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About four months ago, I wrote about the Simple Retirement Portfolio, meant to provide retirees with, well, a simple retirement portfolio, but one meant to outperform comparable indexes and funds, while providing retirees with a strong yield and all the diversification they need. I thought an update on the portfolio’s performance might be of interest to readers and investors, especially considering recent heightened market volatility.
The portfolio as a whole has performed as expected, moderately outperforming its index with gains of 9.30%.
The portfolio’s equity picks have also slightly outperformed the S&P 500, due to a greater focus on international equities and the mid-cap sector.
The portfolio’s fixed income picks have significantly outperformed the broader bond market, due to a savvy selection of funds and management alpha.
Strong results these past few months, expect more of the same in the coming years. That is the goal at least.
What follows is an overview of the portfolio, its performance since inception, and some alternatives to possibly boost the portfolio’s yield further.
Simple Retirement Portfolio – Overview and Analysis
The Simple Retirement Portfolio is based on, and benchmarked to, the Vanguard Target Retirement 2020 Fund (VTWNX). VTWNX invests in a diversified portfolio of low-cost fixed income and equity index funds, and is aimed towards recent retirees.
Balanced funds, including VTWNX, generally provide retirees with superior returns than equity index funds, including those indexed to the S&P 500, as the latter are simply too volatile to fund the monthly income needs of the average retiree. I’ve done the math on this here.
VTWNX seemed like a perfect low-risk fund for retirees, so I used it as the basis for my model portfolio. I simply took VTWNX’s holdings, and swapped the fixed income funds for some with higher yields and stronger track records of shareholder performance. Equity funds remained the same, as there are fewer equity funds with the proven capacity to generate alpha, and to reduce the possibility of substantial underperformance.
I did a more in-depth analysis of the portfolio here, but the above is the gist of it.
Holdings for the fund and portfolio are as follows:
(Source: VTWNX Corporate Website – Chart by author)
As can be seen above, both the fund and the portfolio have roughly comparable underlying holdings and asset allocations, as was my intention.
With the above in mind, let’s take a look at the performance of the portfolio, its underlying holdings, and its index. Inception refers to the portfolio’s inception in 5/27/2020. Results are as follows:
(Source: SeekingAlpha – Chart by author)
As can be seen above, the portfolio outperformed its benchmark by 2.47% since inception, with gains of 9.30%. The portfolio has also outperformed its benchmark year to date, and for most other relevant time periods, as per my previous piece.
Outperformance was exclusively driven by the fund’s fixed income funds, all of which significantly outperformed their benchmark:
The VanEck Vectors Fallen Angel High Yield Bond ETF (ANGL) outperformed as improved economic fundamentals led to the fund’s holdings, recently downgraded non-investment grade corporate bonds, to increase in value. The fund has consistently outperformed in the past and will, I believe, continue to outperform in the future.
The BlackRock Core Bond Trust (BHK) outperformed due to management alpha, a narrowing discount to NAV, and leverage. The fund has consistently outperformed in the past and will, I believe, continue to outperform in the future.
The PIMCO Active Bond Exchange-Traded Fund (BOND) outperformed due to management alpha, and due to its focus on longer-term bonds, which have seen collapsing yields and skyrocketing prices these past few months. Although I believe that the fund will continue to outperform in the future, it is a cash-like fund, so returns will be quite low regardless.
The portfolio’s equity funds also slightly outperformed the S&P 500:
The portfolio’s equity index funds were not selected, or are intended, to outperform the S&P 500, but to provide investors with greater diversification than said index. As such, I don’t believe that their outperformance is all that relevant, but it is good news regardless.
The Vanguard Total Stock Market ETF (VTI) slightly outperformed the S&P 500 due to its inclusion of mid-cap, small-cap, and micro-cap holdings. Some of these have outperformed these past few months, due to improved economic fundamentals, and as these saw comparatively greater losses during the beginning of the downturn.
The Vanguard Total International Stock ETF (VXUS) also slightly outperformed the S&P 500, as international equities underperformed at the beginning of the downturn, but have recovered a bit faster as well.
The Simple Retirement Portfolio moderately outperformed its benchmark, due to the excellent performance of its fixed income funds. The portfolio’s equity index funds also slightly outperformed the S&P 500, although the difference was small and not quite material. In my opinion, outperformance was driven by savvy fund selection and management alpha and, as such, will continue in the future.
Simple Retirement Portfolio – Higher Yield Alternatives
The Simple Retirement Portfolio, unlike many of its peers, is quite similar to its index or benchmark. The portfolio and the benchmark have identical asset class weights, invest in the same equity funds, and invest in comparable, if perhaps not identical, fixed income funds. The differences are small, so the possibility of substantial under or over-performance are too. As such, the portfolio makes sense for more risk-averse retirees, less so for those seeking higher yields or the possibility of substantial capital gains.
In light of the above, I decided to create two similar portfolios, with similar asset allocations and strategies, but with larger differences to the index. These are higher risk, higher yield, higher returns, and higher conviction portfolios, so their performance is more dependent on specific fund selection, market timing, management alpha, and economic and market conditions. These portfolios could significantly underperform or over-perform relative to their index, unlike the original portfolio. I had originally intended to model and publish all three of these portfolios earlier in the year, but it took me a while to really conceptualize all three.
The three portfolios, ordered by level of conviction, are as follows:
As mentioned previously, for the original low conviction portfolio, I only swapped the fixed income funds for some higher yielding alternatives.
For the medium conviction portfolio, I also swapped the equity funds and BOND for the Eaton Vance Tax-Advantaged Global Dividend Opportunities Fund (ETO), Lazard Global Total Return & Income Fund (LGI), Cohen & Steers Quality Income Realty Fund (RQI), three leveraged CEFs with strong yields, discounts, and past shareholder performance. All three have outperformed global equity indexes, which could function as a benchmark for the three combined:
I believe that the medium conviction portfolio offers investors greater yields and potential market-beating performance, although risks are moderately higher, and the portfolio should underperform during downturns.
For the high conviction portfolio, I swapped the fixed income funds for the Income Opportunity Fund (PKO) and the Dynamic Credit and Mortgage Income Fund (PCI), two PIMCO funds with strong yields and outstanding shareholder performance.
PIMCO has a decades-long track record of outstanding performance in the fixed income space, so focusing on these funds seems appropriate. These funds focus on high-risk assets and bonds, so performance is strongly dependent on improved economic and market conditions, and management capabilities/investment choices.
I believe that the high conviction portfolio offers retirees the highest potential yields and returns, but it is quite risky, and it will almost certainly significantly underperform during downturns. At the same time, I do believe that the funds selected have the greatest potential shareholder returns, and that the portfolio itself should outperform comparable indexes. At the same time, the portfolio’s 8.76% dividend yield is quite good, and allows long-term investors and retirees to mostly ignore any short-term movements in the price of its underlying funds.
The Simple Retirement Portfolio provides retirees with a simple way to invest and save during their retirement, and has outperformed its benchmark since inception. I created two similar model portfolios with the potential for greater returns and higher yields, but with greater risks as well. These are intended to help retirees make appropriate investment decisions, taking into consideration their tolerance for risk.
I plan on further quarterly updates on the performance of these portfolios, and should also post updates on their underlying holdings semi-regularly.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.