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Saturday, January 19, 2013

Beat the Bond Market (Part II)

In the last post, we looked at a portfolio of several exchange traded bond funds, as an example of a portfolio seeking to outperform the overall bond market.  I stressed then, and re-stress here, that trying to beat any market, in my opinion, is very difficult.  I do recognize, however, that markets tend to go to extremes on occasion (read: bubbles are created) and, in deference to the tactical asset allocation approach, do present opportunities for structuring assets accordingly. Many people believe that we are in that situation today in the fixed income markets.

In the investment approach I take, there are 3 steps.  Decide on an asset allocation, decide how to invest, and monitor your investments.  Here we have an asset allocation, and are investing in low-cost, well diversified funds.  The final step is to monitor, i.e., track so that you can see if you are in fact achieving your goal of outperforming the market.  In our specific, we are monitoring the percentage of assets allocated to fixed income.

The exercise here is merely instructive to show the process.  It has only been 3 weeks since the beginning of the year, at which point the portfolio was set up.  This exercise would, at most, be updated when changes are made or on a monthly or quarterly time schedule.  Again, here I'm just setting out the process.

Calculate Portfolio Price Return

Step 1 is to gather prices.  This can be done by going to Morningstar or Yahoo! Finance, for example.

(P) 12/31 (P) 1/18

HYS 103.43 104.69 1.218 0.059
BKLN 24.98 25.17 0.761 0.012
SCHZ 52.34 52.3 -0.076 -0.004
VCIT 87.66 87.7 0.046 0.015
CSJ 105.48 105.72 0.228 0.062
MBB 107.99 108.05 0.056 0.007
FLOT 50.59 50.59 0.000 0.000
HYG 93.35 94.71 1.457 0.162



AGG 111.08 110.93 -0.135

The 1st column on the left lists the ticker symbols of the ETFs comprising the portfolio set up in the last post.  In the 3rd column are the updated prices.  The 4th column shows the calculated price returns.  For example, HYS had a price return of 1.218% over the 3-week period.  Here's the formula as entered into Excel:  =((I2/H2)-1)*100, where I2 and H2 refer to particular cells on the spread sheet.

The final column shows the contribution to total return based on the weighting of each ETF in the portfolio.  Here's the formula:  =C2*J2.  For HYS,  C2 is .049 (meaning that it represents 4.9% of the portfolio).  Thus, .059, shown above, is just .049 * 1.218.

The bottom line is that, so far, the portfolio is ahead with a return of .313% versus -.135% for the overall bond market as represented by the Barclay's Aggregate Index.

A teaching moment:  the reason the price return on AGG is negative is because bond yields have risen since the beginning of the year!

For this short time period, the result doesn't have a whole lot of meaning - I would hold back on the high 5s!  Also, there is an income component that over longer periods you'll want to add in.  For example, after 6 months you'll add one-half of the yield to get an estimate of total return.

Knowing how to use the copy key in Excel and how to sum columns makes this an easy spreadsheet to set up  and can increase your understanding of how the fixed income portion of your portfolio is performing relative to the overall market.

Disclosure:  This post is for educational purposes.  Individuals should consult with an advisor or do their own research before making an investment decisions.  My clients and I own some of the ETFs mentioned above.

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