Tag Archives: investment

Day-Of-Month Effect On A Bond/Equity Portfolio

In this post we will: Take a look at a simple, momentum based, monthly rebalanced Equity/Bond portfolio. Search for what has been the optimal dates in the month to rebalance such a portfolio. Each month we allocate to two ETFs: SPY and TLT . If SPY has outperformed TLT we rebalance to 60% SPY – 40% TLT. If TLT has outperformed SPY we rebalance to 20% SPY – 80% TLT. For the first run we will re-balance on the first of the month and close at the last day of the month. Click to enlarge source: sanzprophet.com Now we will try different combinations of entry and exit days. We will try to purchase x days before or after the month and instead of exiting at the end of the month we will exit after y days. Click to enlarge source: sanzprophet.com Click to enlarge source: sanzprophet.com The top chart is optimized for Net Profit while the second one for annual return/max drawdown. They are similar in this case, but we will use the second one. According to the chart the best combinations have been: Buy 3-7 days after the month and hold for around 10-18 days. The BuyDayRefToMonth variable refers to when we buy relative to the turn of the month. For example -5 means we buy five days after the turn of the month (i.e., the 6th trading day). +5 means we buy 5 days before the month ends. The BarsnStop variable refers to how many days later we sell the positions. Looking at the charts more closely we see that buying after (not before) the 1st of the month gives consistently better results when set between 2 and 7 days. Click to enlarge source: sanzprophet.com How many days we hold the investment is less obvious and seems to work across the given range: Click to enlarge source: sanzprophet.com Let’s run this again but now only for 2012-May 2016: Click to enlarge source: sanzprophet.com Similar results. The only difference is that the holding times are shorter. Let’s now input the optimized numbers and run the backtest. Obviously we will get something that looks good since it has been fit to the data. We buy 6 days after the month and hold 10 trading days. Click to enlarge source: sanzprophet.com Conclusion: There are many variables that affect how we run a dynamic Equity/Bond portfolio. We optimized only two of them, namely when to rebalance relative to the turn of the month and how many days to hold the investment. In terms of entry it was better to wait 3-6 days after the month changes to enter the trade. When it comes to this bond/equity portfolio, rebalancing late is better. Disclosure: I am/we are long SPY, TLT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Q2 2016 Style Ratings For ETFs And Mutual Funds

At the beginning of the second quarter of 2016, only the Large Cap Value and Large Cap Blend styles earn an Attractive-or-better rating. Our style ratings are based on the aggregation of our fund ratings for every ETF and mutual fund in each style. Investors looking for style funds that hold quality stocks should look no further than the Large Cap Value and Large Cap Blend styles. These styles house the most Attractive-or-better rated funds. Figures 4 through 7 provide more details. The primary driver behind an Attractive fund rating is good portfolio management , or good stock picking, with low total annual costs . Attractive-or-better ratings do not always correlate with Attractive-or-better total annual costs. This fact underscores that (1) cheap funds can dupe investors and (2) investors should invest only in funds with good stocks and low fees. See Figures 4 through 13 for a detailed breakdown of ratings distributions by style. Figure 1: Ratings For All Investment Styles Click to enlarge Source: New Constructs, LLC and company filings To earn an Attractive-or-better Predictive Rating, an ETF or mutual fund must have high-quality holdings and low costs. Only the top 30% of all ETFs and mutual funds earn our Attractive or better rating. Absolute Shares WBI Tactical LCV Shares (NYSEARCA: WBIF ) is the top rated Large Cap Value fund. It gets our Very Attractive rating by allocating over 34% of its value to Attractive-or-better-rated stocks. Ameriprise Financial (NYSE: AMP ) is one of our favorite stocks held by WBIF and earns a Very Attractive rating. Over the past decade, Ameriprise has grown after-tax profit ( NOPAT ) by 8% compounded annually. The company has improved its return on invested capital ( ROIC ) from -2% in 2008 to 11% in 2015. Similarly, the company has increased its NOPAT margin from 11% in 2005 to 14% in 2015. Across all facets, Ameriprise is improving business fundamentals, yet the stock remains undervalued. At its current price of $99/share, AMP has a price-to-economic book value ( PEBV ) ratio of 1.1. This ratio means that the market expects Ameriprise to grow NOPAT by only 10% over its remaining corporate life. If AMP can grow NOPAT by just 6% compounded annually for the next decade , the stock is worth $132/share today – a 33% upside. ProFunds Mid-Cap Value ProFund (MUTF: MLPSX ) is the worst rated Small Cap Value fund. It gets our Very Dangerous rating by allocating over 37% of its value to Dangerous-or-worse-rated stocks. Making matters worse, total annual costs are a whopping 6.72%. New York Community Bancorp (NYSE: NYCB ) is one of our least favorite stocks held by MLPSX and earns a Dangerous rating. Over the past decade, New York Community Bancorp’s NOPAT has declined from -$294 million to -$80 million. Over the same time period, the company’s ROIC declined from 8% to a bottom-quintile -1%, while its NOPAT margins fell from 43% in 2005 to -13% in 2015. Worst of all, the stock has not followed this decline in operating performance and is significantly overvalued. In order to justify its current price of $15/share, NYCB must immediately achieve positive pre-tax margins of 18% (from -21% in 2015) and grow revenue by 31% compounded annually for the next 13 years . In this scenario, NYCB would be generating over $20 billion in revenue 13 years from now, which is equal to Aflac’s (NYSE: AFL ) revenue in the last fiscal year. It’s clear the expectations baked into NYCB are overly optimistic. Figure 2 shows the distribution of our Predictive Ratings for all investment style ETFs and mutual funds. Figure 2: Distribution of ETFs & Mutual Funds (Assets and Count) by Predictive Rating Click to enlarge Source: New Constructs, LLC and company filings Figure 3 offers additional details on the quality of the investment style funds. Note that the average total annual cost of Very Dangerous funds is almost four times that of Very Attractive funds. Figure 3: Predictive Rating Distribution Stats Click to enlarge * Avg TAC = Weighted Average Total Annual Costs Source: New Constructs, LLC and company filings This table shows that only the best of the best funds get our Very Attractive Rating: they must hold good stocks AND have low costs. Investors deserve to have the best of both and we are here to give it to them. Ratings by Investment Style Figure 4 presents a mapping of Very Attractive funds by investment style. The chart shows the number of Very Attractive funds in each investment style and the percentage of assets in each style allocated to funds that are rated Very Attractive. Figure 4: Very Attractive ETFs & Mutual Funds by Investment Style Click to enlarge Source: New Constructs, LLC and company filings Figure 5 presents the data charted in Figure 4 Figure 5: Very Attractive ETFs & Mutual Funds by Investment Style Click to enlarge Source: New Constructs, LLC and company filings Figure 6 presents a mapping of Attractive funds by investment style. The chart shows the number of Attractive funds in each style and the percentage of assets allocated to Attractive-rated funds in each style. Figure 6: Attractive ETFs & Mutual Funds by Investment Style Click to enlarge Source: New Constructs, LLC and company filings Figure 7 presents the data charted in Figure 6. Figure 7: Attractive ETFs & Mutual Funds by Investment Style Click to enlarge Source: New Constructs, LLC and company filings Figure 8 presents a mapping of Neutral funds by investment style. The chart shows the number of Neutral funds in each investment style and the percentage of assets allocated to Neutral-rated funds in each style. Figure 8: Neutral ETFs & Mutual Funds by Investment Style Click to enlarge Source: New Constructs, LLC and company filings Figure 9 presents the data charted in Figure 8. Figure 9: Neutral ETFs & Mutual Funds by Investment Style Click to enlarge Source: New Constructs, LLC and company filings Figure 10 presents a mapping of Dangerous funds by fund style. The chart shows the number of Dangerous funds in each investment style and the percentage of assets allocated to Dangerous-rated funds in each style. The landscape of style ETFs and mutual funds is littered with Dangerous funds. Investors in Small Cap Value funds have put over 34% of their assets in Dangerous-rated funds. Figure 10: Dangerous ETFs & Mutual Funds by Investment Style Click to enlarge Source: New Constructs, LLC and company filings Figure 11 presents the data charted in Figure 10. Figure 11: Dangerous ETFs & Mutual Funds by Investment Style Click to enlarge Source: New Constructs, LLC and company filings Figure 12 presents a mapping of Very Dangerous funds by fund style. The chart shows the number of Very Dangerous funds in each investment style and the percentage of assets in each style allocated to funds that are rated Very Dangerous. Figure 12: Very Dangerous ETFs & Mutual Funds by Investment Style Click to enlarge Source: New Constructs, LLC and company filings Figure 13 presents the data charted in Figure 12. Figure 13: Very Dangerous ETFs & Mutual Funds by Investment Style Click to enlarge Source: New Constructs, LLC and company filings D isclosure: David Trainer and Kyle Guske II receive no compensation to write about any specific stock, sector or theme. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.