, TFC.) Personally, I have faith in Wellington Management to navigate this risk.
- the fact that the Fed Funds rate will stay at or near zero for at least the next few years [as of Sept 2020].
- Higher inflation likely leads to higher interest rates and a steeper yield curve?
Facts don't change, but predictions do as events change or more data is known. In June, "The central bank forecast it would raise interest rates twice by the end of 2023 after previously estimating there would be no interest rate hike until 2024."
Most recently (Sept), "Just over 70 per cent of [leading academic economists surveyed by FT] believe the Fed will raise rates by at least a quarter of a percentage point in 2022, with almost 20 per cent expecting the move to come in the first six months of the year. That is far earlier than the 2023 lift-off from today’s near-zero levels that Fed officials pencilled in back in June."
Wellesley traditionally holds a longer duration portfolio than is typical for its peers. That would hurt Wellesley if you believe this generalization linking interest rates and yield curves and that it will hold the next time.
However, when we look at the last sharp spike in interest rates (1978-1981) we see a very different picture. Rate going up across all maturities (which would hurt all high grade bonds), but with the yield curve inverting - the opposite of steepening. (Inverted yield curves often presage recessions, which in turn can be triggered by high inflation and lower spending.)
M* has an actual analysis of real performance data for VWINX to see how the fund responds to rising interest rates.
What M* found was that Aug-Dec 2016, "as the price of long-dated bonds fell, Vanguard Wellesley Income lagged its average category peer by 1.2 percentage points." VWINX lost money over that period while on average its peers eeked out gains.
OTOH, "over the more recent January-October 2018 interest-rate climb ... [VWINX] modestly outpaced the average of that group by 0.5 percentage points. Even with its longer duration, the strategy’s lower exposure to weaker-performing non-U.S. equities gave it a bump.
Hmm, a lesser exposure to foreign equities. SA didn't pick up on this. Could help again if rates climb globally, but hurt if rates rise disproportionately in the US. Regardless, we're again talking about relative performance against peers, not measuring against inflation oriented funds.
I certainly wouldn't sell VWINX. Though that's different from saying that this fund is designed to weather extended bouts of inflation well.
FSRRX, which has been in existence since 2005 and was tested very early in it's short life when in June of 2008 it slide nearly 32%. Comparing FSRRX to PRRRX, the Pimco Real Return fund provides a smoother ride. PRRRX also proved itself better choice than a pure TIPS etf (TIPS).
I guess my biggest complaint about FSRRX is its periodic drawdown that long term investors would be negatively impacted by.
Yes - But the max drawdown (14.5%) appears to have come in a single quarter (Qtr 1 2020). By contrast, Price’s TMSRX lost 3.2% over that quarter. To be fair, that brief period was particularly cruel to funds holding certain types of fixed income, as a severe liquidity crunch threatened until emergency measures by the Fed to prop up corporate debt were undertaken.
Not to suggest FSRRX sn’t still a fine fund. Just to say that along with 2008 (if a fund’s history extends back that far), Qtr 1 of 2020 is another place to look if seeking out maximum historical volatility.
For the roughly 30% of portfolio devoted to “alternatives” I like to include at least 2 (preferably 3) different funds, as the approaches and success achieved under varying market conditions vary greatly among the alternatives. None, AFAIK, have perfected the “secret sauce” for managing risk in down markets.
I like FSRRX, VCMDX, COM, and EIPCX/EAPCX to supplement a portfolio during different times such as inflation.
Took a closer look at FSRRX, a fund that I owned many years ago. Truly is outperforming in its category during an inflationary period and worth a closer look for anyone with a strategy of owning specific inflationary period holdings.
That said I'm not as psyched out over inflation as many on forums are, and I'm also not inclined to BUY a fund that I think will outperform ONLY in an (albeit potentially transitory) inflationary period. I simply just did the fundamental move - I added more stock exposure via Total Mrkt/S&P index funds. Yeah, FSRRX is less effective equity and less risk, but increased inflation means increased stock exposure to me, and I'll take their 18% YTD TRs and higher risk over FSRRX's 13% YTD TR every time.