Tag Archives: mutual funds

VSCSX: High Quality Short Term Corporate Debt May Be On Sale In December

Summary The Vanguard Short-Term Corporate Bond Index mutual fund is everything I would hope for in a short-term corporate debt exposure. The mutual fund has low volatility and low correlation with other important investments. The Federal Reserve may push up yields and put high quality bond funds on sale in December. The Vanguard Short-Term Corporate Bond Index Admiral Shares (MUTF: VSCSX ) is simply a great fund. I wish I could start more articles out with comments that are this positive. This fund is simply great. The yields are severely limited since this is short term debt with respectable credit quality, but the ETF on the whole is just exceptional when it comes to being part of an effective portfolio. Duration The following chart breaks down the duration of the funds. Holdings are almost all less than 5 years and usually more than 1 year. Again, this is a solid choice. If an investor wants to load up on even shorter term bonds, there are funds designed specifically for that. It is difficult to find a useful yield level on those ultra-short bonds so this is a reasonable portfolio composition. Credit The following chart shows the credit quality breakdown. When it comes to a corporate bond fund there are two ways that I like to see the weightings. Either I would want a junk bond fund or I would want one with a credit breakdown similar to this. Personally, favor combining a fund like this with quite a few other bond funds to create a more complex group of bond holdings. Sector The following chart breaks down the sector allocation: This sector allocation may seem absurd if an investor looks at numbers without reading the names. The names of the sectors indicate that rather than breaking down the market into all the corporate sectors, Vanguard is containing several other bond sectors that are not relevant to corporate debt. It wouldn’t make sense for this fund to have an allocation to foreign debt issues or MBS. Portfolio Usage When the mutual fund is placed within the context of a portfolio that is heavy on U.S. equities it looks like an intelligent way to reduce the overall risk of the portfolio. When it comes to generating alpha, I’ve often told investors that the secret to reaching alpha is to focus on reducing risk. (click to enlarge) Most other investors are already focused on trying to maximize their returns and many will take on more risk than they can handle. Focusing on risk reduction reduces the incentives for an investor to sell off after a big loss and makes it easier to generate alpha relative to the S&P 500 because it is easier to reduce risk through superior diversification. In this case we can see that the return on the fund was fairly weak over the last several years, but the annualized volatility has also been fairly low. When consider that the total risk contribution to the portfolio is negative due to the fund having a negative correlation with the S&P 500, the impact on risk adjusted returns is much more favorable than it would have appeared at first. These bonds do take on some credit risk as corporate debt, but the fund is not holding junk bonds so the credit risk is not material enough to outweigh the impact of a small amount of duration risk. As a result, investors end up with a negative correlation between this fund and most domestic equity funds. One Risk Factor The biggest risk factor for this portfolio right now is the potential for share prices to drop if the Federal Reserve is able to raise rates in December. I’m treating an increase in rates as a buying opportunity for any rate sensitive asset. That could mean bond funds, equity REITs, mREITs, or utilities. Regardless, I’d like to have a little cash available this December to see if the Federal Reserve is able to push some of the investments I want into the bargain bin. Another Use Investors that want to keep a fairly short amount of duration exposure in their portfolio while maintaining higher yield may consider this bond fund as part of an automatic allocation strategy within retirement portfolios. The yields aren’t going to be incredible, but for an investor that is feeling particularly risk averse this is a fairly nice fund. Since volatility is fairly low, it isn’t likely to move up or down very far, but it does offer some gains over time while making the portfolio less risky. Conclusion This mutual fund offers high quality corporate debt that will offer superior yields to treasuries but it still has a negative correlation with equity securities. The return is severely limited by short duration and high credit quality combining to create very low yields on the bonds, but it still makes sense for investors looking for some less volatile investments. If the Federal Reserve moves to raise rates it could put this fund on sale for a bit in December which would create a nice buying opportunity.

American Funds Lack Luster In Q3: Funds That Saved Face

American Funds, proclaimed as one of the largest active fund managers, perhaps wants to forget its third quarter performance – the sooner the better. The handful of flimsy gainers compared to the horde of mutual funds that ended in the red painted a dismal picture of the quarter. None of the American Funds mutual funds could even reach a 2% gain in the third quarter, whereas 371 funds ended with at least a 5% loss. As for the broader markets, the key benchmarks suffered their worst loss in four years. In the third quarter, the Dow, the S&P 500 and Nasdaq declined 7.6%, 7% and 7.4%, respectively. In fact, calling the third quarter a bloodbath will not be far from the truth. Just 17% of the mutual funds managed to finish in the green in the third quarter. This was a slump from 41% in the second quarter, which was also a sharp fall from 87% of the funds that ended in the positive territory in the first quarter. However to justify American Funds’ dismal performance in relation with the broader markets will only be partially right. American Funds even failed to beat the modest-to-poor performances from key peers like Franklin Templeton, Fidelity, Vanguard or T. Rowe Price mutual funds. American Funds in Q3: Comparative Study As mentioned, American Funds failed to beat its major peers. The best gain from this fund family was a meager 1.7% scored by the American Funds U.S. Government Securities Fund® Retirement (MUTF: RGVFX ) . This 1.7% gain was not only far short of the best gains achieved by key peers, but was also somewhere around the average gains that mutual funds from fund families like Franklin Templeton, Fidelity, Vanguard, BlackRock or T. Rowe Price scored. In a quarter ravaged by headwinds, mutual funds from the Vanguard Group gave a decent performance. Its best gain hit 8.4%, achieved by the Vanguard Extended Duration Treasury Index Fund Inst (MUTF: VEDTX ) . Separately, Fidelity’s top-gainer, the Fidelity Spartan® Long Term Trust Bond Index Fund (MUTF: FLBAX ) , could post only 5.5% return. In fact, the only other fund that managed a 5% plus gain from this lineup is Investor class fund, the Fidelity Spartan® Long Term Trust Bond Index Fund Inv (MUTF: FLBIX ) . For T. Rowe Price, the T. Rowe Price U.S. Treasury Long Term Fund No Load (MUTF: PRULX ) gained 5.1% and was the best performer. However, it was the only fund in the 180 T. Rowe Price assortment we studied, that posted a 5% plus return. Franklin Templeton could put up a modest show in the tough third quarter. The Franklin Real Estate Securities Fund Retirement (MUTF: FSERX ) was the best gainer among the Franklin Templeton mutual funds, which gained only 3.4%. BlackRock’s best performer was the BlackRock Real Estate Securities Fund Inst (MUTF: BIREX ) , which gained 2.4%. The average gain from mutual funds that finished in the green for Franklin Templeton, Fidelity, Vanguard and T. Rowe Price were 1.2%, 1.2%, 1.9% and 1.3%, respectively. Of the 629 American Funds mutual funds we studied, only 135 funds finished in the green with paltry gains. The average gain for these 135 funds was just over 1%. None of the funds could post above 2% return and 68 out of these 135 funds finished with sub 1% gain. Meanwhile, 493 American Funds mutual funds finished in the red. The average loss for these 493 funds was 6.6%. While 371 funds lost over 5%, 60 funds lost at least 10%. The biggest loser in the third quarter was the American Funds New World Fund® C (MUTF: CNWCX ) , which slumped 12.4%. In comparison, of the 626 funds we studied in the second quarter, 232 funds had finished in the green while 2 funds had break-even returns. The average gain for these 232 funds was 1.41%. This compared favorably to the average loss of -0.84% for the 392 funds in negative territory. (Note: The numbers include same funds of different classes) Top 15 American Funds Mutual Funds in Q3 Below we present the top 15 American Funds mutual fund performers of Q3 2015: Fund Name Objective Description Q3 Total Return Q3 % Rank vs Obj YTD Total Return % Yield Beta vs S&P 500 Load American Funds US Govt Sec R5 Government 1.72 5 2.43 1.39 -0.03 N American Funds High Inc Muni Bnd F2 Muni Natl 1.67 14 2.34 4.07 0.05 N American Funds Tax Exempt of CA A Muni CA 1.66 41 1.84 3.23 -0.01 Y American Funds US Govt Sec A Government 1.64 7 2.19 1.1 -0.03 Y American Funds High Inc Muni Bnd A Muni Natl 1.63 16 2.22 3.91 0.05 Y American Funds Mortgage A Govt-Mtg 1.56 3 2.08 1.04 -0.01 Y American Funds T/E Bd of America A Muni Natl 1.44 31 1.58 3.13 Y American Funds Tax Exempt of VA A Muni State 1.4 42 1.13 2.94 0.01 Y American Funds Tax Exempt Of NY A Muni NY 1.34 49 1.26 2.72 0.02 Y American Funds Tax Exempt of MD A Muni State 1.24 61 1.02 3.03 0.08 Y American Funds Tax-Exempt Prsrv A Muni Natl 0.99 67 0.98 2.29 Y American Funds Bnd Fd of Amer A Corp-Inv 0.96 9 0.85 1.85 -0.01 Y American Funds Bnd Fd of Amer 529A Corp-Inv 0.93 10 0.78 1.76 -0.01 Y American Funds Ltd Term T/E Bond A Muni Natl 0.91 70 0.95 2.3 -0.01 Y American Funds Intm Bd Fd Amer R5 Corp-Inv 0.9 12 1.79 1.45 -0.03 N Note: The list excludes the same funds with different classes, and institutional funds have been excluded. Funds having minimum initial investment above $5000 have been excluded. Q3 % Rank vs. Objective* equals the percentage the fund falls among its peers. Here, 1 being the best and 99 being the worst. Morningstar data showed many sub Municipal fund categories, such as Muni California Long, Muni Pennsylvania and Muni New York Long, featured in the top performers’ list for the third quarter. However, the gains were modest, with Muni California Long giving the best performance with a 1.7% gain in the quarter. Long Government funds category was the second-best gainer in the third quarter. According to Morningstar, Bear Market funds category gained 13.1% and Long Government was next in line with gains of 4.3%. So we see that among the American Funds’ best 15 gainers, the Government category is the top gainer. However, Municipal Bond funds dominate the top 15 gainers’ list. Among the Municipal funds, the American High-Income Municipal Bond Fund® (MUTF: AHMFX ) , the American Funds Tax-Exempt Fund California® A (MUTF: TAFTX ) and the American High-Income Municipal Bond Fund® A (MUTF: AMHIX ) sports a Zacks Mutual Fund Rank #1 (Strong Buy). Meanwhile, the American Funds Tax Exempt Bond Fund® A (MUTF: AFTEX ) holds a Zacks Mutual Fund Rank #2 (Buy). Municipal funds the American Funds Tax Exempt Virginia Fund A (MUTF: TFVAX ) and the American Funds Tax-Exempt Fund of New York® A (MUTF: NYAAX ) carry a Zacks Mutual Fund Rank #3 (Hold). However, while the American Funds Tax Exempt Maryland Fund A (MUTF: TMMDX ) and the American Funds Tax-Exempt Preservation Portfolio A (MUTF: TEPAX ) carries a Zacks Mutual Fund Rank #4 (Sell), The American Funds Limited Term Tax-Exempt Bond Fund® A (MUTF: LTEBX ) has a Zacks Mutual Fund Rank #5 (Strong Sell). Coming to the Government funds, top gainer the American Funds US Govt Sec R5 and fifth-placed the American Funds U.S. Government Securities Fund® A (MUTF: AMUSX ) carry a Zacks Mutual Fund Rank #2. However, Government-Mortgage fund the American Funds Mortgage Fund® A (MUTF: MFAAX ) holds a Sell rating. Original Post

VTHRX: A Great Mutual Fund For The Investor Nearing Retirement

Summary The Vanguard Target Retirement 2030 Fund has a simple construction and a low expense ratio. Despite being a very simple portfolio, they have covered exposure to most of the important asset classes to reach the efficient frontier. This is quite simply one of the best constructed portfolios I’ve seen for a worker nearing retirement. Lately I have been doing some research on target date retirement funds. Despite the concept of a target date retirement fund being fairly simple, the investment options appear to vary quite dramatically in quality. Some of the funds have dramatically more complex holdings consisting with a high volume of various funds while others use only a few funds and yet achieve excellent diversification. My goal is help investors recognize which funds are the most useful tools for planning for retirement. In this article I’m focusing on the Vanguard Target Retirement 2030 Fund Inv (MUTF: VTHRX ). What do funds like VTHRX do? They establish a portfolio based on a hypothetical start to retirement period. The portfolios are generally going to be designed under Modern Portfolio Theory so the goal is to maximize the expected return relative to the amount of risk the portfolio takes on. As investors are approaching retirement it is assumed that their risk tolerance will be decreasing and thus the holdings of the fund should become more conservative over time. That won’t be the case for every investor, but it is a reasonable starting place for creating a retirement option when each investor cannot be surveyed about their own unique risk tolerances. Therefore, the holdings of VTHRX should be more aggressive now than they would be 3 years from now, but at all points we would expect the fund to be more conservative than a fund designed for investors that are expected to retire 5 years later. What Must Investors Know? The most important things to know about the funds are the expenses and either the individual holdings or the volatility of the portfolio as a whole. Regardless of the planned retirement date, high expense ratios are a problem. Depending on the individual, they may wish to modify their portfolio to be more or less aggressive than the holdings of VTHRX. Expense Ratio The expense ratio of Vanguard Target Retirement 2030 Fund is .17%. That is higher than some of the underlying funds, but overall this is a very reasonable expense ratio for a fund that is creating an exceptionally efficient portfolio for investors and rebalancing it over time to reflect a reduced risk tolerance as investors get closer to retirement. In short, this is a very solid value for investors that don’t want to be constantly actively management their portfolio. This is the kind of portfolio I would want my wife to use if I died prematurely. That is a ringing endorsement of Vanguard’s high quality target date funds. Composition The fund is running almost 75% stocks to about 25% bonds, but over time the portfolio shifts to sell off stocks and hold more bonds as Vanguard assumes that investors nearing retirement will have a reduced risk tolerance. This portfolio strategy is the embodiment of what financial advisors seek to do for clients. Unfortunately Vanguard does not know the unique circumstances of every client, but for a .17% expense ratio they are doing a great job. Holdings / Composition The following chart demonstrates the holdings of the Vanguard Target Retirement 2030 Fund: (click to enlarge) This is a fairly simple portfolio. Only four total funds are included so the fund can gradually be shifted to more conservative allocations by making small decreases in equity weightings and increases in bond weightings. The Vanguard Total Stock Market Index Fund is the largest holding at 45% of the portfolio and it is also available as an ETF. The ETF version is the Vanguard Total Stock Market ETF (NYSEARCA: VTI ). To be fair, Vanguard has a great reputation for running funds but not for coming up with creative names. I have a significant position in VTI because it carries an extremely low expense ratio and offers excellent diversification across the U.S. economy. Volatility An investor may choose to use VTHRX in an employer sponsored account (if their employer has it on the approved list) while creating their own portfolio in separate accounts. Since I can’t predict what investors will choose to combine with the fund, I analyze it as being an entire portfolio. Since the fund includes domestic and international exposure to both equity and bonds, that seems like a fair way to analyze it. (click to enlarge) When we look at the volatility on VTHRX, it is dramatically lower than the volatility on SPY. That shouldn’t be surprising since the portfolio has some very material bond positions. Investors should expect this fund to retain dramatically more value in a bear market and to fall behind in a prolonged bull market. Investors may recognize that the max drawdown for this fund was not that much weaker than the max drawdown for the market overall. That is strongly related to this portfolio being designed for people that will retire in about 15 years from now or 23 years from the crash of 2007. It would be unwise for Vanguard to become too conservative. While the fund has underperformed the S&P 500 by a notable margin, it is worth noting that part of that underperformance has been tied to international markets doing quite poorly relative to the S&P 500 over the last several years. Over the longer horizon I think it would be absurd to expect the domestic markets to continue beating the international markets so thoroughly. When it comes down to it, VTHRX is doing a very solid job of providing risk adjusted returns for the passive investor. Conclusion VTHRX is a great mutual fund for investors looking for a simple “set it and forget it” option for their employer sponsored retirement accounts. It is ideally designed for investors planning to retire around 2030, but can also be used by younger employees with lower risk tolerances or older workers with higher risk tolerances.