Measuring Risk

When considering risk, one needs to take into account inflation, drawdown, financial goals, risk tolerance, and time horizon. For someone contemplating retirement, an investor should also take into consideration current high valuations, low interest rates, and the COVID induced recession.

I maintain a list of fifty funds in a Mutual Fund Observer Watch List that are intended for small investors through Charles Schwab, Fidelity, or Vanguard with no loads and low minimum initial investment requirements. There are a few funds included with a minimum investment of $100,000. The funds listed in this article were selected based on multiple time periods, drawdowns, Ulcer Index (risk), Martin Ratio (Risk Adjusted Returns), assets under management, yields, and expense ratios. Lipper Categories were oriented toward multi-asset funds including Absolute Bond Return, Absolute Return, Alternatives, Flexible Income, Flexible Portfolio, and traditional funds with a Conservative MFO Risk (2). Most of the funds were selected to be buy and hold, and not as market timing tools such as inverse or bearish funds.

Why multi-asset funds? According to FTSE Russell, in “The Growth Of Multi-Asset Investing“, multi-asset investing has been one of the fastest growing segments for the past decade, and now represents more than $11T in assets. Some funds target increasing risk-adjusted returns, others target income in a low interest rate environment, still others may strive to be “all weather” funds.

Figure #1: Contemplating Retirement (or Enjoying the Sunrise)

Fifty Defensive Funds

Source: Author

For the following time periods, 1 or 2 funds per Lipper Category were selected. The funds are sorted from highest risk adjusted return (Martin Ratio) to lowest. The Ulcer Index is calculated based on length and depth of drawdown and Martin Ratio is the risk free return divided by the Ulcer Index. MFO Risk is from Very Conservative (1) to Very Aggressive (5). MFO Rating is best performing funds by percentile from lowest (1) to highest (5).

Twenty Years

Notice that over the past 20 years that conservative funds have performed as well as moderate funds with lower drawdowns. This time period begins at the peak of the Technology Bubble. Global and International Income funds have done well.

Table #1: Top Fund Performance over 20 Years

Symbol Name Lipper Category APR MAXDD Date MAXDD Ulcer Index Martin Ratio MFO Risk MFO Rating Yld
PFORX PIMCO Intern Bond (US Dlr-Hdgd) Intern Income 6.1 -9.0 200811 1.5 3.2 2 5 5.9
EXDAX Manning & Napier Pro-Blend Cons Term Mxd-Ast Alloc Consv 5.5 -10.4 200902 1.8 2.3 2 5 1.5
PAIIX PIMCO Global Bond Oppor (US Dlr-Hdgd) Global Income 5.3 -10.3 200811 1.7 2.3 2 5 3.3
VWINX Vanguard Wellesley Income Mxd-Ast Alloc Consv 7.1 -18.8 200902 3.0 1.9 2 5 2.9
EXBAX Manning & Napier Pro-Blend Mod Term Mxd-Ast Alloc Mod 5.9 -26.4 200902 5.2 0.9 3 5 1.0
VSCGX Vanguard LifeStrategy Cons Growth Mxd-Ast Alloc Mod 5.1 -28.0 200902 5.3 0.7 2 5 2.3

Source: Created by the Author using Mutual Fund Observer

Fifteen Years

Table #2 shows the metrics of top performing defensive funds starting in 2005, just prior to the housing bubble bursting followed by the financial crisis. Absolute bond funds start to appear in the top performing defensive funds.

Table #2: Top Fund Performance over 15 Years

Symbol Name Lipper Category APR MAXDD Date MAXDD Ulcer Index Martin Ratio MFO Risk MFO Rating Yld
PFORX PIMCO Intern Bond (US Dlr-Hdgd) Intern Income 5.8 -9.0 200811 1.7 2.8 2 5 5.9
EXCPX Manning & Napier Uncons Bond Abs Return Bond 4.6 -8.5 200810 1.3 2.6 2 5 2.6
PAIIX PIMCO Global Bond Oppor (US Dlr-Hdgd) Global Income 4.8 -10.3 200811 2.0 1.8 2 4 3.3
VWINX Vanguard Wellesley Income Inv Mxd-Ast Alloc Consv 6.9 -18.8 200902 3.4 1.7 2 5 2.9
VTINX Vanguard Target Retire Income Mxd-Ast Today 5.3 -17.0 200902 3.1 1.4 2 5 2.0
VSCGX Vanguard LifeStrategy Cons Growth Mxd-Ast Alloc Mod 5.5 -28.0 200902 5.7 0.8 2 4 2.3

Source: Created by the Author using Mutual Fund Observer

Ten Years

Table #3 shows the metrics of top performing defensive funds starting in 2010, during high quantitative easing induced asset price increases. Flexible portfolio funds start to appear in the top defensive fund list.

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Table #3: Fund Performance over 10 Years

Symbol Name Lipper Category APR MAXDD Date MAXDD Ulcer Index Martin Ratio MFO Risk MFO Rating Yld

COTZX

CTFAX

Columbia Thermostat Flexible Portfolio 8.6 -8.0 201109 1.1 7.3 2 5 1.7
VWINX Vanguard Wellesley Income Inv Mxd-Ast Alloc Consv 7.3 -8.6 202003 1.4 5.0 2 5 2.9
PFORX PIMCO Intern Bond (US Dlr-Hdgd) Intern Income 5.2 -4.0 201506 1.1 4.2 2 5 5.9
FIKFX Fidelity Freedom Index Income Inv Mxd-Ast Today 4.1 -3.1 202003 0.8 4.2 2 5 1.5
SWLRX Schwab Mnth Income – Max Payout Retire Income 3.7 -3.7 202003 0.9 3.3 2 5 2.4
VSCGX Vanguard LifeStrategy Cons Growth Inv Mxd-Ast Alloc Mod 6.4 -8.7 202003 1.8 3.3 2 5 2.3
PAIIX PIMCO Global Bond Oppor (US Dlr-Hdgd) Global Income 4.2 -4.4 201308 1.4 2.7 2 5 3.3
EXCPX Manning & Napier Uncons Bond Abs Return Bond 3.4 -4.6 202003 1.2 2.4 2 5 2.6
MTNKX Manning & Napier Target 2020 Mxd-Ast 2020 6.5 -12.2 201109 3.0 2.0 3 1 16.5

Source: Created by the Author using Mutual Fund Observer

Five Years

Table #4 shows the metrics of top performing defensive funds starting in 2015, just prior to tax cut incentives. Alternative Credit Focus, Absolute Return, Flexible Income and Alternative Global Macro Funds start to appear in the top performing defensive funds.

Table #4: Top Fund Performance over 5 Years

Symbol Name Lipper Category APR MAXDD Date MAXDD Ulcer Index Martin Ratio MFO Risk MFO Rating Yld
COTZX Columbia Thermostat Flexible Portfolio 9.3 -2.6 201601 0.7 11.5 2 5 1.7
NTBIX Navigator Tactical Fixed Income Alt Credit Focus 6.3 -4.0 202003 1.0 5.4 2 5 1.1
PUTIX PIMCO Strategic Bond Abs Return Bond 5.2 -3.8 202003 0.8 5.3 2 5 2.6
FIKFX Fidelity Freedom Index Income Mxd-Ast Today 5.2 -3.1 202003 0.8 5.1 2 5 1.5
VASIX Vanguard LifeStrategy Income Mxd-Ast Alloc Consv 5.6 -4.3 202003 0.9 4.8 2 5 2.4
PMZIX PIMCO Mortgage Oppor and Bond Abs Return 4.1 -4.8 202003 0.7 4.1 1 5 4.4
ADVNX Advisory Research Strategic Income Flexible Income 5.0 -3.3 202003 1.0 4.0 2 5 2.5
PAIIX PIMCO Global Bond Oppor (US Dlr-Hdgd) Global Income 3.9 -4.0 202003 0.7 3.7 2 5 3.3
AEDNX Water Island Event-Driven Alt Event Driven 4.0 -3.1 202003 0.8 3.6 2 5 0.4
VTABX Vanguard Total Intern Bond Intern Income 4.3 -2.9 201701 0.9 3.5 1 5 3.2
VSCGX Vanguard LifeStrategy Cons Growth Mxd-Ast Alloc Mod 7.0 -8.7 202003 1.7 3.4 2 5 2.3
MTNKX Manning & Napier Target 2020 Mxd-Ast 2020 7.2 -6.8 202003 1.9 3.3 2 5 16.5

FAYZX

FMSDX

Fidelity Advisor Multi-Asset Income Flexible Portfolio 8.6 -10.9 202003 2.3 3.2 3 5 3.4
SWLRX Schwab Mnth Income – Max Payout Retirement Income 4.2 -3.7 202003 1.0 3.0 2 4 2.4
IAU BlackRock iShares Gold Trust Precious Metals 10.8 -13.8 201612 5.4 1.8 4 5
THLGX Toews Tactical Monument Alt Global Macro 9.2 -10.9 201805 5.1 1.6 3 4 1.0

Source: Created by the Author using Mutual Fund Observer

Two Years

Table #5 shows the metrics during the business cycle late stage followed by the COVID induced recession. Newer funds oriented to reduce risk are appearing more frequently. These funds should be used only in moderation – remember Collateralized Debt Obligation tranches were supposed to reduce risk.

Table #5: Top Fund Performance over 2 Years

Symbol Name Lipper Category APR MAXDD Date MAXDD Ulcer Index Martin Ratio MFO Risk MFO Rating Yld
COTZX Columbia Thermostat Flexible Portfolio 17.1 -1.7 201810 0.6 26.4 2 5 1.7
FIXD First Trust TCW Oppor Fixed Income Multi-Sector Income 9.4 -1.1 202003 0.3 23.0 1 5 2.0
HSTRX Hussman Strategic Total Return Mxd-Ast Alloc Consv 13.7 -2.0 201909 0.6 20.1 2 5 0.7
HMXIX AlphaCentric Premium Oppor Options Arbitrage /Strategies 20.8 -3.3 202002 1.0 19.1 3 5
IAU BlackRock iShares Gold Trust Precious Metals 25.8 -4.5 201911 1.6 14.8 3 5
DRSK Aptus Defined Risk Flexible Income 14.2 -2.7 202003 1.0 13.0 2 5 1.4
SUBFX Carillon Reams Uncons Bond Abs Return Bond 7.8 -3.0 202003 0.6 9.8 2 5 2.4
ADVNX Advisory Research Strategic Income Flexible Income 8.4 -3.3 202003 0.8 8.8 2 5 2.5
JHBTX Janus Henderson Global Bond Global Income 7.5 -2.2 201911 0.8 7.3 2 5 1.2
VTABX Vanguard Total Intern Bond Index Intern Income 6.6 -2.5 202003 0.8 6.6 1 5 3.2
FIKFX Fidelity Freedom Index Income Mxd-Ast Today 7.0 -3.1 202003 0.9 6.5 2 5 1.5
VASIX Vanguard LifeStrategy Income Mxd-Ast Alloc Consv 7.8 -4.3 202003 1.1 6.0 2 5 2.4
THLGX Toews Tactical Monument Alt Global Macro 16.5 -7.9 202009 2.6 5.7 3 5 1.0
SWLRX Schwab Mnth Income – Max Payout Retire Income 6.7 -3.7 202003 0.9 5.6 2 5 2.4
PFORX PIMCO Intern Bond (US Dlr-Hdgd) Intern Income 6.0 -3.7 202003 0.9 4.9 1 5 5.9
AEDNX Water Island Event-Driven Alt Event Driven 5.4 -3.1 202003 0.8 4.6 2 5 0.4
GAVIX KL Allocation Flexible Portfolio 10.4 -6.9 201812 2.3 3.8 2 5
EXDAX Manning & Napier Pro-Blend Cons Term Mxd-Ast Alloc Consv 7.4 -5.9 202003 1.6 3.7 2 5 1.5
PAIIX PIMCO Global Bond Oppor (US Dlr-Hdgd) Global Income 5.0 -4.0 202003 0.9 3.7 1 3 3.3
BACPX BlackRock 20/80 Target Allocation Mxd-Ast Alloc Consv 7.1 -5.8 202003 1.6 3.6 2 5 2.0
MTNKX Manning & Napier Target 2020 Mxd-Ast 2020 9.0 -6.8 202003 2.1 3.5 2 5 16.5
EXBAX Manning & Napier Pro-Blend Mod Term Mxd-Ast Alloc Mod 9.1 -7.4 202003 2.2 3.5 2 5 1.0
TMSRX T Rowe Price Multi-Strat Total Return Alt Multi-Strategy 6.1 -4.7 202003 1.4 3.3 2 5 2.4
GPAIX Grant Park Multi Alt Strategies Alt Multi-Strategy 7.3 -4.4 201810 1.8 3.2 2 5 11.2
VTINX Vanguard Target Retire Income Mxd-Ast Today 7.0 -6.6 202003 1.8 3.1 2 4 2.0
VWINX Vanguard Wellesley Income Mxd-Ast Alloc Consv 7.8 -8.6 202003 2.1 3.0 2 4 2.9
VSCGX Vanguard LifeStrategy Cons Growth Mxd-Ast Alloc Mod 7.6 -8.7 202003 2.4 2.5 2 5 2.3
PMZIX PIMCO Mortgage Oppor and Bond Abs Return 4.3 -4.8 202003 1.1 2.5 1 5 4.4
BAMPX BlackRock 40/60 Target Allocation Mxd-Ast Alloc Mod 7.8 -8.9 202003 2.6 2.4 2 5 2.2
NTBIX Navigator Tactical Fixed Income Alt Credit Focus 4.4 -4.0 202003 1.3 2.2 2 4 1.1
BTAL AGFiQ US Market Neutral Anti-Beta Alt Equity Market Neutral 8.6 -7.9 202009 3.8 1.9 3 4 0.8
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Source: Created by the Author using Mutual Fund Observer

Morningstar

During the past week, the S&P 500 has fallen 5.6 percent. Fund performance during dips can provide valuable insight into how the fund will perform during a major correction. Table #6 contains the defensive funds in this article sorted from lowest one week drawdown to highest. The S&P 500 (SPY) and Vanguard Balanced (VBIAX) are included (grey) as baseline funds. The green shaded funds had positive funds, and the yellow shaded funds had a downside capture of 25% or less. Risk and Return refer to performance within the fund’s category.

Table #6: Defensive Fund Short Term Performance

Name Ticker Beta 3 Yr Risk Return Return 1 Week Return 3 Month Return YTD
SPDR S&P 500 Trust SPY 1.0 Average Above Average -5.6 0.4 2.9
Vanguard Balanced VBIAX 1.0 Below Average High -3.5 0.6 5.3
AGFiQ US Market Ntrl Anti-Beta BTAL 1.1 High Above Average 1.5 -8.3 3.2
PIMCO Intern Bond (USD-Hdg) PFORX Average Above Average 0.2 1.5 4.7
Vanguard Total Intl Bd VTABX 0.7 Below Average Average 0.2 0.4 3.9
PIMCO Mort Oppor and Bd PMZIX 0.4 Low Above Average 0.2 1.8 3.8
PIMCO Strtgc Bond PUTIX Low Above Average 0.0 1.4 2.5
PIMCO Glbl Bnd Opps (USD-Hdg) PAIIX Average Average 0.0 1.6 4.9
T. Rowe Price Multi-Strat Ttl Ret TMSRX -0.2 1.9 9.2
First Trust TCWOppor Fxd Inc FIXD 1.0 Below Average High -0.2 -1.0 7.4
Water Island Event-Driven Fund AEDNX Average Above Average -0.3 2.8 7.2
Manning & Napier Uncons Bond EXCPX 0.4 Below Average Above Average -0.5 1.1 4.6
Carillon Reams Uncons Bond SUBFX 0.7 Below Average Above Average -0.5 0.4 8.0
Hussman Strtgc Total Return HSTRX 0.2 Low Average -0.6 -1.2 10.5
Janus Henderson Global Bond JHBTX Below Average Average -0.8 -0.7 8.7
North Square Strtgc Inc ADVNX 0.8 Low Above Average -0.9 -0.5 7.0
Aptus Defined Risk DRSK -0.9 0.1 11.9
Schwab® Mnthly Inc Max Payout SWLRX Low Below Average -1.0 -1.2 2.9
Vanguard LifeStrategy Inc VASIX 0.4 Below Average Above Average -1.1 -0.6 4.6
Fidelity Freedom Inc FIKFX Low Below Average -1.1 -0.8 4.3
BlackRock 20/80 Target Alloc BACPX 0.5 Average Above Average -1.4 -0.3 4.6
iShares Gold Trust IAU High -1.5 -5.1 23.4
Grant Park Multi Alt Strats GPAIX 0.3 Above Average Above Average -1.6 -2.4 2.4
Vanguard Target Retire Inc VTINX 0.5 Average Above Average -1.7 -0.1 3.8
Navigator Tactical Fixed Inc NTBIX 0.5 Average High -1.8 0.3 3.2
AlphaCentric Prem Oppor HMXIX 0.0 Average High -1.8 -0.6 21.8
Manning & Napier Pro-Blend Cnsrv EXDAX 0.5 Low Average -1.9 -0.9 4.2
Vanguard LifeStrategy Cnsrv Gr VSCGX 0.7 Below Average Above Average -2.2 -0.3 3.6
BlackRock 40/60 Target Alloc BAMPX 0.7 Average High -2.4 0.1 5.4
Manning & Napier Pro-Blend Mod EXBAX 0.7 Average Above Average -2.7 -0.4 6.5
Columbia Thermostat COTZX 0.4 Low High -2.8 0.5 19.4
Toews Tactical Monument THLGX 0.4 Average High -3.9 -2.5 16.5
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Source: Created by the Author using Mutual Fund Observer

Portfolio Optimization

So what might a portfolio constructed of these funds look like? For this article, I chose to minimize the drawdown for a return of 8%. As a starting point, I selected most of the funds in the tables for five and two years. The link is provided here, and readers may change parameters and funds to suit their preferences. The downside capture of this portfolio is about 10%. The funds are shown in Table #7. The portfolio is compared the the Vanguard Balanced Fund (VBIAX) in Figure #2.

Table #7: Minimum Drawdown for 8% Return

Source: Created by the Author using Portfolio Visualizer

Figure #2: Optimized Portfolio (Minimum Drawdown) vs VBIAX

Source: Created by the Author using Portfolio Visualizer

The portfolio optimization is limited to the age of DRSK and FIXD. Substituting VSCGX and FAYZX, and changing from minimizing drawdown to maximizing return at 7% volatility would have resulted in the returns shown in Figure #3. The link is provided here. The portfolio returned 7% annualized with only a third of the drawdown of a traditional 60/40 portfolio. This may be the best option if the recession continues longer than many investors anticipate.

Figure #3: Optimized Portfolio (Max Return @ 7% Volatility) vs VBIAX

Source: Created by the Author using Portfolio Visualizer

Closing

This article provides a good starting point for investors wishing to manage risk. My preference is to own low cost funds with a proven track record. I own several of the funds in the green and yellow shaded portion of Table #6. I find several more in the same table that deserve further consideration.

As an update on funds from previous articles, Columbia Thermostat Fund (CTFAX) is now available as a no-load, no transaction fee fund at Fidelity, and (COTZX) is available through Vanguard. KL Allocation Fund Institutional Class (GAVIX) will have its minimum required investment lowered to $5,000 at the beginning of next year.

If you liked this article then you may enjoy other recent articles such as Seeking Yield With Safety, Defensive Funds For This High Risk Market, or Downside Protection For Retirement Portfolios.

Disclosure: I am/we are long VWIAX, TMSRX, SWLRX, VTABX, BTAL, COTZX, DRSK, EXDAX, FIKFX, FMSDX, HSTRX, GAVAX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am an engineer with an MBA nearing retirement and not an economist nor an investment professional. The information provided is for educational purposes and should not be considered as advice. Investors should do their due diligence research and/or use an investment professional. In September 2019, I began contributing to the Mutual Fund Observer monthly newsletter.



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