AFL: Common Sense Investing Not Contarian Investing

“Investors pulled an estimated net $10 billion out of U.S. equity mutual funds in the week ended July 27”

 

This was a headline put out by Reuters in 2011.  In my book, I spend a lot of time discussing the negative impact of the herd mentality and trying to time the market over the long-term.  This headline represented mutual fund outflows for just one week in the year 2011, and by the end of the year U.S. equity funds finished with a net outflow for all of 2011.  Let’s examine how this individual investor retreat has worked out since July 27, 2011.  Since that date and since the end of 2011 the average U.S. equity fund and S&P 500 TR returns are as follows as of the close on December 7, 2012:

	Since 7/27/11	YTD
S&P 500 TR	12.16%	15.19%
Large Cap Value	9.14%	13.56%
Mid Cap Value	6.51%	14.45%
Small Cap Value	5.64%	12.41%
Large Cap Growth	6.04%	14.15%
Mid Cap Growth	3.62%	12.03%
Small Cap Growth	2.09%	10.10%

 

How have those redemptions worked out for shareholders?  Not well.  People always ask me, “How have your models achieved such high returns over the last 10 years and since the year 2000?”  Well it’s not rocket science and it is all explained in my book that you can find at any online book retailer.  For those of you that do not know about the success they are asking about, here are my model average annual returns over the last ten years and since inception that are updated daily at www.allocationforlife.com:

	Since Inception	10 Year
Model 1	9.23%	9.23%
Model 2	10.07%	9.80%
Model 3	11.09%	10.38%
S&P 500 TR	1.61%	6.89%

 

My models and my methodology for success are all outlined in my book.  I rarely give away my process and my current holdings.  My newsletter subscriber’s pay for that privilege, but the one thing I can tell you is time and time again as I look back on my models, more often than not I am doing the exact opposite as the mutual fund inflow/outflow data.  For example, foreign equities had a very rough 2011 and a sharp increase was seen in foreign equity funds outflows.  Let’s take a look now at the average performance for these foreign equity funds thus far for 2012:

	YTD
Foreign Large Cap Value	13.08%
Foreign Small/Mid Value	16.45%
Foreign Large Cap Growth	15.37%
Diversified Emerging Markets	14.29%

 

In all three of my models I added more money to my foreign equity positions on December 30^th 2011.  I did not do this because my crystal ball works, but rather because that is what my models were telling me to do.  People like to call my investment style “Contrarian”.  It’s not contrarian it’s “Common Sense”.  At Allocation For Life we have tried to simplify the process for individual investors.  The way I invest will never change and we believe giving investors the ability to own strategies that make sense to them, and that they can follow via the Allocation For Life Investment Newsletter, should not have to cost them a fortune in fees.  The average investor that seeks help is paying over 1% of their total assets away in advisory fees each year.  All of my AFL models are available to my newsletter subscribers to own in self-directed accounts at Folio Investing.  There are no management fees or advisory fees because I am not advising.  My followers simply read my book and found an approach that makes sense to them.  We created a way for these investors to own what I own and have given them ability to make changes to their models when I make changes to mine.  The process to do so at Folio takes about 5 seconds.  Yes we timed the process.

Isn’t finding things that we can relate to and that make sense to us the ultimate goal?  I found my way many years ago and I have been trying my best to spread the word.  If you are deploying an investment strategy that has worked over the long-term and that you can clearly define, then I say, “Good for you.” That is a sincere congratulation’s, because if you are at that point then you are in position to win the war.  However, I know the truth, and that truth is that most individual investors are a part of the herd, and cannot clearly define how they are going to get where they need to go.  The fund inflow/outflow data does not lie, and it does not paint a pretty picture for the average investor’s success.  It's up to us to find our own way.

 

Jon R. Orcutt is the founder of Allocation For Life, Author of The Allocation For Life Investment Newsletter, Author of "Master The Markets With Mutual Funds: A Common Sense Guide To Investing Success" and manager/creator of the AFL Models available to Allocation For Life subscribers at Folio Investing.

 

http://www.allocationforlife.com/

http://www.allocationforlife.com/thebook.php

Week Ending 12/7/12 S&P 500, Asset Class & Sector Performance

It was a relatively quiet week for the markets.  Domestic growth stocks clearly lagged, especially when compared to domestic value stocks.  Real estate got off to a good start for the month which is right in line with its historical trend for the month of December.  The miners continue to struggle and have almost reached a point where I would consider buying the Market Vectors Gold Miners ETF (GDX).  It was a trade I entered at the end of July that paid off big by the end of September.

S&P 500 Index	0.20%
Asset Classes		Sectors
Domestic Large Cap Value	0.71%	Technology	-0.46%
Domestic Mid Cap Value	0.60%	Consumer Discretionary	-0.72%
Domestic Small Cap Value	0.17%	Financials	0.95%
Foreign Large Cap Value	0.85%	Telecom	0.33%
Foreign Small/Mid Value	0.97%	Industrials	0.75%
Domestic Large Cap Growth	-0.45%	Utilities	0.42%
Domestic Mid Cap Growth	-0.10%	Natural Resources	-0.02%
Domestic Small Cap Growth	-0.52%	Real Estate	1.39%
Foreign Large Cap Growth	0.62%	Health Care	0.13%
Diversified Emerg Markets	1.62%	Energy	0.15%
Gold & Precious Metals Equities	-3.61%	Consumer Staples	0.17%
Real Estate	1.39%
Broad-Basket Commodities	-1.19%
Regions
Europe Stock	0.76%
China Region	1.31%
Japan Stock	0.79%
Latin America Stock	2.84%

Jon R. Orcutt is the founder of Allocation For Life, Author of The Allocation For Life Investment Newsletter, Author of "Master The Markets With Mutual Funds: A Common Sense Guide To Investing Success" and manager/creator of the AFL Models available to Allocation For Life subscribers at Folio Investing.

 

www.allocationforlife.com

 

Bill Gross.....Enuf Said

Today I am going to re-visit an article that I wrote last December.  The article was titled “Pre-Mature to Dance On The Gross Grave” and the article shared my disgust with the financial media jumping all over the greatest fixed income manager of all-time.  Here is the article:

“Being that Bill Gross and the PIMCO Total Return Fund (PTTDX) represent a large portion in two of my three models, I find the need to defend Mr. Gross and his fund’s 2011 YTD performance. I find it hilarious that a defense needs to be made, but it seems society is eager to tear down anyone who has been successful in the past.

A big deal has been made of the fact that Gross miscalculated (for a very short period of time) earlier this year by betting against a rally in U.S. Treasuries. This admitted misstep has been well covered in the financial media and has left the PIMCO Total Return Fund trailing many of its peers YTD. Or has it? Who exactly is a total return bond manager’s competition? While the headlines are fun to read, they show a complete misunderstanding of the total return approach to investing in bonds.

The main problem I see with managers within the total return bond sector is that they are automatically lumped in with other funds based upon their current portfolio weighting. Yes many of these funds, based upon their current positions, could be viewed as short-term government securities funds, but in reality they offer so much more with a tremendous amount of flexibility.

A total return investing approach to bonds means that the management team is focused on the overall performance of a bond. This means both the price and the yield of the bond are factored into total performance measures. Unlike corporate bond, municipal bond and U.S. Treasury bond funds that have to invest specifically within those sectors, a total return bond manager is not handcuffed by these restrictions. Good total return bond managers will try to position their portfolios in bond securities that they feel offer the potential for the highest total return on investment.

Do you think a high quality corporate bond fund manager was happy that he or she had to own corporate bonds in 2008? I’m sure they saw risk all over the bond horizon but there was not much they could do about it because they were mandated to own corporate bonds. In 2008, the average corporate bond fund lost 15% of its total value, and the average municipal bond fund lost 10%. In that same year Gross guided the PIMCO Total Return Fund to a gain of 4.48%. The total return approach gave Gross the flexibility to avoid areas of the bond market that others could not. Again, not all of the others are bad managers, but they simply had to stay within their sectors. I have a large amount of respect for the management team of the Loomis Sayles Bond Fund. The fund was down almost 22% in 2008. Not beause the managers stunk but because there was not much they could do when the sector they invest in was out of favor.

Sometimes the best offense is simply a good defense and that is why I prefer the total return approach to owning bonds within a strategy that deploys tactical allocation. I want a manager that can focus on total return and capital preservation, and has the ability to sit on a tremendous amount of cash. Not being mandated to invest a minimum percentage of your portfolio in a specific sector (ex. corporate bonds) gives these managers that ability.

While everyone is eager to compare the PIMCO Total Return Fund to government securities funds let’s remember that is not accurate. How did Gross achieve such outperformance in the last decade? It certainly did not come from owning treasuries. In fact, if we could look back 11 years ago at the fund it would most likely resemble a corporate bond fund. As the Fed raised rates aggressively in 2000 to cool down the economy, Gross began buying a tremendous amount of high-grade corporate bonds. As it turned out the Fed overshot and rates have been coming down ever since. That decision provided a large amount of appreciation for the fund. While Gross was able to lock in these gains and go to cash, corporate bond fund managers watched their portfolio values rise and then comeback down because of their mandates.

My theory is that when someone has earned the title “Bond King”, and did not have it handed to them, then I would like that person to manage my bond assets. So before you decide to dance on Gross’ early grave, ask yourself why it makes you feel good to do so. We are talking about a mutual fund and a manager that is still up 3.14% YTD. If you are living in a “what have you done for me lately” world then you need to take the blinders off. Bill Gross’ risk vs. reward returns over the last 3, 5 and 10 years are still unmatched.

Go ahead and bet against the “Bond King”, but if you do, I would suggest getting some pretty favorable odds. It is a bet that I am smart enough not to make because I understand what I own and why I own it.”

 

So here we are on December 6, 2012.  The same journalists that thought Gross’ slight misstep was a newsworthy event have spent much of 2012 writing about his funds stellar performance year-to-date.  With just a few weeks left in 2012, Gross has thus far guided his PIMCO Total Return Fund to a gain of 10.40% for the year.  My point?  Stop following the sensationalized headlines.  Doing so, more often than not, leads to poor investment returns.

Does this mean you should run out and invest in the PIMCO Total Return Fund?  No.  It means you better learn (and I mean learn fast with the risk I see in the bond markets) the differences between a total return manager and other bond managers.  This article will help you:

http://www.learnbonds.com/the-total-return-approach/

 

Jon R. Orcutt is the founder of Allocation For Life, Author of The Allocation For Life Investment Newsletter, Author of "Master The Markets With Mutual Funds: A Common Sense Guide To Investing Success" and manager/creator of the AFL Models available to Allocation For Life subscribers at Folio Investing.

 

www.allocationforlife.com

 

 

 

 

Nov '12: How The Sectors Stood Up

In November, sector’s performed very close to their historical trend over the last 25, 20, 15 and 10 year trailing periods.  Much like the past, financials, real estate, energy stocks, natural resources and utilities finished as bottom half performers when compared to the other sectors.  The S&P 500 TR finished right around the middle of the pack, much like it has done throughout the last twenty-five years during the month of November.  Consumer discretionary stocks, industrials, technology and telecom stocks once again all finished in the top half of performance.

Based on my sector research for the month of November, I weighted my AFL Cyclical Sector Folio evenly across the following sector ETFs:

SPDR S&P Telecom (XTL)

Consumer Discretionary Select SPDR ETF (XLY)

Industrial Select Sector SPDR ETF (XLI)

Technology Select Sector SPDR (XLK)

 

The AFL Cyclical Sector Folio finished up 2.4% in November versus the S&P 500 TR which finished November with a gain of .58%.  For those of you that wonder why I publish my holdings and their performance after the month has concluded; it is because the AFL Newsletter subscribers receive this information before the month begins and have the ability to invest in the AFL Folio’s in self-directed accounts at Folio Investing.

 

	25 Year	20 Year	15 Year	10 Year	2012
1	Technology	Technology	Technology	Industrials	Consum Staples
2	Telecom	Telecom	Telecom	Energy	Industrials
3	Consum Disc	Industrials	Consum Disc	Nat Resources	Technology
4	Consum Staples	Consum Disc	Industrials	Telecom	Consum Disc
5	Health Care	Health Care	S&P 500 TR	Consum Disc	Health Care
6	Industrials	S&P 500 TR	Consum Staples	Technology	Telecom
7	S&P 500 TR	Consum Staples	Health Care	S&P 500 TR	S&P 500 TR
8	Utilities	Utilities	Utilities	Utilities	Financials
9	Real Estate	Financials	Real Estate	Consum Staples	Real Estate
10	Financials	Real Estate	Financials	Health Care	Energy
11	Nat Resources	Nat Resources	Nat Resources	Real Estate	Nat Resources
12	Energy	Energy	Energy	Financials	Utilities

 

 

Jon R. Orcutt is the founder of Allocation For Life, Author of The Allocation For Life Investment Newsletter, Author of "Master The Markets With Mutual Funds: A Common Sense Guide To Investing Success" and manager/creator of the AFL Models available to Allocation For Life subscribers at Folio Investing.

 

www.allocationforlife.com