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(Should we) Give PAUIX Third Pillar strategy more time?
If you buy Rob Arnott's rationale, 2013 'was a daunting outlier,' during which downside diversification rivaled 1998 ( ...and similarly 1975, 1985 and '86).
While I am certainly disappointed with recent performance, the Q & A provides insight into his thinking...
Nice. I like that he focused on the diversification aspect of the fund, you know, the "Third Pillar" stuff, instead of "The 3-D Hurricane: Deficit, Debt, and Demographics," which Mr. Arnott and the folks at RA have railed-on for several years now.
The PIMCO gang seem to be wrong about their "macro" bets as often as they are correct. With all of their research and brainpower, if they can't get it right, who can? Makes me think more about indexing...
Thanks for posting the Q&A on All Asset and All Asset All Authority.
FWIW, I am still with my position in All Asset, PASAX, which is one of six funds found in the hybrid income sleeve of my portfolio. I am going to see how it does over the next couple of months. While others may have to cut and run from a short term performace measure by using my sleeve method of investing allows the stronger performing funds to support the weaker funds thus allowing the sleeve as a whole to propel the portfolio. With this, it remains a fund I am keeping under review. I have had it a good while; and, the purpose of the sleeve is to blend the different perspectives of the funds that it holds together as one.
More time? Is 10 years enough? I can't do the graph thing, but looking at VWELX vs PAUIX (cheating, perhaps, but I think it's about 60/40 in the first "two legs"), I get 7.85%vs 6.55% return and you rent them for 0.26% vs 1.23%. Arnott's Q&A seems really logical and you may need more than the past 10 years to make up your mind, and Ted seems a millennium out of step on corrective discipline, but Bitzer is right and a lot of us probably need to think a bit more about indexing (VBMFX 40%/VTSMX 60% at 10 years yields 6.21% costing about 0.18%), which is a bit worse total return, but there may be cheaper ETFs out there for current portfolio construction. (FWIW, it does look like VWELX earns its ER, so indexers should not feel smug yet). But that
Intellectually, the legs on which Arnott's so-called 'Third Pillar" stand (high yield, REITS, EM equities, EM bonds, commodities and long TIPS) - not to mention shorting US stocks - stunk up the joint.
But...they do diversify away an investor's exposure to mainstream equity markets.
Why does everything we hold have to produce great returns all the time? There are reasons to own funds like PAUIX, if for nothing else than to have a contrarian position to reduce losses in selloffs. As I look at its YTD numbers, the S&P 500 is down about 4%. PAUIX is down 0.5%. Yes, holding it over the last 5 years would have been a drag on gains. But most investors I know have found that downside protection is a heck of a lot more important than matching or beating the market in good times. And the last 5 years, PAUIX has averaged better than 8.6%. I do not see that as bad for a fund that is run to beat the CPI by 6.5% over a market cycle. Manager Rob Arnott has been successful, but unfortunately some people do not read fund prospectuses, and then become disillusioned when it does not beat some crazy asset class in which M* has decided (wrongly) it belongs. Read the prospectus! Read the annual reports! The fund is not supposed to look like VWELX or any other so-called balanced fund. Ted, I respect you a lot. But I disagree with your take on this one.
Am I thrilled with 2013 returns for PAUIX? Of course not, but I also understand what the fund is trying to do. Look at 2008 and understand how this fund would have reduced volatility and loss in a portfolio. THAT is why I would own this fund. Yeah, 2013 was a stinker of a year for it, but given the crazy bull market for domestic stocks, it was also not totally surprising. We expect the manager to do what he says the fund will do, nothing more, nothing less. So far, it has done just that. Diversification works, sometimes whether we like it or not.
While we're on the subject of funds that disappointed because they didn't do better than the S & P, can we talk about the Merger (MERFX) fund? I mean, that really lagged the S & P last year.
In all seriousness, I agree with what BobC said completely. When a fund's benchmark is CPI + 6.5%, what are your expectations and needs? What role did you see the fund fitting in your portfolio in the first place? If you want something more aggressive than that, hey, there are other funds out there. If it does not meet that benchmark, fine, but comparing it to the S & P 500 or even more aggressive (which is the majority of the category, probably) funds in the same category?
People get into conservative funds and then get upset when things are good and the funds are conservative ("Why isn't it beating the S & P 500?") and then they dump the fund when it starts to be the right time to have it. They get upset when things are bad and they have a bunch of too aggressive funds ("Why is it doing worse than the S & P 500?") and dump them at the wrong time.
I think it becomes understand who you are and your risk tolerance, understand the risk level of funds you are in and understand what place a fund has in your portfolio for a multi-year time-frame. If a fund disappoints vs its benchmark, then take a look at what happened and whether or not you want to switch to something else. If you are disappointed because you own a conservative fund during a good year, then it becomes what role did you see the fund fitting in your portfolio in the first place and whether or not you want to try to time the market.
If you want to try to time the market and raise and lower risk levels in the short-term, that's up to you.
If you haven't given up on it at least 6 months ago, I don't know why. Sure it will perform well again but why is it necessary to wait? As they say "even a broken clock is right twice a day"
Reply to @ron: Hi Ron. I look at it very differently. It is doing what I want from it, and that is to offer a contrarian view that should offer a cushion during a selloff or prolonged downturn. Through yesterday, the S&P 500 is down about 2.25% for the last week, while PAUIX is up 0.10%. This is certainly no long-term number with which to rejoice, but it perhaps is telling. As I said earlier, I don't expect the fund to do any better than its objectives, and so far it has met its objectives. Of course, I would be thrilled if all of my holdings went up a lot and never went down. But that is unrealistic, and it is unrealistic to expect a fund like PAUIX to do the same. My guess is that IF we see a real correction of 10-15%, PAUIX will look darned good by comparison. In the end, that is the reason for owning it...downside protection, contrary thinking, lower correlation, diversification. Cheers.
Reply to @BobC: If you had invested $10,000 with Arnott in the 10/03, fund's inception date, and held to the end of 2013, the $10,000 would be worth $10,968, or a gain of 0.0103305785123967% per year. With an expense ratio of 1.45% per year you would have lost money. In that case Rob Arnott should be exiled to Devil's Island. Regards, Ted
Reply to @Ted: Ted, I think it is ok that we disagree about a fund now and then. PAUIX has a 10-year average return of 6.43, according to the M* data I review. That is almost exactly the same as SPY's 6.48% over the same 10 years, with a lot less downside. For me and a lot of my clients, a calmer ride is ok. Will Arnott be right all the time? Nope, but he has done what the fund set out to do. 9.2% average over last 5 years is just fine for what I expect from the fund.
Reply to @BobC: I stand corrected, $10,000 investment since fund inception, would be worth $19,968, not $10,968 at end of 2013. That would be an annual return of 0.9117432530999271% per year. Regards, Ted
Comments
Thanks for posting the Q&A on All Asset and All Asset All Authority.
FWIW, I am still with my position in All Asset, PASAX, which is one of six funds found in the hybrid income sleeve of my portfolio. I am going to see how it does over the next couple of months. While others may have to cut and run from a short term performace measure by using my sleeve method of investing allows the stronger performing funds to support the weaker funds thus allowing the sleeve as a whole to propel the portfolio. With this, it remains a fund I am keeping under review. I have had it a good while; and, the purpose of the sleeve is to blend the different perspectives of the funds that it holds together as one.
Thanks again as I had not seen this report.
Old_Skeet
@Ted Keep those daily links coming!
I can't do the graph thing, but looking at VWELX vs PAUIX (cheating, perhaps, but I think it's about 60/40 in the first "two legs"), I get 7.85%vs 6.55% return and you rent them for 0.26% vs 1.23%.
Arnott's Q&A seems really logical and you may need more than the past 10 years to make up your mind, and Ted seems a millennium out of step on corrective discipline, but Bitzer is right and a lot of us probably need to think a bit more about indexing (VBMFX 40%/VTSMX 60% at 10 years yields 6.21% costing about 0.18%), which is a bit worse total return, but there may be cheaper ETFs out there for current portfolio construction. (FWIW, it does look like VWELX earns its ER, so indexers should not feel smug yet).
But that
"But that Q&A does really sound convincing."
Emotionally, I want to dump the fund.
Intellectually, the legs on which Arnott's so-called 'Third Pillar" stand (high yield, REITS, EM equities, EM bonds, commodities and long TIPS) - not to mention shorting US stocks - stunk up the joint.
But...they do diversify away an investor's exposure to mainstream equity markets.
Am I thrilled with 2013 returns for PAUIX? Of course not, but I also understand what the fund is trying to do. Look at 2008 and understand how this fund would have reduced volatility and loss in a portfolio. THAT is why I would own this fund. Yeah, 2013 was a stinker of a year for it, but given the crazy bull market for domestic stocks, it was also not totally surprising. We expect the manager to do what he says the fund will do, nothing more, nothing less. So far, it has done just that. Diversification works, sometimes whether we like it or not.
Just MHO.
In all seriousness, I agree with what BobC said completely. When a fund's benchmark is CPI + 6.5%, what are your expectations and needs? What role did you see the fund fitting in your portfolio in the first place? If you want something more aggressive than that, hey, there are other funds out there. If it does not meet that benchmark, fine, but comparing it to the S & P 500 or even more aggressive (which is the majority of the category, probably) funds in the same category?
People get into conservative funds and then get upset when things are good and the funds are conservative ("Why isn't it beating the S & P 500?") and then they dump the fund when it starts to be the right time to have it. They get upset when things are bad and they have a bunch of too aggressive funds ("Why is it doing worse than the S & P 500?") and dump them at the wrong time.
I think it becomes understand who you are and your risk tolerance, understand the risk level of funds you are in and understand what place a fund has in your portfolio for a multi-year time-frame. If a fund disappoints vs its benchmark, then take a look at what happened and whether or not you want to switch to something else. If you are disappointed because you own a conservative fund during a good year, then it becomes what role did you see the fund fitting in your portfolio in the first place and whether or not you want to try to time the market.
If you want to try to time the market and raise and lower risk levels in the short-term, that's up to you.
Regards,
Ted
Regards,
Ted