Tag Archives: mutffschx

Will A Fidelity Select Funds Portfolio Perform Well In A Rising Interest Rates Environment?

Summary Old portfolio: FBMPX, FSCHX, FSELX, FSPHX, FGMNX. New portfolio: FBMPX, FSCHX, FSELX, FSPHX, FIBIX, FSBIX. The new portfolio significantly outperforms the old one. In a previous article , we presented the performance of a portfolio made up of five Fidelity select mutual funds. That portfolio had a stellar performance over the whole 27-year period from 1987 to 2015, but we are concerned about its performance in a stock bear market within a rising interest rate environment. To increase its robustness for such events, we decided to replace the GNMA fund (MUTF: FGMNX ) with two high-quality government bonds. The portfolio is made up of the following funds: Fidelity Select Multimedia Portfolio No Load (MUTF: FBMPX ) Fidelity Select Chemicals Portfolio No Load (MUTF: FSCHX ) Fidelity Select Electronics Portfolio No Load (MUTF: FSELX ) Fidelity Select Medical Delivery Portfolio No Load (MUTF: FSHCX ) Fidelity Spartan Intermediate Trust Bond Index Fund Inv (MUTF: FIBIX ) Fidelity Spartan Short Term Trust Bond Index Fund Inv (MUTF: FSBIX ) Our old portfolio performed very well during the two big bear markets of 2000-03 and 2008-09. During those markets, the portfolio was invested mostly in the GNMA fund that experienced growth due to declining interest rates associated with economic contraction. But if a stock bear market happens while interest rates are rising, the GNMA fund most likely would not offer protection. We expect that a short-term government bond would allow the portfolio capital to be preserved during such adverse market environments. Due to their low sensitivity to interest rates, the short-term Treasury bonds act mostly as cash. Basic information about the funds was extracted from Yahoo Finance and is shown in the table below. Table 1 Symbol Inception date Net assets Yield% Category FSELX 7/29/1985 2.32B 0.47% Technology FBMPX 6/30/1986 803M 0.24% Consumer Cyclical FSPHX 7/14/1981 10.75B 1.90% Health FSCHX 7/29/1985 1.47B 1.02% Natural Resources FIBIX 12/20/2005 1.35B 1.90% Intermediate Term Treasuries FSBIX 12/20/2005 863M 0.76% Short Term Treasuries Since the historical price data of the bond funds is available only from December 2005 on, and we need 65 trading days for estimating market parameters, we were able to simulate our optimal allocation strategy starting with April 2006. We performed an analysis of the difference in performance of the old and the new portfolios. The data for the study were downloaded from Yahoo Finance , using the Historical Prices menu for FGMNX, FBMPX, FSCHX, FSELX, FSPHX, FIBIX, and FSBIX, respectively. We use the daily price data adjusted for dividend payments. The portfolio is managed as dictated by a variance-return optimization algorithm developed on the Modern Portfolio Theory ( Markowitz ). The allocation is rebalanced monthly at market closing of the first trading day of the month. In table 2 below, we present the performance of the new portfolio for three levels of risk. Table 2. Portfolio performance from April 2006 to June 2015 TotRet% CAGR% No. of trades maxDD% VOL% Sharpe Sortino Low risk 247.96 14.41 112 -8.02 8.81 1.63 2.27 Medium risk 363.25 18 108 -9.86 12.35 1.46 2.01 High risk 457.9 20.39 94 -13.26 15.01 1.36 1.9 SPY 91.37 7.26 0 -55.18 20.98 0.35 0.41 In figure 1, we show the graphs of the portfolio equities. (click to enlarge) Figure 1. Equity curves for three portfolios adaptively optimized for low-, medium- and high-risk targets. Source: This chart is based on EXCEL calculations, using the adjusted monthly closing share prices of securities. In figure 2 below, we show the time variation of the percentage allocation of the funds for medium risk. (click to enlarge) Figure 2. Asset allocations for the new portfolio adaptively optimized for the medium risk target Source: This chart is based on EXCEL calculations, using the adjusted monthly closing share prices of securities. In figure 2, it can be observed that during the bear market of 2008-09, most money was allocated to the intermediate-term bond fund, FIBIX. During the market corrections of 2010 and 2011, most money was allocated to the short-term bond fund, FSBIX. The current fund allocations are shown in table 3. Table 3. Asset allocations for July 2015 FSELX FBMPX FSPHX FSCHX FIBIX FSBIX Low risk 30% 70% 0% 0% 0% 0% Medium risk 0% 100% 0% 0% 0% 0% High risk 0% 100% 0% 0% 0% 0% We also simulated the performance of the old portfolio over the same time period from April 2006 to June 2015 and for the same risk levels. Consistently over the whole simulation period, the new portfolio outperformed the old one by about a 40% increase in annual returns and a 20% or more decrease in maximum drawdown. We compared the returns of the portfolios over the bear market of 2008 and the market corrections of 2010 and 2011. The results are shown in table 4. Table 4. Total returns of the portfolios during market downturns Time Period SPY Old Portfolio New Portfolio 12/2007 – 3/2009 -48.92 -11.08% 9.74% 3/2010 – 7/2010 -10.95 -5.75% -0.30% 4/2011 – 9/2011 -16.22 -1.59% 15.51% From table 4, it is clear that the new portfolio performs better than the old one, and that it is very robust to market downturns. Unfortunately, there were no long enough periods of rising interest rates to allow us to make any judgment about the behavior of the portfolios during such times. It is our belief that in a long period of rising interest rates, the new portfolio will suffer only small losses by parking the money in the short-term bond fund. Conclusion The modified Fidelity portfolio performed significantly better than the old one. It even made gains during the 2008 bear market and the 2011 market correction. While there is no empirical data to prove it, we believe that the new portfolio is robust and will perform well even during a prolonged period of rising interest rates. Disclosure: I am/we are long FSELX, FSPHX. (More…) 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.

Safe Withdrawal Rates For Retirement Income Portfolios Using Fidelity Select Mutual Funds

Summary Robust investment portfolios with large withdrawal rates can be constructed with Fidelity select mutual funds. From January 1990 to December 2014, a Fidelity portfolio with fixed allocation allowed a safe 6% annual withdrawal rate and achieved 6.19% annual increase of the capital. Same portfolio with rebalancing at 25% deviation from the target allowed a safe 6% annual withdrawal rate and achieved 7.78% compound annual increase of the capital. Radically better performance is achieved using adaptive asset allocation. Same portfolio allowed a safe 6% annual withdrawal rate and 22.05% annual increase of the capital. The Chicago South Suburban Investment Club has been experimenting with a monthly asset rotation strategy applied to a hypothetic IRA account using five Fidelity mutual funds. On the last trading day of each month, the funds are ranked by the previous 3-month return. All equity is invested in the fund with the highest return, as long as that return is positive. If all the assets had negative returns over the previous 3 months, then all equity is moved into CASH. The five mutual funds considered for investment are the following: Fidelity GNMA (MUTF: FGMNX ) Fidelity Select Multimedia (MUTF: FBMPX ) Fidelity Select Chemicals (MUTF: FSCHX ) Fidelity Select Electronics (MUTF: FSELX ) Fidelity Select Health Care (MUTF: FSHCX ) This experiment has been ongoing since July 2014. It extends over a period of 5 months. Within this time interval, the system had been invested 4 months in FSPHX, 1 month in FSELX, and current month in FLBIX. The results are showed in the table below. Table 1. Momentum allocation portfolio August 2014 to January 2015 Month AUG SEP OCT NOV DEC JAN ETF FSPHX FSPHX FSPHX FSPHX FSELX FLBIX BUY 206.52 218.7 218.92 228.7 81.43 13.32 SELL 218.7 218.92 228.7 236.08 84.78 RETURN 5.90 0.10 4.47 3.23 4.11 EQUITY 100.00 105.90 106.00 110.74 114.31 119.02 In this article, three different strategies will be considered: (1) Portfolio is initially invested 50% in the bond fund , and 12.5% each in the four equity funds without rebalancing. (2) Portfolio is initially invested 50% in the bond fund , and 12.5% each in the four equity funds but is rebalanced when the allocation to any fund deviates by 25% from its target. (3) Portfolio is at all times invested 100% in only one fund. The switching, if necessary, is done monthly at closing of the last trading day of the month. All money is invested in the fund with the highest return over the previous 3 months. The data for the study were downloaded from Yahoo Finance on the Historical Prices menu for the five tickers, FGMNX, FBMPX, FSCHX, FSELX, FSPHX. We use the monthly price data from January 1990 to December 2014, adjusted for dividend payments. The purpose of this exercise is to develop a robust strategy for income generation in retirement. The paper is made up of two parts. In part I, we examine the performance of portfolios without any income withdrawal. In part II, we examine the performance of portfolios when income is extracted periodically from the account. Part I : Portfolios without withdrawals In table 2 we show the results of the portfolios managed for 25 years, from January 1990 to December 2014. Table 2. Portfolios without withdrawals 1990 – 2014. Strategy Total return% CAGR% Number trades MaxDD% Fixed-no rebalance 1,463 11.62 0 -49.21 Fixed-25% rebalance 1,395 11.43 28 -22.55 Adaptive 18,015 23.35 126 -33.11 The time evolution of the equity in the portfolios is shown in Figure 1. (click to enlarge) Figure 1. Equities of portfolios without withdrawals. Source: This chart is based on EXCEL calculations using the adjusted monthly closing share prices of securities. Notice that the prices are shown in a logarithmic scale. That allows a better differentiation between the curves. It is apparent that the rate of increase of the adaptive portfolio is very stable and is substantially greater than the rate of the fixed allocation portfolios. One can also see that rebalancing of the fixed allocation portfolio makes its rate of increase much more stable than that of the portfolio without rebalancing. Part II: : Portfolios with withdrawals Assume that we have $1,000,000 to invest for income in retirement. In table 2 we show the results of the portfolios managed for 10 years, from January 2005 to December 2014. Money was withdrawn monthly at a 6% annual rate of the initial investment plus a 2% inflation adjustment. Over the 10 years from January 2005 to December 2014, a total of $664,704 was withdrawn. Table 3. Portfolios with 6% annual withdrawal rate 2005 – 2014. Strategy Total return% CAGR% Number trades MaxDD% Fixed-no rebalance 122.63 2.06 0 -28.82 Fixed-25% rebalance 125.76 2.32 5 -30.11 Adaptive 278.92 10.8 56 -15.92 The time evolution of the equity in the portfolios is shown in Figure 2. (click to enlarge) Figure 2. Equities of portfolios with 6% annual withdrawal rates. Source: This chart is based on EXCEL calculations using the adjusted monthly closing share prices of securities. Conclusion The adaptive allocation algorithm performed substantially better than the fixed allocation algorithms. The fixed allocation strategies allow a safe withdrawal rate of 6% at any time horizon between 1990 and 2014, without a substantial decrease of capital. The adaptive allocation algorithm allows a 6% annual withdrawal rate while assuring a substantial increase of capital. In fact, the momentum-based adaptive allocation strategy allows a safe 10% annual rate of withdrawal without any decrease of capital.