In part one I laid out the concept of "trading" versus holding by investing in funds with active and effective trading managers. The funds are Hussman's Strategic Total Return Fund (HSTRX); PIMCO's All Asset-All Authority Fund (PAUIX or PAUDX), guided by Rob Arnott, the allocation master who can move around amongst almost any of PIMCO's excellent funds; and Oakmark's Equity and Income fund (OAKBX). When OAKBX is closed to new investment, as it is right now,FPA Crescent (FPACX) is an equally excellent alternative. These three funds out performed both the Vanguard SP500 fund and the Vanguard Total Bond Market Index fund during the past five volatile years. In my view they make an excellent core portfolio for conservative growth and income and could work both for patient accumulators (pre-retirement) and for a part of a retirement portfolio. They throw off an average of 3% cash dividends, but this is insufficient for most retirement portfolios.
I mentioned the possibility that interest yields could well rise after a 30 year bond bull market. Higher rates sound nice, but of course bonds and other interest or higher yeld instruments are priced inversely to yields, so higher rates would send them all down, and the farther out in time they mature the greater would be the price decline. One can always buy individual bonds or other yield instruments and hold them until they mature, but then one has taken on the credit risk of the issuer of just a few instruments. A mutual or closed-end fund fund spreads that risk over a larger number of bonds. So does an index fund or ETF, but we get average results with them whereas we want excellent management that gets superior results.
Again I am limiting this income portfolio to three funds as I did with the conservative growth and income group: Loomis Sayles Bond Fund (LSBDX or LSBRX), Berwyn Income Fund (BERIX) and Pimco Bond Fund (PTTRX or PTTDX). LSBDX is a "go anywhere, do anything" bond fund with nearly 18 years of superior growth and which specializes in better grade BBB and higher higher-yield corporate and foreign bonds. They can and do change their portfolio to meet the best available securities. Just one example is the fact that they have emphasized Canadian government bonds for several years among their mix. Current yield per Yahoo is 5.89% paid in monthly distributions.
BERIX is versatile and specializes in looking at the issued common stock, preferred stock, convertibles and regular bonds of select companies. Currently they have 27% US stocks, 2% foreign stocks, 30% bonds, 20% preferreds and convertibles, and 20% cash. Current yield is 3.93% paid in quarterly cash distributions.
PTTRX is Bill Gross's workhorse Total Return Bond Fund which is the largest US mutual fund by assets. The duration (maturity interest rate sensitivity) is about five years and currently pays 3.10% in monthly distributions.
The average current yield of the three is 4.30%. That doesn't really sound like "high yield" but it truly is currently for conservative managed funds with nearly all investment grade securities and moderate five to six year duration/maturity. In my own case these are the core of my income accounts which are then "flavored" with much higher yield preferreds (CMO PrB, MHR PrC), a few oil and gas trusts (CRT, PBT, SBR) few closed-end funds (AWF, EVV, GIM) and a few mortgage REITs (AGNC, ANH, STWD. These "flavors" raise the overall yield to 8% and all of them are listed stocks and can be sold at any time without disturbing the core funds. The core funds are augmented also by long term holdings of three Vanguard funds: Wellesley Income (VWAIX/VWINX), Ginnie Mae (VFIJX/VFIIX), and Short Term Corporate (VFSUX, VFSTX)funds which nearly make another portolio core by themselves.
But I strongly feel that one could do very well over time with just the three core funds and a little bit of high yield "flavoring" for a "trading" conservative income portfolio which will trade for you. The core funds will very likely be able to deal with the end of the bond bull market without too much damage. One can already see that they are shortening their maturities over the past year to reduce volatility.
You can get a feel for (and numbers for) how they did over a very long period of almost twenty years as well as just the past five years in the following two charts.
Keep in mind that you also get growth of capital as well as income with these funds as is also true of the growth and income funds. In fact there is some obvious overlap of the two groups. But the first three (OAKBX/FPACX, HSTRX, and PAUIX/PAUDX) stress capital growth, and the latter three (LSBDX/LSBRX, BERIX, and PTTRX/PTTDX) stress income.
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