I have a M* watch list of alternative type funds. I'm intrigued by the idea of a fund being able to navigate different economic cycles to give steady positive results. The last 3 months, both the bond and stock markets have been pretty volatile. So short term results for these funds, though not a true testament of the fund, are pretty interesting. Charles could do a much better analysis the last 3 months, but here is some simple comparisons.
I'll add VFINX as a market comparison and FPACX, one of my favorite funds where the manager has great flexibility. Ranked by best 1 month and worst 1 month.
comps: 1m 3m
VFINX -3.1 2.9
FPACX -1.8 3.0
best: 1m 3m
HSGFX 2.4 0.4
MFLDX -0.6 2.2
WBLSX -0.8 2.1
HSTRX -0.9 -6.5
RGHVX -1.6 2.5
worst: 1m 3m
AQRIX -8.9 -9.6
ABRIX -5.8 -5.4
PAUDX -5.1 -5.9
PRPFX -4.9 -8.1
PASDX -4.8 -4.2
others on my watch list that fell in the middle of best and worst: PGDPX, ARLSX
My take-away from this is that the much talked about alternatives just didn't hold up (AQRIX, ABRIX, PAUDX, PRPFX). My favorite manager and fund, FPACX, did just fine, which makes me think why not just stick with the tried and true performer. I would never touch HSGFX again, just because it only does well in bear markets - but in this comparison it did well. MFLDX is a very nice alternative fund as many here have said in the past. And lastly, I bought into RGHVX after David's commentary on the fund. It has been relatively volatile, but looking back 1 and 3 months, has weathered the storm fairly well.
Comments
More soon,
David
IMHO, the participants here are overlooking one of the best alternative funds out there. I dislike that they use the term "absolute" in the fund description as they do not go short. The Wells Fargo Absolute Return fund is managed by one of the best firms (GMO) and managers (Inker) in the biz.
One thing I like so much about GMO is that is has both passive and active elements. It is passive in the sense that they believe that asset classes revert to the average over a full business cycle. If you buy them at below average valuations, you can expect above average returns. They are also continually exploring structural reasons for undervaluation so they are not just blindly investing in something that is cheap for a reason (e.g. are profit margins elevated because of a structural change the has permanently altered them). No doubt it is active, but at least taking out some of the forecasting element. But at the same time, not blindly investing in stock at any price.
An investor would be wise to check out this fund! FYI, I dislike most if not all long short funds as I do not think they have the ability to time the ins and outs consistently. I do like Arnott's approach with PAUIX. I do not care for MFLDX now that they have been purchased by NY Life as IMO they care more about fee generation than shareholders best interests.
As for a static allocation it does not get any better than PRPFX (well actually Harry Browne's true PP consisting of equal parts gold, LT treasuries, ST treasuries and equity). It is structured in a way to deal with deflation, inflation, prosperity and recessions. No one can guess the future which is why this fund is so appealing. I think most on this forum do not fully comprehend the intricacies here and encourage you to read up on the PP at this blog: http://crawlingroad.com/blog/
I have also researched quite a few tactical asset allocation funds and like these to fulfill a portion of the stock component of a portfolio as they can capture most of the upside while dampening downside volatility. The three that I like are Good Harbor US Tactical Core, F Squared Premium and Darwin funds. See here:
http://www.goodharborfinancial.com/GHUSTCoreA_Current.pdf
http://f-squaredinvestments.com/wp-content/uploads/2013/01/AlphaSector-Premium-Index-033120131.pdf
http://www.macquarieprivatewealth.ca/specialist/darwin/strategies
As for the premise behind global buy hold rebalance stock bond portfolios I am not a believer that the next 10-15 years this is a wise approach. I would also consider the Gateway fund as a diversifier for a trendless market. It us important to know how all the pieces work as a whole when putting these together. Good luck
This may result in some interesting responses from other forum members...
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"I have also researched quite a few tactical asset allocation funds"
Look at the GTAA etf. Some of these tactical allocation funds have done okay, some have done okay for periods but I don't think I've seen one yet that has been consistently impressive (considering what one should expect of it.) The funds you mention are new and might be great, but they don't have much of a record as mutual funds.
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"As for a static allocation it does not get any better than PRPFX"
Well, aside from recently. It's an autopilot/static fund and we live in interesting times. Personally, I'd rather be able to be somewhat flexible.
Scott,
I'm quite familiar with Meb Faber's GTAA and his white papers on his 200 dma strategy. Although there is nothing magical about them both the Good Harbor and F Squared funds have been operating as managed funds for quite some time demonstrating live track records through bear and bull markets versus some back tested BS paper theoretical result.
AND Yes I am quite amused by the ignorance of many past comments on this forum about the Permanent Portfolio. It is quite obvious the mechanics are not understood. People cannot look at the asset class in isolation and need to comprehend how it works as a unit. Seriously you need to read up on the concept and theories behind Harry Browne's PP at the crawling road PP
I hope whatever flexible portfolio you administer is capable of dealing with deflation, inflation, recessions and prosperity. From what I've seen not many are structured to handle deflation and recessions.
You noted: " Yes I am quite amused by the ignorance of many past comments on this forum about the Permanent Portfolio. It is quite obvious the mechanics are not understood. People cannot look at the asset class in isolation and need to comprehend how it works as a unit. Seriously you need to read up on the concept and theories behind Harry Browne's PP at the crawling road PP."
Via a major house cleaning in April, we gave away all of our Harry Browne books that had rested in the basement for too many years. We had also deleted the "crawling road" and "Bogleheads" discussions of replicating a permanent portfolio method via etf's, etc., from our too long list of favorite places on the net.
I suggest that you start a thread for a complete discussion of the permanent portfolio methodology with your opening presentation of the mechanics, concept and theories; so that we may have a concrete starting point.
Such a presentation and discussion is the basis for this forum site.
Regards,
Catch
If you want to be spokesperson for Mr. Cuggino's fund, go ahead. Truth is a great many different investing approaches have been advocated in this forum. Many, including Rono and BobC, have spoken quite favorably of PRPFX. And many others, including Dr. Snowball and MikeM, have spoken equally persuasively against it. Same is true of other styles - be that passive stock indexing, high yield bonds, target date funds, Hussman's funds, etc. ..... ad infinitive. Here's a link to David's April 1, 2012 Commentary in which he raises serious issues with the fund and its manager Michael Cuggino. Perhaps you'd care to address some of his concerns? http://www.mutualfundobserver.com/2012/04/april-1-2012/
My own indictment of most investors today (and myself) is that instant access to charts, bars, graphs, star-ratings and other forms of "evaluation" have made it difficult for most of us to stay with any style of investment that hasn't produced market beating returns over recent time - more an indictment of the times I think.
Catch's suggestion makes great sense if you want to continue to beat this dog to death. But why you have chosen to play Russian Roulette with a loaded term like "ignorance" I have no idea ......
I've read and understand the permanent portfolio theory. I held PRPFX for many years but traded it for a dividend total return type fund, PGDPX. I understand the 2 funds are apples and oranges. I think PP is a great approach over long time periods and if you want a steady fund for 20-30 years you may not do much better. But my belief is there is a mean return for any approach and over the last 10-15 years PP has performed above it's expected average. Gold and treasuries have propelled this theory to over reaching returns and I believe the economic cycle will bring it back to the 5-7% average expected from a fund like PRPFX. My guess is PP will have some pretty low returns over the next 10 years to bring returns back to the mean.
In reading your thoughts both here and in your other posts, I think we are very much on the same investing page. I too invest with Arnott and Romick but also with flexible managed funds, FAAFX and MACSX. I also prefer funds managers that put capital preservation first and foremost with good upside downside capture ratios. Managers with funds like YAFFX, ARIVX, ODVYX.
Looking forward for more posts from you.
I understand the rationale behind Harry Browne version, the difference between original concept and PRPFX implementation and various approximations of the original through ETFs (long threads at Bogleheads forum). Also, I see risk parity funds/asset allocation as a more modern day version of PP concept.
I have invested in PRPFX for a number of years and like many in the forum I have decided that I have better risk/return profile going forward through other funds in my portfolio. In the end, everyone makes their own decisions and we need to respect that. This forum has people with a bunch of styles of investing and people have been successful through luck or otherwise with some of them.
I'm incline to cut Hrux/ Heather some slack. I was young once, really I was
Heather, opinions aren't ignorant, just another point of view that may differ from your own. Please keep on posting. I can tell you have much to contribute.
Limiting volatility and down side risk while achieving benchmark results is also my biggest investment goal. I also am not a fan of long-short funds. The only funds on the list that I actually invest in are FPACX, PAUIX. Also RGHVX at a very low percentage. RGHVX is a newly acquired fund.
Yes, perhaps a wrong choice of words. My apologies.
Please be careful about risk parity. It will be very interesting to see how they hold up in next major decline.
FYI. Yes there are indeed forum members that understand the approach. I'm sorry to hear that you abandoned the PP. several others have done the same lately due to its recent 9% decline from peak to trough. Being the contrarian I would say short term it will recover. Anyway the true intent behind my comments is that IMO this is a much better investment than a boglehead approach or mimicking the latter using active funds like a few have suggested. But I do think there are better alternatives to the PP
(For reference: "Should you invest in one, or any, of these vehicles? If so, proceed with extreme care. There are three factors that should give you pause. ...")
Hi Heather,
I have linked below a Moringstar fund report on Wells Fargo Advantage Absolute Return Strategy Fund A (WARAX) for easy reference. It seems from review of this report the fund does short or holds a trust that does have some short positions. I thought you'd like to know in view of what you recently wrote.
"IMHO, the participants here are overlooking one of the best alternative funds out there. I dislike that they use the term "absolute" in the fund description as they do not go short. The Wells Fargo Absolute Return fund is managed by one of the best firms (GMO) and managers (Inker) in the biz."
http://quotes.morningstar.com/fund/f?t=warax®ion=USA
Cordially,
Skeeter
Allow me to clarify. I always encourage an investor to get as familiar as possible with the manager and their style. This GMO fund will not go aggressively short and will take minor hedging positions. IMO, hedging is much different than betting a stock price will decline. They will do the latter on the rarest of occasions.
Simply looking at a Morningstar data report does not tell the whole story Skeeter
Again, the core investment philosophy of GMO is that things revert to their mean over time. Basically, asset prices can diverge for short or even long periods of time from their long-term average rate but the further they diverge, the tighter the bungee cord becomes which will eventually snap them back in the direction of the mean. The bungee works in both directions so assets that are producing above average returns will revert downward and assets that are generating below average returns will eventually revert upward. The core belief in mean reversion is why GMO has long been considered a value-oriented investment shop.
The track record of the GMO Benchmark-Free Allocation strategy is rather impressive. First and foremost, it is impressive that GMO has been able to compound stock market beating returns without being fully invested in stocks and while only realizing about half the volatility of the S&P 500. This is why their Sharpe Ratio, a measure of return per unit of risk, is so much higher than that of the S&P 500. The key metric to drill into is the upside versus downside capture of the GMO Benchmark-Free Allocation strategy to the S&P 500. Although GMO was only able to capture roughly 60% of the upside of the S&P 500, which led to them lagging this arbitrary benchmark almost half the time, they were able to limit the downside capture to a little under 30% making the upside to downside capture ratio better than 2-1.
Heather, thank you for your reply in response to my posting the Morningstar report on WARAX. You seem to be a very knowledgeable, seasoned and versed fund investor. Shorting for defensive and hedging purposes, in my book, none the less entails short position(s) on the books. They still may be net long ... but, none the less, they have from the looks of things put short positions on their books. Therefore, they are not a pure long only fund. I am not by any measure saying it is not a fine fund; and, with this, it is a fund I plan to study in more detail and possible adding to my speciality fund sleeve.
Thanks again ...
Skeeter
Hi Skeeter,
My pleasure. Please keep in mind that this fund is also a fund of funds type structure so there is a layering of fees. Despite this the performance has been really good, IMO. It truly is all about mean reversion and investing utilizing their infamous 7 year forecast.
I really like the fund and have even broke my own rule by investing 20% in it. May even go higher. The alternatives to me are not appealing
Hi anfrei,
Thanks for your comments and perspective on the WARAX. Rest assured, I'll give it a good review before putting money to work. I am waiting for the S&P 500 Index to pull back to 1565 to 1575 before I venture into any new positions. However, Heather seems to be pretty happy with it thus far. So I'll score it one for, one aginst and one neutral.
Thanks agian ...
Skeeter
For this thread, I was only noting brief information relative to Harry Browne and related methodologies. Whatever any investor may take from Mr. Browne's writings, may be applied ,in part or whole; to a dynamic, suitable portfolio mix based upon the investor's risk and reward suitability.
We have not held PRPFX in any portfolio.
Regards,
Catch
FYI, GMO’s strategy for the GMO Benchmark free (Wells Fargo Absolute) is not one of high turnover generally, but can appear that way depending on the prevailing strategy. It’s tax efficiency will also vary. They could be holding stocks for years or they could be 100% taxable bonds. All depends on the most attractive asset classes. The fund is still relatively small. GMO’s entire firm is still only a fraction of the size of the PIMCO TR fund. I don’ t believe fund size will meaningfully alter the approach and has not since inception.
The fund you refer to (EAIFX) is basically a 60/40 fund with very little leeway for adjustment. In comparison the WF Absolute (benchmark free strategy) allows relief of any stock/bond required allocation constraint so you're comparing apples to oranges.
In summary, the only meaningful difference I would expect you to see between the internal BF fund and the WF version is a 30bp marketing/admin fee built into the expense ratio. Essentially you are paying 30bp more than you would to go to GMO direct for the same thing (which in my case is not possible due to the large minimum that GMO requires for their direct funds).
http://www.mutualfundobserver.com/discussions-3/#/discussion/comment/10384
Hi Hank,
The article you reference is quite lengthy and do not have time to address every element. However, I posted this in another thread and will repeat it here. IMO, The worst possible scenario for PP is probably rising real rates (especially rapid ones not based on growth ). If one believes that is in the cards the PP will have a tough time. I think the name says it all. It is meant to be a permanent strategy, but I think some mistakenly believe that there is less downside than there is because of its history.
Finding assets with zero correlation is the holy grail of investing. Many investors who understand the power of correlations will even buy an investment with dismal return prospects, if it can offer desirable correlations to a portfolio. However, what I love about the Permanent Portfolio is that I never know which malaise will afflict equities, so I have taken out insurance against the major macro economic problems that they will face. I see gold, bonds, and cash as insurance-like instruments that protect my stocks from economic malaise. Unlike traditional insurance, cash, gold, and bonds have all offered real returns over the last 40 years while still offering protection.
In the end despite the volatility of the individual components, the portfolio itself provides consistent inflation adjusted returns. It is important to note that every asset class in the portfolio has had times of strengths and times of weakness. No matter which asset class was doing well or poorly, the PP performed.