With so much attention focused on the stock market and its meteoric rise, the market's "inferior step-sister," as some like to think of the bond market, is too often not analyzed strategically enough to help benefit fixed-income investors. If you happen to be one of those investors (like my own wife) who choose not to invest in bond funds, you may want to skip ahead to my second topic. Of course, there are potential pitfalls in putting all your investment eggs in the stock market basket; nearly all segments of the bond market have easily outperformed the stock market since we began our Model Portfolios in 2000 - all without the "now you have it, now you don't" volatility the stock market has shown.
One year and one month ago (Apr. '10), our recommended allocations to bonds for moderate and conservative risk investors remained at moderately high levels of 35 and 45% respectively of one's overall portfolio.
The following table shows how our specifically recommended bond funds performed over the last 13 months.
|Category||Recommended % of |
|Interm Term Govt||10%||Vanguard Tot. Bond Market||6.3%|
|Diversified||42.5||PIMCO Total Return Instit (PTTRX) |
or Harbor Bond Fund (HABDX)
|Intermediate Term Muni Bonds||15||Vang. Interm. Term Tax-Exempt||3.1%|
|Inflation||7.5||PIMCO Real Return Instit (PRRIX) |
or Harbor Real Return (HARRX)
|International||7.5||T Rowe Price Intl Bond||13.0%|
|Short-Term Non-Govt||10||Vang. ST Investment Gr.||4.6%|
|High Yield||7.5||Vang. High Yield||14.0%|
Note: Return for the muni fund adjusted to reflect equivalent taxable returnfor investors in 28% Fed. tax bracket.
As can be seen, the biggest component of our portfolio, PTTRX (or the slightly inferior HABDX), along with our high yield, inflation, and international bond selections allowed us to easily outperform our benchmark, the Vanguard Total Bond Market Fund, which was also included as one of our picks. All told, the Model Portfolio outperformance was approximately +1.8% (8.1 vs 6.3%) over the period.
Our latest Apr. '11 Model Portfolios suggest a somewhat less optimistic picture for bond returns looking forward for moderate risk investors. With many investors convinced that bond prices have likely seen their best days as we move away from the recent economic crisis towards continuing moderate growth, and with prospects for stocks remaining good, we agree it does make sense to continue to lighten up on bond funds in favor of stocks.
Our current portfolio includes five of the same funds shown above along with an added fund, the multisector Loomis Sayles Bond Retail (LSBRX). LSBRX has outstanding management expertise, an exceptional long-term track record that is as good or better than our perennial favorite, PTTRX, and is doing particularly well over the last month (up 3.4) and year-to-date (6.8%). We are optimistic this fund will continue to outperform our benchmark. This is because managers within the multisector category have the flexibility to invest wherever in the bond market they think the best returns will be. By contrast, most bond funds have well-defined and limited areas within the market that their investments must stick to. This should allow a multisector fund to better navigate within a market that often favors particular categories of bonds, depending upon which way the economic winds blow.
Many investors are also convinced inflation will continue to move higher, making most types of bonds less attractive. We agree this will likely be the case, although we do not expect anything like a near-tsunami of inflation is coming, as sometimes is claimed. The main category of bonds that we expect may underperform are U.S. Treasuries. For those who want a high measure of safety, we think that inflation-protected (or so-called "real return" funds), will do better than Treasuries, as they have done over the last year.
Municipal bonds currently represent a dilemma for investors who wish to minimize taxes on their fixed-income investments. On the one hand, these bonds are offering higher yields than Treasuries, sweetened by no Federal, and possibly, no state taxes as well. Yet as attractive as these tax-free yields are, one has to be cautious since state/local finances are in such poor shape that investors may continue to flee the category, as they have since late last year, raising the prospects of further price declines; muni bonds have underperformed most other categories of bond funds, even taking into consideration the tax exemption for the last 3 to 5 years. While we don't expect a calamity in these bonds, we think that other categories offer better prospects for higher total returns, as shown by our current Model Portfolio.
While some experts feel that high yield (also called "junk") bonds will not be able to sustain their recent performance at the top of the bond market charts over the last one and three years (up 12.8 and 9.0% annualized respectively), we continue to recommend a fair amount of exposure. Such bonds tend to do well in an expanding economy and tend to correlate positively with a rising stock market.
It has been observed by economists that the Fed's easy money/low interest rate policies, as opposed to the disposition to raise rates by central banks in most other countries, are one of several factors causing downward pressure on the US dollar. While currency rates are notoriously difficult to predict, the dollar's already long-term continued fall may continue for some time to come. Since US investors profit from owning shares of foreign bonds "unhedged" for currency movements under these conditions, we now think aggressive investors may want to go back to adding some exposure to a good international bond fund to take advantage of this possibility. The fund we favored in April 2010 (see above) is also the one we currently favor, the T. Rowe Price International Bond Fund (RPIBX).
In summary, our selections of where to invest your bond holdings a little over a year ago proved to be good choices, especially for that portion of one's portfolio that one did not wish to put in the stock market. With a few minor changes, that should continue to be the case looking forward.
By Tom Madell
Last month, we published an article showing how by adjusting your asset allocations regularly over the last 5+ years in accordance with our Model Portfolios, you could have done considerably better than the S&P 500 Index. We also had an article examining how fast the economy might be expected to grow over the coming year and the implications for the stock market.
We asked for feedback from Readers as to whether they found each article useful (as we did for our March articles), but we received very little. (Thank you to those who did provide it.) What then are we to assume?
Here are just a few possible guesses:
- Some Readers found one or both of the articles useful, and therefore did not feel the need to respond.
- Some are just tired of responding to all Internet site requests, regardless of how useful they found the articles.
- Some remain skeptical of any investment advice; or, perhaps they actually did not like our article(s) for whatever reason, but just didn't feel impelled to tell us.
This brings us to some further questions regarding our site, which we've said we hope serves as a source of fresh, useful information to our Readers.
- What is the role of an investment website?
- What is the best way in which we can help readers?
- Who is our audience and what do they want from our articles?
We believe that our funds-newsletter.com site is unlike virtually all other mutual fund newsletter sites. We are not in existence to make a profit off of Readers. Rather, we hope that Readers will be able to profit off of us, that is, by profiting from our well-researched material. As proof, check out the other 14 top newsletter sites (although three are now defunct), where we are ranked 7th in popularity in the US by Google:
In fact, we could have been called funds-newsletter.org to indicate a not-for-profit site or even funds-newsletter.info, instead of funds-newsletter.com.
I created the funds-newsletter.com site as something interesting for me to do in retirement (yes, I am retired), not to try to earn an income from it. We are truly unconnected with the financial industry, and therefore, can be as impartial in our advice as possible. We do not make a penny from ads or anything else.
At the same time, we do not have any staff to make our web site look spiffy or to even proofread our articles. In addition to my articles, articles are also contributed by one other writer (Steve Shefler) who is also retired and writes without monetary compensation, but also out of sheer love of our topic.
As our site title "Mutual Fund Research Newsletter" implies, it is dedicated to the goal of using research to help investors (including myself and my contributing writer) get better returns than the average fund investor. My research and testing background (PhD, University of Illinois) has provided me with the knowledge to apply a research-oriented approach to uncover and confirm what most frequently works in fund investing vs. the usually more intuitive predictions of "experts" that are primarily advocated elsewhere.
Year after year over the last 12 years, I have presented articles and then followed up with subsequent evidence that, by and large, the strategies and advice featured on this site would have significantly profited most investors. We have attracted a meaningful following; yet investors, and also other websites, are not really beating down the doors to either follow our site or, in the case of other sites, to mention our site to investors.
Almost everybody knows of, or reads about, people who have fared badly in their investments or who no longer feel they will be able to retire when they'd like. But by following the advice contained within my articles, I myself have not only retired relatively early, but never suffered any sustained losses during the last 11+ years we have been publishing our Model Portfolios. While the majority of stock indexes are still below where they were in Jan. 2000, anyone with a diversified stock/bond and possibly cash portfolio similar to our recommended Moderate Risk portfolios would have earned growing returns over the long term.
All this brings me back to my aforementioned questions, and in particular, is there something else we could be doing to get through to our audience?
Of course, I realize that we have many, many for-profit competitors who can better impress or even attempt to capitalize on the investing public's need for advice with any/all of the following: a) flashy websites; b) paying for website promotion and other means of gaining visibility; c) well-known economists, advisors, or other so-called "experts"; d) claims you will can get rich quickly or that you can be successful by trading in and out of investments, usually stocks and commodities rather than mutual funds; e) I am sure there are other things I have missed in this list.
But without Reader feedback, we remain essentially in the dark. There is no reason we must write our articles since we are retired and ourselves financially secure; we could simply keep our knowledge and willingness to research important investment information to ourselves. But perhaps by sharing our needs with you, we will enable some of you to share a little back with us. To make this even easier to do, just click on this e-mail feedback link. We look forward to reading your comments, whether you like what you have seen at our site, or not.
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