Allocation/Balanced funds vs. separate stock & bond funds

[chang]

I have mentioned my preference for separate stock and bond funds for a long time. The main reason was/is to access both separate areas of expertise, as well as specific sectors. (For instance, HY Munis in taxable accounts; or HY stocks in tax deferred accounts.)

However, the current bond meltdown illustrates another reason why I don't like balanced funds: the ability to quickly convert a 60/40 portfolio from 40% IG bonds (e.g., a Wellington-type portfolio) to 40% cash. Which is basically what I've done over the last 12 months.

Of course, hard core stay-the-course investors will desire and appreciate that a fund like VWELX maintains a fixed allocation to stocks and bonds, and rebalances more or less constantly. I am very sympathetic to this viewpoint, but the bond debacle was just too much for me to hang on to "safe" IG bonds while they drop 10-20% (DODIX down > 13% from its high).

[racqueteer]

Agree. I've been a big proponent of allocation funds in the past, but I've been selling them down and holding cash in lieu of bonds for some time now (as reflected in the 'cash' survey).

[galeno]

We too prefer to keep stock and bond allocations seperate. We prefer "lumpy" DIY rebalancing.

[win1177]

Apr 19, 2022 13:32:30 GMT galeno said:

We too prefer to keep stock and bond allocations seperate. We prefer "lumpy" DIY rebalancing.

I’m in the same boat, keeping my stock and bond allocations separate. Allows me to “adjust” things more accurately than adding to a “moderate allocation fund” (60:40 for example). Also allows me to sell just bonds, which I recently did with all my muni funds to capture the tax losses and stop the bond hemorrhage. Granted, I’m still losing ground to inflation in Money Markets, but its not quite as bad as what I was losing in bonds. 

Win

[mozart522]

Yup, this is a tough period (3 1/2 months really) to justify holding Wellesley and Wellington, and may well get tougher. I think most who hold them are only concerned with the total return and may not think as much about the components that make it up. As said, best for buy and holders.

[retiredat48]

Apr 19, 2022 12:20:10 GMT racqueteer said:

Agree. I've been a big proponent of allocation funds in the past, but I've been selling them down and holding cash in lieu of bonds for some time now (as reflected in the 'cash' survey).

Once upon a time I made posts against balanced funds (on a balanced fund forum), stating that investors would do well SEPARATING the bond and stock sides of investments.  Host of reasons why.  Got a lot of grief.

Now we are seeing those reasons in play.

Especially, if one wanted to reduce exposure to intermediate term bonds, in a balanced fund you had to sell the stock side as well.  Not so, with separate holdings.

To me, allocation funds are not "bad"...they simply are made obsolete by the new developments of hosts (thousands) of available stock and bond funds, to meet investor individual needs.

It is not rocket science to select a stock and a bond fund, to mirror any balanced fund.  

And many wealth manager/advisor houses today will permit the investor to rebalance as quickly as DAILY.  Yes, everyday.  I had a demo visiting one firm, and it was impressive in the  mechanics.

Disclosure...I have held Vanguards Wellington Fund (balanced) since 1953.  Not a typo...1953.  Not added to in 47 years.

R48

[Mustang]

It would not come as a surprise to anyone that I'm currently buying a little of Wellington and Wellesley Income every month. I do not want to buy and sell and try to time the market. I could do it if I wanted to. I'm a retired accountant and CFO. It's not hard to read a chart or work a formula. I just don't want to. I'll let the professional managers do that for me. That's what they get paid for. Wellesley Income has reduced its share of bonds from 65% to 55%. It looks to me like they are doing their job.

My portfolio of balanced funds is down 6% for the year. I can't believe how a 6% drop is causing so much panic especially since people our age have been through this several times before. I remember someone posting that if the market loses 10% they are going to buy back in. What if it loses 20%. If the market goes down at a constant rate then dollar-cost-averaging the slide down to 20% is exactly the same as waiting and buying in at 10% then watching it drop to 20%. The worst thing you can do is to get in then get out again and lock in those losses. I can't see the future. I don't know if we are at the bottom or the market will stop at 10% or continue to 20%.

But I do look at the past. Let's assume its 2008 when the S&P 500 lost 37%. That is enough to panic anyone. Wellington lost 22.3% and Wellesley lost 9.8%. I own equal amounts of each because Wellington outperforms during bull markets and Wellesley Income outperforms during bear markets. Let's assume $10,000 invested in each. The portfolio recovered after one year and then made 9.7% over the three year period.

EOY                  Wellington                 Wellesley          Total
2007                      $10,000                     $10,000      $20,000
2008     -11.3%     $ 7,770        - 9.8%    $ 9,020       $16,790
2009    +22.2%     $ 9,495      +16.0%    $10,463      $19,958
2010    +10.9%    $10,349      +10.7%    $11,583      $21,932

The 2018 loss isn't even worth mentioning. S&P 500 -4.4% then +31.5%; Wellington -3.4% then +22.5%; and Wellesley -2.6% then +16.4%. The S&P 500 losses from 2000 thru 2002 would be worth mentioning but Wellington's performance was +10.4%, +4.2% and -6.9%. Wellesley's was +16.2%, +7.4% and +4.6%. Very few or no losses to recover from. You have to go back to 1973 and 1974 when both funds had back to back losses to find a time where it took longer than a year to recover.

If you enjoy trading then do it. You might make more if you are good at timing. But you don't need to. Buy and hold balanced funds will still make you money.

[roi2020]

I have mixed feelings regarding balanced funds.
Investors using balanced funds can simplify their portfolios and take more of a hands-off approach.
The total number of portfolio holdings can be potentially reduced.
Since the funds are periodically rebalanced, this can prevent investor mistakes during the rebalancing process.
Like others have mentioned, I prefer to have discrete stock and bond funds.
This allows greater control over my asset allocation and sub-asset classes.
Also, withdrawing money from balanced funds may lead to suboptimal results if you need to sell while stocks are down.

[retiredat48]

Mustang ,...couple comments to your post.

1. I have posted about market experiences, in the past 100 years, where "this time it's different" really meant it--it was different.

Your review of balanced fund history is looking backwards, and I agree with it. Typically, when stocks fell, bond yields fell (like in a recession) and bond prices thus rose. You gained with bonds being non-correlating.

However, this time it is different. Bond yields have gone to 1/2%, and actual negative yields existed for 1/3 of the world countries. This has never happened in history. Bond yields (money lending rates)are actually the lowest in 4000 years.

So the impact of being in bonds at these low yields, and price risks as to where can rates go for "the reserve currency--the dollar", other than upward. So stocks and bonds may be very correlated in the next cycle to normalcy; and we have seen that so far.

Thus the safety aspect is questionable, and likely both will lose together.

2. The drops in stocks should be, and usually are recoverable. Not so , bonds, which are contractual instruments that expire. Many bonds previously got to selling way above par value due low market yields. Many losses now are bonds going down to par, that at maturity will only be paid at the par price. You may never have recoveries in bond prices.

3. As a shareholder, I would be dismayed that Wellesley has gone down to 55% bonds. They advertise about 2/3 bonds/1/3 stocks. Vang'd usually sticks to their knitting. This will lower people's bond allocations, without some knowing this. Not a good practice, IMO.

R48

[alvinthechipmunk]

My only balanced fund is PRWCX and I'm not about to ditch it. It's not yet sunk far enough this year for me to want to buy more. I like Giroux's magic sauce.

APART from that, yes, I keep equities and bonds separated. In effect, I've used a few of my bond funds as available cash, taking profit and dollar-cost-averaging into equities, this year. What I have left in bonds is what PRWCX holds, plus PRFRX and TUHYX. Morningstar X-Ray shows me with 30% bonds in the portfolio. Long time since I've held so little in bonds.

[hondo]

Well, I use balanced funds for the simple reason that it is simple. AS many other investors, I and my wife are of advanced age and, (as you have heard from many other posters in the past) the wife is not interested in managing a portfolio. That in a nut shell is the reason many of us use only balanced funds - to keep it simple. The managers do their job - the wife doesn't have to worry about it after I am gone. She can just set back and draw the RMD for her remaining years. Then the children and make any changes they want to.

Of course, many others want to manage their portfolio, and that is great. I believe a person could likely do better keeping stocks and bonds separated. I think I may have went that route if not for the wife, but things being as they are, balanced funds are far better for us.

So I don't see why we have to argue about which way is best. One way is best for some and the other is best for others. We are all right. It all depends on each of our situation and desires.

Just another point of view.

[retiredat48]

hondo ...Very good, hondo.

Sure, since you may not be the investor in the future, and leaving a spouse a balanced fund is a way to minimize involvement.

I have a similar spousal situation. But alternatives exist also, such as:

--Have a trusted son or daughter with reasonable investment knowledge, to handle the portfolio going forward, after death.

--or, use an advisor, and take all the investment decisions and administration away from the spouse. The spouse will simply get monthly income deposits into the checking account.

Personally, I have built up both...our oldest daughter for handling my portfolio, and a trusted advisor if needed. I am likely splitting my portfolio, for certain reasons, and using both.

Also, for instance, one particular daughter will be inheriting a rental property...AND will continue with the same property manager to handle all aspects of the continued rental. Yes, a management fee is involved.

R48

[mozart522]

retiredat48, You said: "As a shareholder, I would be dismayed that Wellesley has gone down to 55% bonds. They advertise about 2/3 bonds/1/3 stocks. Vang'd usually sticks to their knitting. This will lower people's bond allocations, without some knowing this. Not a good practice, IMO."

Wellesley has been about 37-38% equity for many years. Now they have gone up a little to about 40%. They have about 5% total in cash and "other", which leaves 55%.

What you would notice is that although the bond allocation has dropped, the duration has increased and they are now at 10-year maturity, the highest I've seen in the 20 years I have followed it. So clearly they are compensating for lower bond yields, by going out the yield curve and buying premium bonds (average at 107 currently). As you say, this could be a headwind down the road and about 23% of their bonds are 1-3 years from maturity. The increase in equities is likely because they can actually get a higher yield on stocks than bonds right now.

Some points, however, about the fund. 1, It is an income fund. Its goal is to produce income. 2. It is an active fund, and has a range of acceptable stock/bond/cash allocations which it is clearly within. Why would an investor want to pay for an active fund that just "sticks to its knitting". Might as well hold just hold VYM and VCIT, which frankly, I personally would do.

We will see how they play the next year or so. I would expect a small loss with no recession, and a much smaller than average loss if we have a recession, just like in 2008. Bottom line for me, a buy and hold conservative investor wanting steady but moderate income could do a lot worse.

[acksurf]

Allocation funds IMO remain a good option for true buy and hold investors. For those who like to trade frequently and are comfortable doing so may they not be the best way to go. Like others I've been selling here and there but for me they help me maintain a higher equity % than I would otherwise. Perhaps I am behind in selling allocation funds but I've been out of Asia and Tech for quite some time :-). I am down to FMSDX, a smallish position in Wellesley and declining position in Vanguard Tax Managed Balanced.

[retiredat48]

Apr 23, 2022 13:04:10 GMT mozart522 said:

retiredat48 , You said: "As a shareholder, I would be dismayed that Wellesley has gone down to 55% bonds. They advertise about 2/3 bonds/1/3 stocks. Vang'd usually sticks to their knitting. This will lower people's bond allocations, without some knowing this. Not a good practice, IMO."




mozart:  Some points, however, about the fund. 1, It is an income fund. Its goal is to produce income. 2. It is an active fund, and has a range of acceptable stock/bond/cash allocations which it is clearly within. Why would an investor want to pay for an active fund that just "sticks to its knitting". Might as well hold just hold VYM and VCIT, which frankly, I personally would do.

Hi moz....my bold added above.

The reason is twofold:  first, Vanguard has a complimentary fund, Wellington, that has the higher equity allocation. Generally 2/3 stocks and 1/3 bonds/fixed income.  If Wellesley looked like Wellington, I would be disappointed.

Second, is is important that balanced funds stick to their knitting...to a degree.  Investors are rightly or wrongly making a bet on that stock/bond allocation.  Sometimes for a lifetime.  What if Wellesley  had a major change in allocation, and they were wrong.  I suspect some lawsuits could follow.

Remember when Fidelity's super stock fund, Magellan (Peter Lynch, who retired), the next manager went to about 40% cash at one point.  Turned out wrong, and Magellan never recovered as a top fund.  Investors were very PO'd about it.  Many fled.

Like, if I invest in an intermediate term corp bond fund,  I don't want to see it holding 75% short term us treasury bonds.  That decision is for the investors to make within their individual portfolios.

R48

[saratoga]

I find PRWCX easy to stay with. It is not just its lower volatility compared with stock funds but also a trust on the manager Giroux from his records.
So I tend to receive full benefits from the fund by not trading it.

[fred495]

At this stage of my life, I prefer to invest in certain low volatility allocation/hybrid funds like JHQAX, BLNDX/REMIX and FMSDX, for example. Their success relies heavily on the experience and judgement of the fund managers. These funds also have too many moving parts and would be quite impossible for me to replicate on my own.

But, I can certainly see the concept of separate and distinct funds working well and even outperform VWINX or VWELX, for example, since they have exhibited more well defined and rather static bond/stock allocations over the years.

Fred

[Capital]

I've never owned an Allocation or Balanced fund. From the comments here I'm glad I do not. My preference for bonds is to own the bonds directly. I prefer to have a term certain end date and not a constant maturity. I invest in bonds for income not capital gains or loses.

[Norbert]

Jul 16, 2023 17:20:30 GMT saratoga said:

I find PRWCX easy to stay with. It is not just its lower volatility compared with stock funds but also a trust on the manager Giroux from his records.
So I tend to receive full benefits from the fund by not trading it.

PRWCX hasn't just experienced lower volatility.  It has also outperformed the S&P 500 since inception, delivering over a CAGR of over 11%.  That's very good work!

(Click to enlarge.)

While it's true that the S&P 500 outperformed during the late 1990s, PRWCX held up better 2000-2003.  On the other hand, PRCWX temporarily gave back 36% in 2008 (versus 51% for the S&P 500); Giroux didn't foresee the subprime crash.  Anyway, at the end of the day, PRWCX is ahead (though largely because Giroux didn't buy into the Tech bubble over 20 years ago).

It's been pointed out that over recent years the stock indexes have again outperformed PRWCX.  That's true. However, valuations have soared, largely thanks to government easy money policies and low bond yields.  That may or may not be sustainable. The market leadership is on the thin side. We may or may not see a major correction going forward.

I think PRWCX is a smart choice for a risk-conscious, buy & hold investor.  David Giroux is a contrarian investor, who has a knack for successfully investing in out-of-favor stocks and staying away from overpriced assets that eventually correct.  That's how he has beat the S&P 500 with significantly lower draw-downs.

N.

[johntaylor]

T. Rowe did have a canary in the coal mine so that helped a bit.

An analyst called Susan Troll -- a name to conjure with -- became "The Duchess of Doom" by warning re subprime:

www.kiplinger.com/article/business/t040-c000-s002-she-called-the-mortgage-mess.html

[retiredat48]

PRWCX...alternate viewpoint.

I currently have PRWCX on a "wait-and-see" status. (I own a foothold). Reason is, I read in detail about the main six investment themes of Giroux going forward. Most were in greenspace, EGS favs, climate change stuff, etc. Not much in AI. I need to find time to think about it and digest more. Will post my conclusions. Perhaps PRWCX to be an alternate viewpoint fund, but I need to see performance beating the other ones, until I switch more back into it. Been out for a few years now. Bond component didn't help Giroux any.

edit to add...on M* Compare charts;

one yr, growth of $10,000:

$13600 prwcx
   15278 vpccx
    15581 fsptx, fido select techn fund

3 months:

$10366  prwcx
   10718 vpccx
   12346  fsptx
   


R48

[racqueteer]

Yeah, Giroux seems to have been pulling in his horns (He's a contrarian at his core).  Will he be proven right, or can this market continue to run on irrational exuberance/hope?  If one thinks they know the market's future better than he, why would they want to own a hybrid fund - or a fund of any kind, for that matter?  What were you thinking of in AI?

Edit for your edit: PRWCX is roughly 60% equity.  You're comparing it to 100% funds...AND it's been a down market for many bonds.  Why would you expect equal performance?

[retiredat48]

Jul 17, 2023 20:31:02 GMT racqueteer said:

Yeah, Giroux seems to have been pulling in his horns (He's a contrarian at his core).  Will he be proven right, or can this market continue to run on irrational exuberance/hope?  If one thinks they know the market's future better than he, why would they want to own a hybrid fund - or a fund of any kind, for that matter?  What were you thinking of in AI?

Edit for your edit: PRWCX is roughly 60% equity.  You're comparing it to 100% funds...AND it's been a down market for many bonds.  Why would you expect equal performance?

M* has PRWCX at 30% fixed income/5% cash.  I had not checked in awhile...my memory is at times Giroux was about 20% bonds a few years ago.  So yes, comparisons to a 100% stock fund, a little unfair.  But perhaps why I still just have a foothold, and not a major holding.

You asked: What were you thinking of in AI?  I was thinking of fsptx, select tech and how pleased I am that it has a large commitment to AI type companies...such as NVIDIA.  fsptx  managers doing great.  I started a thread in MAY about fsptx here:

big-bang-investors.proboards.com/thread/2515/fsptx-fido-select-tech-fund



R48

[johntaylor]

Yep, an all-stock fund -- or comm-tech fund -- should be beating Cap Apprec handily this year.

In 2022, Cap Apprec was negative for the third time since 1986.   Although it did fine v S&P 500 on Sharpe, there is literature re Sharpe not being an ideal measure in negative return situations.

Since 2006 when Giroux took the reins, Cap Apprec generated 101 percent of mkt return with 69 percent of the risk.

Cap Apprec is useful as a core holding, but won't shoot out the lights as tech might some years.    In 1999, my worst tech fund was plus 93 percent.

[roi2020]

Jul 18, 2023 14:02:19 GMT johntaylor said:

Yep, an all-stock fund -- or comm-tech fund -- should be beating Cap Apprec handily this year.

In 2022, Cap Apprec was negative for the third time since 1986.   Although it did fine v S&P 500 on Sharpe, there is literature re Sharpe not being an ideal measure in negative return situations.

Since 2006 when Giroux took the reins, Cap Apprec generated 101 percent of mkt return with 69 percent of the risk.

Cap Apprec is useful as a core holding, but won't shoot out the lights as tech might some years.    In 1999, my worst tech fund was plus 93 percent.

That's an excellent risk/reward ratio!