Figure #1 shows the incremental returns of the S&P 500 minus Baa bonds since 1928. The bars (L) are annual differences and the blue lines are cumulative (R). While it is true that over the long term stocks outperform bonds, there are periods lasting decades where bonds perform as well or better than stocks. With interest rates low and stock valuations high, returns are likely to be volatile and low for the next decade. This is why I look for funds that adapt to the investment environment.

Figure #1: S&P 500 minus Baa Bond Returns

(Source: Created by the Author based on NYU Stern School of Business, Data from here)

Each month, I rate and rank about a thousand funds based on Risk, Risk-Adjusted Returns, Quality, Valuation, Momentum, and Income Factors as described in Behind the Curtains – Building a Ranking System at Mutual Fund Observer. My objective is to identify funds with higher risk-adjusted returns and build a low-volatility portfolio as I near retirement. The first section looks at Mixed Asset Funds including Flexible Portfolio Funds with high risk-adjusted returns, and the second section highlights COTZX, FMSDX, GAVAX, and HNDL.

1. Mixed Asset and Flexible Portfolio Funds with High Risk-Adjusted Returns

This month, I look a little deeper into Flexible Portfolio Funds, which are defined as:

Funds that allocate their investments to both domestic and foreign securities across traditional asset classes with a focus on total return. The traditional asset classes utilized are common stocks, bonds, and money market instruments.

Below are 25 top-ranked mixed asset funds and 11 Flexible Portfolio Funds. The return, including dividends and expenses for the past 12 months, is plotted against risk, which is measured by the Ulcer Index and represents the length and duration of drawdown. The three ellipsoids loosely represent core funds (blue), such as target retirement funds, Lower Risk – Higher Return funds, and Lower Return – Higher Risk Funds. Note that all funds have had positive returns this past year. The symbols in blue boxes are Flexible Portfolio Funds.

Figure #2: Return vs. Risk (Ulcer Index for 12 months)

(Source: Created by the Author Using Mutual Fund Observer)

The following tables show the funds in the chart above. The funds in Table #1 (blue shaded area) are those with the highest risk-adjusted return as measured by the Martin Ratio. It is the risk-free return divided by the Ulcer Index. The funds in Table #2 (green shaded area) are the mixed asset funds that performed as well as traditional conservative funds. The funds in Table #3 (yellow shaded) had positive returns but took more risk to achieve those returns. From Table #1, I own COTZX, FIKFX, and TMSRX.

Table #1: Top Mixed Asset Funds

Symbol Name Lipper Category Ulcer Index Return Martin Ratio Expense Ratio Yield Fund Flow %
GAVAX KL Alloc Adv Flexible Portfolio 0.5 16.3 29.0 1.5 -2.2
THLGX Toews Tactical Monument Alt Global Macro 1.2 33.3 26.2 1.3 0.9 4.3
PHDG Invesco S&P 500 Downside Hedged Absolute Return 1.0 25.9 26.1 0.4 1.3 54.7
RLSIX RiverPark L/S Opport Alt Long/ Short EQ 1.7 40.9 23.6 1.8 0.7 7.7
RPIEX T Rowe Price Dyn Glbl Bond Alt Global Macro 0.5 9.0 16.4 0.7 2.1 0.1
COTZX Columbia Thermostat Fund Flexible Portfolio 0.0 26.5 15.0 0.6 1.7 6.6
QMLFX Advisors Prfrd Quant Mrkt Ldrs Flexible Portfolio 5.0 39.5 7.7 1.7 -1.1
FIKFX Fidelity Freedom Inc Mxd-Ast Trgt Today 0.9 7.7 7.7 0.1 1.6 2.1
TMSRX T Rowe Price Multi-Strtgy Total Return Alt Multi-Strategy 1.4 9.4 6.1 1.2 2.4 15.7

(Source: Created by the Author Using Mutual Fund Observer)

Table #2 contains funds with low-to-moderate risk, good returns, and moderate risk-adjusted returns.

Table #2: Funds with Moderate Risk-Adjusted Returns

Symbol Name Lipper Category Ulcer Index Return Martin Ratio Expense Ratio Yield Fund Flow %
VASIX Vanguard LfStrtgy Inc Mxd-Ast Trgt Consv 1.3 7.2 4.9 0.1 2.5 4.6
GDMA Gadsden Dyn Multi-Asset Alt Multi-Strategy 3.7 19.0 4.9 0.8 1.1 4.1
SWLRX Schwab Monthly Inc – Max Payout Retirement Income 1.1 5.7 4.4 0.2 2.5 5.6
PWS Pacer WealthShield Flexible Portfolio 2.8 12.6 4.2 0.6 1.1 -2.4
FMSDX Fidelity Multi-Asset Income Flexible Portfolio 3.7 15.3 3.9 0.9 3.3 12.3
BAMPX BlackRock 40/60 Trgt Mxd-Ast Trgt Mod 2.9 11.9 3.8 0.7 2.2 2.1
VTINX Vanguard Trgt Retirement Inc Mxd-Ast Trgt Today 2.1 8.5 3.6 0.1 2.2 1.2
HNDL Strategy Shrs Nas 7HANDL Flexible Portfolio 2.9 11.4 3.6 1.2 6.2 16.0
SWCRX Schwab Trgt 2020 Mxd-Ast Trgt 2020 2.8 11.0 3.6 0.4 2.4 -0.5
JABAX Janus Hend. Blncd Mxd-Ast Trgt Mod 4.4 15.4 3.3 0.8 1.4 -0.2
AOK BlackRock Core Consv Mxd-Ast Trgt Consv 2.3 8.3 3.2 0.3 2.3 1.5
FPIFX Fidelity Freedom 2020 Mxd-Ast Trgt 2020 3.4 11.8 3.2 0.1 1.7 0.4
LSWWX Natixis Loomis S. Glbl Alloc Flexible Portfolio 4.9 16.5 3.2 0.9 0.6 1.4
VTMFX Vanguard Tax-Managed Blncd Mxd-Ast Trgt Mod 3.8 12.9 3.1 0.1 1.9 0.7
VSCGX Vanguard Cons Grwth Mxd-Ast Trgt Mod 2.8 9.7 3.1 0.1 2.3 1.4
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(Source: Created by the Author Using Mutual Fund Observer)

While VWIAX is one on my larger holdings, its performance has been respectable but not great this past year. Table #3 contains mostly funds that have done well, but with somewhat higher risk.

Table #3: Funds with Moderate Risk and Risk-Adjusted Returns

Symbol Name Lipper Category Ulcer Index Return Martin Ratio Expense Ratio Yield Fund Flow %
NSOIX North Star Opportunity Flexible Portfolio 7.8 17.6 2.1 1.3 0.9 -0.4
VWIAX Vanguard Wellesley Inc Mxd-Ast Trgt Consv 2.8 6.6 2.1 0.2 2.9 2.7
MBEAX AMG GW&K Global Alloc Flexible Portfolio 5.6 12.3 2.0 1.1 1.2 -3.5
RGBGX Amer. Funds Glbl Blncd Flexible Portfolio 4.9 10.8 2.0 0.5 1.7 0.5
GBLEX Amer. Funds Global Blncd Flexible Portfolio 5.0 10.4 1.9 0.9 1.3 0.5
RPGAX T Rowe Price Global Alloc Flexible Portfolio 5.7 11.5 1.9 1.0 1.3 0.8
UMAFX Victory USAA Managed Alloc Flexible Portfolio 3.9 7.7 1.8 0.8 2.6 -2.3
LCORX Leuthold Core Invest Retail Flexible Portfolio 3.8 7.3 1.7 1.4 0.3 -0.3

(Source: Created by the Author Using Mutual Fund Observer)

2. Flexible Portfolio Funds with High Risk-Adjusted Return

Table #4 contains the Flexible Portfolio Funds with high risk-adjusted performance for the past two years along with VBINX and SPY for comparison. They are sorted from highest Martin Ratio (risk-adjusted return) to lowest. The key take away is that COTZX, GAVAX, and FAYZX/FMSDX have outperformed the Vanguard Balanced Index Fund during the past two volatile years with less risk, but are likely to underperform during less volatile periods. HNDL may be an option for those wishing to own an exchange-traded balanced fund. LSWWX and QMLFX have outperformed by taking on more risk.

Table 4: High Risk-Adjusted Flexible Portfolio Funds with Baseline Funds

(Source: Created by the Author Using Mutual Fund Observer)

Figure #3 shows my short list of Flexible Portfolio Funds for those who seek reasonable returns with less downside risk. I own COTZX and FMSDX, and have GAVAX and HNDL on my watchlist.

Figure #3: High Risk-Adjusted Flexible Portfolio Funds

(Source: Created by the Author Using Mutual Fund Observer)

Table #5 contains the Mutual Fund Metrics for the Flexible Portfolio Funds for the past two years. The MFO Risk is low (2) for GAVAX, COTZX, and HNDL, while it is aggressive (4) for LSWWX. All are in the highest (5) for MFO Rating, bringing them in the top 20% on a risk-adjusted basis.

Table #5: Flexible Portfolio Metrics

(Source: Created by the Author Using Mutual Fund Observer)

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Table #6 contains the current asset allocation of the highlighted funds. These allocations will vary more than in traditional balanced funds.

Table #6: Flexible Portfolio Exposures

(Source: Created by the Author Using Mutual Fund Observer)

Table #7 contains the composite ratings for the funds, which takes into account longer-term performance. This reflects that the some of the funds take on more risk over longer time periods when markets are less volatile.

Table #7: Flexible Portfolio Composite Ratings

(Source: Created by the Author Using Mutual Fund Observer)

KL Allocation Fund

GAVAX is available through Charles Schwab as a no-transaction fee, no load fund with low maximum initial investment. It is available through Fidelity with a transaction fee.

David Snowball summarizes GAVAX in Mutual Fund Observer as:

That cautious flexibility has paid remarkable dividends: the fund has outperformed its benchmark in every one of the 17 drawdowns of 5% or more since its launch and even made money during two of the three major drawdowns between May 2019 and May 2020.

The dividend yield of GAVAX is 7.36% TTM, and the history is shown in Figure #4.

Figure #4: GAVAX Dividend History

(Source: Seeking Alpha)

GAVAX’s objective is:

The fund is trying to grow capital, with the particular goal of beating the MSCI All Country World Index over the long term while maintaining an emphasis on capital preservation. The fund allocates assets between stocks (10-90%), fixed-income securities (10-90%), and cash depending on market conditions. The equity portion of the portfolio is invested in stocks of firms that they designate as “knowledge leaders.” Knowledge Leaders are a group of the world’s leading innovators with deep reservoirs of intangible capital. These companies often possess competitive advantages such as strong brand, proprietary knowledge, or a unique distribution mechanism. Knowledge Leaders are largely service-based and advanced manufacturing businesses, often operating globally. Their investable universe is mid- and large-cap stocks in 24 developed markets. They buy those stocks directly, in local currencies, and do not hedge their currency exposure.

The managers of GAVAX try to limit volatility by:

In addition to the inherent resilience of Knowledge Leaders, they also limit the size of any individual position to 5% of the portfolio. They entirely screen out a number of high leverage sectors, especially those where a firm’s fate might be controlled by government policies or other macro factors. The excluded sectors include financials, commodities, utilities, and energy. Conversely, many of the sectors with high concentrations of knowledge leaders, health care, for example, are defensive.

The second tool is the fixed-income and cash buffer. The extent of equity exposure is controlled by their view of the macro environment. Finally, they have the option to reduce market exposure when some combination of four correlation and volatility triggers are pulled. They monitor the correlation between stocks and bonds, the correlation between stocks within a broad equity index, the correlation between their benchmark index and the VIX and the absolute level of the VIX. In high-risk markets, they increase the buffer. Equities, as a percentage of the portfolio, have ranged over the past five years from 45-70% with a substantial fraction invested overseas.

Columbia Thermostat Fund

Columbia Thermostat Fund is available through Vanguard as a no-load fund and low maximum initial investment. It is not available through Charles Schwab or Fidelity.

From the prospectus:

Generally, the Fund’s allocation to stock funds increases as the S&P 500® Index declines and decreases as the S&P 500® Index rises. When the S&P 500® Index goes up in relation to trading range bands that are predetermined by the Investment Manager, the Fund sells a portion of its stock Portfolio Funds and invests more in the bond Portfolio Funds, and when the S&P 500® Index goes down in relation to the predetermined bands, the Fund increases its investment in the stock Portfolio Funds.

COTZX adjusts its allocation targets based on perceived risk and valuations. Table #6 shows the current targets.

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Table #8: Allocation Targets

S&P 500 Lower S&P 500 Upper Stock Allocation Bond Allocation
2677 + 50% 50%
2570 2677 55% 45%
2467 2570 60% 40%
2368 2467 65% 35%
2273 2368 70% 30%
2182 2273 75% 25%
2095 2182 80% 20%
2011 2095 85% 15%
2011 90% 10%

The dividend yield for COTZX is 5.17% TTM, and the history is shown in Figure #5.

Figure #5: COTZX Dividend History

(Source: Seeking Alpha)

Fidelity Advisor Multi-Asset Income Fund

Fidelity’s Flexible Portfolio Fund is FMSDX.

• Normally investing primarily in income-producing securities of all types.

• Allocating the fund’s assets among equity and debt securities, including common and preferred stock, investment-grade debt securities, lower-quality debt securities (those of less than investment-grade quality, also referred to as high yield debt securities or junk bonds), floating rate securities, and convertible securities.

• Investing in domestic and foreign issuers.

• Allocating assets across different market sectors and maturities.

• Analyzing a security’s structural features and current pricing, its issuer’s potential for success, and the credit, currency, and economic risks of the security and its issuer to select investments.

• Adjusting allocation among asset classes to take advantage of short-term market opportunities and strategic, longer-term opportunities.

FMSDX pays a monthly dividend which is 6.40% (TWD). The dividend history is shown in Figure #6.

Figure #6: FMSDX Dividend History

(Source: Seeking Alpha)

Nasdaq 7HANDL Index ETF

The index is broadly diversified and seeks to offer the potential for high monthly distributions while maintaining a stable net asset value over time. However, the Fund will have risk characteristics similar to the broad U.S. capital markets and will generally rise and fall with prevailing market conditions.

The index represents an allocation to a balanced portfolio of U.S. equities, bonds and alternative investments that employs leverage in an amount equal to 23% of the portfolio.

The index consists of ETFs that are split into two equally weighted categories, a Core Portfolio and a Dorsey Wright Explore Portfolio. The Core Portfolio consists of a 70% allocation to U.S. aggregate fixed income ETFs and a 30% allocation to U.S. large cap equity ETFs. The Dorsey Wright Explore Portfolio consists of an allocation to ETFs in various U.S. asset categories that have historically provided high levels of income, using a tactical asset allocation methodology developed in consultation with Nasdaq Dorsey Wright Investment Research & Analysis that seeks to incorporate momentum, yield and risk.

HNDL pays a monthly dividend, which is currently 3.01% (TTM). The dividend history is shown in Figure #7. A large portion of the dividends is return of capital, which may reduce taxes for some investors.

Figure #7: HNDL Dividend History

Table #9: HNDL Allocations


Of the Flexible Portfolio Funds that I don’t own, GAVAX is of most interest to me. For my next article in Mutual Fund Observer, I will be comparing GAVAX to other funds listed in this article from other Lipper Categories. Your input is welcomed.

Disclosure: I am/we are long COTZX, TMSRX, FMSDX, FIKFX, FTHRX, DODIX, SWLRX, VEMBX, VTINX, VBIIX, VGSTX, VPGDX, VWIAX. 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.