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Thursday, March 28, 2024

Vanguard’s Actively Managed Funds With Dynamic Asset Allocation: The Best Bet for High Returns

Courtesy of Doug Short.

Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.


“Studies have shown that your asset allocation has a bigger impact on your long-term returns than any specific fund you pick….” This is part of a statement on a Vanguard web-page. My study shows this to be true, and exceptionally high returns can be obtained from Vanguard funds, when a dynamic asset allocation strategy is employed, and actively managed funds instead of index funds are used. Using a combination of bond-, stock-, and sector-funds in the model, and switching asset allocation according to stock-market climate, provided an annualized average return of over 15% for the backtest period Jan-2000 to Jul-2014.

The strategy requires some stock-market timing:

Investment during up-market periods: 80% stocks and 20% bonds.

The bond fund combination consists of three Vanguard funds:

  • 6% Intermediate-Term Investment-Grade Fund (VFICX)
  • 8% Long-Term Invest-Grade Fund (VWESX)
  • 6% Long-Term Treasury Fund (VUSTX)

The stock fund combination consists of three Vanguard funds:

  • 25% Selected Value Fund (VASVX)
  • 33% Energy Fund (VGENX)
  • 22% Health Care Fund (VGHCX)

Investment during down-market periods: 80% bonds and 20% stocks.

The bond fund combination consists of the same three bond funds:

  • 24% Intermediate-Term Investment-Grade Fund (VFICX)
  • 32% Long-Term Invest-Grade Fund (VWESX)
  • 24% Long-Term Treasury Fund (VUSTX)

Only one of the three stock funds is used:

  • 20% Selected Value Fund (VASVX)

The up- and down-market periods come from the MAC-US (backtested over 65 years), or alternatively the Best(MAC-UPRO) will provide nearly the same signal dates: up-market periods are indicated when the model is invested in UPRO. From 2000 to 2014 the models signaled only 5 down-market periods and 6 up-market periods, including the current up-market period; they are listed in Table-3 in the Appendix.

Performance of iM(MAC-Vang)20/80managed versus Vanguard Total Stock Market Index Fund VTSMX

The backtest for (MAC-Vang)managed, from the beginning of 2000 to end of end of July 2014, shows an annualized growth rate of 15.1% with a maximum drawdown of only -16.7%. Risk measurements of monthly returns were Sharpe Ratio= 1.47 and Sortino Ratio= 2.29.

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In Figure-1 the performance of a $100 initial investment is graphed over time.

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In Figure-2 the 1-year returns of (MAC-Vang)20/80managed are compared to those of the Total Stock Market Index Fund. There was only one year (2008) when (MAC-Vang)managed showed a small negative return of -3.6%, but it was only a tenth of the 36% loss of the index fund for the same year.

Click to View

Figure-3 shows the results of investing $1.00 each year from 2000 to 2013 in (MAC-Vang)20/80managed and VTSMX. One would have invested a total of $14.00 cumulatively by the end. This simulates saving for retirement. It shows that the terminal values of (MAC-Vang)20/80managed were higher for every year than those of the Vanguard Total Stock Market Index Fund. The $14.00 invested in the index fund would at the end only have had a value of $26.92, whereas the terminal value from (MAC-Vang)20/80managed would have been 65% higher at $44.42.

Conclusion

Investors in Vanguard funds can achieve good returns with less risk by following a simple market timing strategy to decide on the asset allocation for their investment. A dynamic asset allocation strategy dependent on stock-market climate is the key to better returns. For highest returns one should invest in actively managed funds and avoid index funds as the comparison between (MAC-Vang)20/80managed and (MAC-Vang)20/80index shows.

Following iM(MAC-Vang)20/80managed

Monthly updates of asset allocation and performance for (MAC-Vang)20/80managed will be posted on our website iMarketSignals.com. The nominal asset allocation is maintained by rebalancing every 12 months, at the end of December. The last rebalance occurred on Dec-31-2013, and the asset allocation as of Aug-15-2014 is:

  • 6.07% Intermediate-Term Investment-Grade Fund (VFICX)
  • 8.09% Long-Term Invest-Grade Fund (VWESX)
  • 6.07% Long-Term Treasury Fund (VUSTX)
  • 24.03% Selected Value Fund (VASVX)
  • 33.44% Energy Fund (VGENX)
  • 22.30% Health Care Fund (VGHCX)

Appendix

Performance of iM(MAC-Vang)20/80managed versus Vanguard Total Stock Market Index Fund VTSMX and iM(MAC-Vang)20/80index

Note: The performance results for iM(MAC-Vang)20/80index, which uses only two Vanguard funds, the Total Bond Market Index Fund (VBMFX) and the Total Stock Market Index Fund (VTSMX), in a 20/80 combination can be found at iMarketSignals.com.

Performance and risk measurements are listed in Tables-1 and -2. It is evident from the analyses that the 20/80 actively managed fund combination iM(MAC-Vang)20/80managed produced much higher returns than the index fund combination and risk measurements are also better.


Georg Vrba

iM imarketsignals.com

Georg Vrba is a professional engineer who has been a consulting engineer for many years. In his opinion, mathematical models provide better guidance to market direction than financial “experts.” He has developed financial models for the stock market, the bond market, yield curve, gold, silver and recession prediction, all published in Advisor Perspectives. The models are updated weekly at http://imarketsignals.com/.

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