Tag Archives: management

Can October Turnaround Heal Q3 Scars? 3 Leading Fund Categories

Third-quarter 2015 turned out to be a stock market bloodbath. However, much to investors’ relief, markets have rebounded sharply from the beginning of October. Key benchmarks are up significantly since October 1, shrugging off the horrid third-quarter performance. In the third quarter, most mutual fund categories struggled to post gains. In fact our Mutual Fund Commentaries will show how certain fund categories like Energy, Health and Technology failed to have even one mutual fund scoring gains. However, the rebound now has changed the story. Technology and Health are now leading the one-month gains among the mutual fund categories. Since October 1 and till November 15, the Dow Jones Industrial Average, Standard & Poor’s 500 and the Nasdaq Composite Index gained 8.7%, 7.4% and 8.1%, respectively, and the mutual funds will not be exempted from growth. Thus, let’s look at the top 3 fund category gainers and pick one mutual fund from each that carries a favorable Zacks Mutual Fund Rank and is a leading gainer. Third-Quarter Rout China-led global growth fears, uncertainty about the Fed rate hike followed by the no liftoff decision, sell-off in biotech stocks and tumbling commodity prices among other factors resulted in the worst quarter in four years. Like a pack of cards, markets from Beijing to Berlin came tumbling down. Eventually, the quarter ended in massive losses, wherein the performance of mutual funds worsened from the dismal second quarter. In the third quarter, just 17% of mutual funds managed to finish in the green. This is a slump from 41% in the second quarter, which was again a sharp fall from 87% of the funds ending in positive territory in the first quarter. Separately, a JPMorgan (NYSE: JPM ) equity strategy note revealed that 67% of mutual funds underperformed their benchmark in the third quarter. Around 34% of funds underperformed their peers by a minimum of 250 basis points. The Dow, S&P 500 and Nasdaq declined 7.6%, 7% and 7.4%, respectively. The Dow registered its third-consecutive quarter of losses and the S&P 500 slumped for the second straight quarter. To term the third quarter of 2015 as a “bloodbath” would not be too off the mark. October Rebound Markets posted their best monthly performance in four years in October. For the month, the S&P 500, the Dow and the Nasdaq soared 8.1%, 8.6% and 9.2%, respectively. Investors largely ignored weak economic data to focus on positive external signals. In a surprise move, China’s central bank cut key rates, leading to further optimism. Additionally, the European Central Bank (ECB) said it would further boost the region’s economy. Tech and healthcare sectors staged a strong rebound, boosting the broader markets. Finally, the Federal Reserve refrained from hiking rates but indicated that such a move was likely in December. Earnings numbers were mixed, once again reflecting weakness in revenues. However, impressive results from the tech sector and resurgence in healthcare stocks boosted the broader markets. November So Far During the first week, the Dow, S&P 500 and Nasdaq gained 1.4%, 1% and 1.9%, respectively. Benchmarks registered weekly gains for the sixth-consecutive week. Merger and acquisition news including that between Dyax (NASDAQ: DYAX ) and Shire plc (NASDAQ: SHPG ), and Treehouse Foods, Inc. (NYSE: THS ) and ConAgra Foods, Inc.’s (NYSE: CAG ) spread cheer. Meanwhile, encouraging third-quarter earnings from companies like The Clorox Company (NYSE: CLX ), Michael Kors Holdings Limited (NYSE: KORS ), Facebook, Inc. (NASDAQ: FB ) and Ralph Lauren Corporation (NYSE: RL ) lifted the benchmarks. Also, strong auto sales data and a better-than-expected reading of the ISM Services Index helped benchmarks to finish the week in the green. Meanwhile, energy shares registered gains despite continued decline in oil prices. However, benchmarks lost some sheen in the second week following a sell-off in retail and energy shares. Nonetheless, markets are expected to continue the positive momentum. 3 Leading Mutual Fund Category Gainers It is not that every fund category is in the green over the past one month. Surprisingly, the Municipal Bond funds, including sub categories like Muni California Long and Muni New Jersey are in the negative territory. These funds were among the few to have posted gains in the third quarter. (Data source: Morningstar) On the contrary, key fund sectors that ended in the red last quarter are now leading one-month gains. Technology and Health are standing out. Let’s look at the top 3 fund categories, and one fund from each that is a leading gainer carries either a Zacks Mutual Fund Rank #1 (Strong Buy), Zacks Mutual Fund Rank #2 (Buy) or Zacks Mutual Fund Rank #3 (Hold), and have a minimum initial investment within $5000 . Technology The technology sector’s mutual funds were far from enjoying encouraging trends in the third quarter. Morningstar data revealed that the Technology fund category lost 7.7%. None of the technology mutual funds we studied could post gains in the quarter. The average loss for these 199 funds was 8%. Now, with a nearly 5% jump over the past one month, the Technology mutual fund category is the leading gainer. The technology stocks impressed with their third-quarter earnings at a time when the overall growth picture was challenged. The tech sector’s stock-price performance reflects strength as its S&P 500 members outperformed the index over the trailing 4-week period. BlackRock Science & Technology Opportunities Investor A (MUTF: BGSAX ) is a leading gainer in the technology sector. BGSAX’s one-month gain is 4.3%. Since October 1, BGSAX has returned 7.6%. BGSAX invests the majority of its assets in equity securities issued by domestic and foreign science and technology companies. BGSAX may invest a maximum 25% of its net assets in emerging economies and generally invests in common stocks, with preferred stocks and convertible securities also considered. BGSAX currently carries a Zacks Mutual Fund Rank #1. Health The robust rally by the Healthcare mutual fund category ended somewhat brutally in the third quarter. After finishing 2014, and the first and second quarters of 2015 as the top gainer among the sector equity funds, healthcare mutual funds finished in the bottom 10 in the third quarter. According to Morningstar, the Healthcare mutual fund category slumped 13.7% and surprisingly, not a single healthcare mutual fund could finish in the positive territory in the July-September period. Over the past one month, Healthcare has gained 3.7%. Growth prospects for the sector are strong thanks to strong fundamentals and an overestimation of the impact of recent events. Encouraging earnings results from several companies such as UnitedHealth Group Inc. (NYSE: UNH ) and Amgen Inc. (NASDAQ: AMGN ) helped the health care sector to stage a rebound in October. BlackRock Health Sciences Opportunities R (MUTF: BHSRX ) gained 2.4% over the past one month. Since October 1, BHSRX has improved 2.8%. BHSRX invests most of its assets in health sciences and related sectors such as health care equipment and supplies, health care providers and services, biotechnology, and pharmaceuticals. BlackRock Health Sciences Opportunities R currently carries a Zacks Mutual Fund Rank #3. Japan Stock Expectations of additional stimulus, rising corporate profitability and attractive valuations are driving the Japan mutual funds. Japan’s benchmark Nikkei 3000 confirmed the momentum with a 10.9% surge since October 1. Japanese companies’ earnings have improved a lot since the launch of Abenomics courtesy of the declining Yen. Nominal GDP has actually turned upward since 2013, after 20 years of sideways movement. Many are expecting Bank of Japan to come up with higher asset purchases in the coming months. Over the past one month, the Japan category has gained 3.7%. Commonwealth Japan (MUTF: CNJFX ) boasts one-month gain of 2.5%. Since Oct 1, CNJFX has jumped 8.5%. CNJFX invests the majority of its assets in securities and depositary receipts that include American Depositary Receipts, Global Depositary Receipts and European Depositary Receipts. The securities are issued by Japanese firms and are economically tied to the country. Commonwealth Japan currently carries a Zacks Mutual Fund Rank #3. Original post .

Enhanced Version Of Low Volatility Momentum Strategy

Summary This article continues the work of my previous article on a tactical asset allocation strategy for Schwab or Fidelity platforms using bond mutual funds with very low volatility. The original basket of funds was modified by exchanging one fund for a less volatile fund, and adding a floating-rate loan fund to enhance the strategy when rates are rising. The backtested results show a CAGR of 12.8%, a MaxDD of -2.9%, and a MAR (defining reward/risk) of 4.4. The worst year from 2000 – 2015 had a +5.6% return. Additional details are presented to help understand the practical implementation of the strategy on Schwab or Fidelity platforms. Funds are traded without costs except for a $50 short-term trading fee. The purpose of this article is to present an enhanced version of the Low Volatility Strategy [LVS] that I presented previously (see here ). Based on comments and further study, I have slightly modified the original LVS-1. The -1 designation means one fund is selected each month from a basket of funds. The original LVS-1 had a basket of four mutual funds coming from four different bond classes. Each fund had very low volatility (i.e. daily standard deviations [DSDs] of 0.35% or less) and the funds were mostly non-correlated to each other. A relative strength approach was used in which the funds were ranked based on their total returns over the previous ten trading days. The top-ranked fund was selected at the end of each month unless it failed a 10-day simple moving average [SMA] test, in which case the money went to a safe harbor. The safe harbor was a money market fund. Further details are explained in the previous article. The original basket of funds for application to the Schwab or Fidelity platforms were: Nuveen High Yield Municipal Bond Fund (MUTF: NHMAX ) Principal High Yield Fund (MUTF: CPHYX ) PIMCO Mortgage-Backed Fund (MUTF: PTMDX ) Dreyfus U.S. Treasury Intermediate Term Fund (MUTF: DRGIX ) Changes to Original Basket and Backtest Results After further study, I have replaced DRGIX with the Loomis Sayles Limited Term Government and Agency Fund (MUTF: NEFLX ) because of its reduced risk (reduced DSD that resulted in lower MaxDD). More importantly, I added a floating rate loan fund to the basket in order to improve performance in a rising rate environment. Since I decided to concentrate on the basket of funds for the Schwab and Fidelity platforms, NHMAX limited how far back I could go in a backtest (2000). Thus, I needed a floating rate loan fund with an inception date in 1999 or before. There were three candidates: Oppenheimer Senior Float-Rate Fund (MUTF: OOSAX ): Annualized Return = 4.66%, DSD = 0.18% Invesco Floating-Rate Fund (MUTF: AFRAX ): Annualized Return = 3.62%, DSD = 0.20% Blackrocks Floating Rate Income Portfolio Fund (MUTF: BFRAX ): Annualized Return = 3.76%, DSD = 0.21% OOSAX was selected because it has the highest annualized return and lowest DSD. Thus, the final basket for use on Schwab or Fidelity platforms is: NHMAX, CPHYX, PTMDX, NEFLX and OOSAX. A correlation matrix is shown below, together with annualized returns and various forms of volatility numbers. It can be seen that all funds are noncorrelated except for PTMDX and NEFLX that have a correlation of 0.81. (click to enlarge) Using these funds, LVS-1 was run on Portfolio Visualizer, a commercially-free software package. The backtest was limited to 2000 – 2015 due to the histories of the selected mutual funds. In this article, I am only going to focus on the LVS-1 using mutual funds we will trade on Schwab and Fidelity. However, it should be noted that, in the previous article, this basic strategy was backtested to 1988 using proxies, and good performance and low risk were demonstrated. The results of LVS-1 are shown below, along with results for a buy & hold, equal weight portfolio. Total Return: 2000 – 2015 (click to enlarge) Annual Return (click to enlarge) Tabulated Annual Return (click to enlarge) Drawdown (click to enlarge) Summary Table (click to enlarge) It can be seen that the Compounded Annualized Growth Rate [CAGR] is 12.8%, the standard deviation [SD] is 5.5%, the worst year is +5.4%, and the maximum drawdown [MaxDD] is -2.9%. There are no losing years, and the monthly win rate is 84%. In terms of reward/risk, the MAR (CAGR/MaxDD) is 4.4. This strategy is appropriate for an investor who wants moderate growth and very low risk. Further Thoughts on Implementing LVS-1 on Schwab and Fidelity Platforms The funds that were selected are no load /no fee funds on Schwab and Fidelity. This means the loads are waived, and there are no commission fees. The only fee you will pay is a short-term trading fee of $49.95 if you sell a fund within 90 calendar days on Schwab or within 60 calendar days on Fidelity. So in some instances, you will hold a fund for multiple months, and avoid the short-term trading fee. But most of the time, there will be a charge when you sell a fund. LVS-1 averages about 8 trades per year. That means it will cost about $400 in short-term trading fees per year. For a $100K account, this will come out to 0.4% per year. But there are no other fees. I also looked at the prospectus of each fund pertaining to trading frequency restrictions. All of the funds warn about excessive trading, but they combat excessive trading in different ways. Round-trips are sometimes used to define excessive trading. A round-trip is the buying and selling of one fund in one account. Excessive trading for the mutual funds of interest are: NHMAX: Limited to two round-trips in a 60-day period. CPHYX: Must hold the fund for 30 days before selling. PTMDX: Nothing specific stated. NEFLX: Limited to two round-trips within a rolling 90-day period. OOSAX: 30-day exchange limit. Fund is blocked for 30 days. Thus, there are no limitations that will stop the trading of the LVS-1 strategy as long as we make our trades 30 days apart. This means if we trade on March 1st, our next trade cannot occur until March 31st at the earliest. Conclusion In conclusion, the LVS-1 shows the potential to achieve 12% net growth on average with maximum drawdown (based on monthly returns) of less than 3%. More realistically, this strategy probably has the potential to earn 10% per year with a maximum drawdown of 5%. The monthly win rate should be higher than 80% according to backtesting. As far as I can tell, this strategy should be viable in Schwab or Fidelity accounts as long as the trades are made 30 calendar days apart. To maintain a spacing of 30 days between trades, a schedule is presented in this article . Recently Herbert Haynes has duplicated this strategy and has looked at the effect of trade day on the results. He has shown that trade day is of paramount importance; the only trade days that produce good results are end-of-the-month [EOM] and first day-of-the-month. It is not clear what causes this seasonality of the strategy. Perhaps it is the effect of using funds with large dividends that occur at EOM, or perhaps it is the effect of a short timing period.