In continuation of our previous article “How Good are Vanguard’s LifeStrategy Funds? Much Better Returns From Vanguard Funds with iM’s (MAC-Vang)20/80” we show that 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.
Figure-2 compares the 1-year returns of (MAC-Vang)20/80managed 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.
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.
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.
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)
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.