Does Vanguard have contrarian funds ?

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redhat33
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Does Vanguard have contrarian funds ?

Postby redhat33 » Mon Mar 20, 2017 2:40 pm

I am worried about a crash so where can I dump a significant Vanguard portfolio in to once I see signals of a pullback or recession? I do not want to ride out a 20% pullback? Too old!

John Z
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Re: Does Vanguard have contrarian funds ?

Postby John Z » Mon Mar 20, 2017 4:58 pm

The only one I am aware of is the
Vanguard Market Neutral Fund Investor Shares
Requires min of $250K
https://personal.vanguard.com/us/funds/ ... undId=0634

minimalistmarc
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Re: Does Vanguard have contrarian funds ?

Postby minimalistmarc » Mon Mar 20, 2017 5:29 pm

Money market?

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Re: Does Vanguard have contrarian funds ?

Postby oldcomputerguy » Mon Mar 20, 2017 5:41 pm

redhat33 wrote:I am worried about a crash so where can I dump a significant Vanguard portfolio in to once I see signals of a pullback or recession? I do not want to ride out a 20% pullback? Too old!


What is your current AA? If a 20% pullback has you this worried, perhaps your allocation to stocks is too high. (You likely will have real problems dealing with a severe bear market.)
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Re: Does Vanguard have contrarian funds ?

Postby lack_ey » Mon Mar 20, 2017 6:07 pm

Okay, a lot of posts here will inform you that big market timing moves are not viewed favorably here (you've stumbled upon a community of largely buy-and-hold adherents, in case you haven't noticed), and you will get an earful about strategy, risk tolerance, etc.

All that aside, I have a question about what you understand to be a "contrarian fund" and how one would use such a thing. What kind of assets does such a fund invest in? What is the strategy used? Why is your thinking behind using one of these, if your idea is to reduce risk and stock exposure, as opposed to market timing your way into more bonds or cash or some other asset? What kind of returns do you expect from such a fund under good conditions and bad conditions, relative to whatever it is you actually hold now?

My first guess as to the meaning would be an actively managed, wide-ranging stock fund with a manager known for market timing, holding significant amounts of cash/fixed income at times, etc. For example, something along the lines of FPA Crescent (FPACX). In which case, no, Vanguard doesn't do that. But I could be very wrong.

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Re: Does Vanguard have contrarian funds ?

Postby VaR » Mon Mar 20, 2017 10:19 pm

A contrarian fund is one that invests in stocks that are out of favor with the market. In the old days, contrarian funds either followed a deep value strategy or engaged in sector rotation for out-of-favor sectors where sector value was found using P/E ratios or P/B ratios.

OP, I don't think this is what you're looking for. It seems to me that you're looking for a fund with limited equity exposure or the holy grail of limited downside exposure. There are a couple of strategies that you can use if these are your goals:
1. Adjust your asset allocation by reducing your stock allocation and increase your bond allocation.
2. Invest in a fund that implements a moderate growth strategy. Perhaps something like Vanguard Wellington.
3. Invest in the Vanguard Global Minimum Volatility Fund. Vanguard's summary for the fund says, " It is reasonable for investors to expect, on average, for a minimum volatility fund to outperform the overall global market in sharp downturns and trail the market in strong bull markets."

But if you tell us more about what you're trying to achieve, we can guess a little better.

I'm obligated to suggest that you not engage in market timing, but rather use the current situation to reassess your true risk tolerance and adjust your long-term asset allocation.

That said, I'd be happy to work within your investing framework and help with implementing your market timing strategy, even if I don't agree with it. :)

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Re: Does Vanguard have contrarian funds ?

Postby whodidntante » Mon Mar 20, 2017 10:28 pm

Vanguard's market neutral fund is poorly run, so I would pass on that even if you're willing to put up the quarter million buy-in. AQR has better options. You can sometimes buy AQR funds at Fidelity without an advisor. I haven't checked recently.

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Re: Does Vanguard have contrarian funds ?

Postby lack_ey » Mon Mar 20, 2017 10:40 pm

VaR wrote:A contrarian fund is one that invests in stocks that are out of favor with the market. In the old days, contrarian funds either followed a deep value strategy or engaged in sector rotation for out-of-favor sectors where sector value was found using P/E ratios or P/B ratios.

That's what I would think outside of the context of this thread, but that seems to have little to do with downside mitigation or anything related to a reason to shift into such a fund when you think bad times are coming, so I assumed something else might be meant.


whodidntante wrote:Vanguard's market neutral fund is poorly run, so I would pass on that even if you're willing to put up the quarter million buy-in. AQR has better options. You can sometimes buy AQR funds at Fidelity without an advisor. I haven't checked recently.

What don't you like about Vanguard's fund under the current management? What are you doing to run it poorly? Is this at a high level, on the individual security picks, or what?

As far as I know they're just running a relatively standard setup but constraining to 1x up, 1x down notional exposures, sector neutral, with picks based on factor-plus kind of quant sorts. Is the problem there or in trade execution or turnover or something along those lines?

I don't use it but wonder where you're going here.

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Re: Does Vanguard have contrarian funds ?

Postby aristotelian » Mon Mar 20, 2017 10:49 pm

Long Term Treasury Index (VUSTX). Up 22% in '08.

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Re: Does Vanguard have contrarian funds ?

Postby Tyler Aspect » Mon Mar 20, 2017 10:50 pm

Investing in out of favor stocks does not automatically insulate you from a recession. If the reason of their out of favor is because of their lack of financial foundation, then a recession may hit them harder compared to the average.

I have encountered three recessions during my investment life, and I can say that keeping a stable asset allocation was the best approach.
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Re: Does Vanguard have contrarian funds ?

Postby Valuethinker » Tue Mar 21, 2017 6:54 am

redhat33 wrote:I am worried about a crash so where can I dump a significant Vanguard portfolio in to once I see signals of a pullback or recession? I do not want to ride out a 20% pullback? Too old!


You will not be able to react faster than the market as a whole, unless you have insider knowledge.

If you are worried about your exposure to a stock market fall, then own more bonds. ST Bond funds or Bank CDs (within FDIC limits) are the safest ways to deploy your capital (other than Money Market Funds, and low risk ones pay essentially zero now, I believe).

Holding contrarian funds is an expensive way to try to do this, and they don't actually work in a bear market-- they don't do what people think they do - those who have not read the fine print and understand the strategy of the funds.

The reason VG doesn't offer them is probably because it doesn't want to get sued when, after the next bear market, a whole bunch of investors who didn't understand them but invested in them, sue the fund manager and the channel distributor (i.e. whoever sold it to them).

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Re: Does Vanguard have contrarian funds ?

Postby Valuethinker » Tue Mar 21, 2017 6:55 am

aristotelian wrote:Long Term Treasury Index (VUSTX). Up 22% in '08.


But it was down in 1994 (not a great year for equities, but a really bad one for bonds)?

The problem is if the next bear market is precipitated by fears of rising inflation (rather than a banking-property financial crash, or the dot com crash of 2000-03) then long Treasury Bonds won't do well i.e. in a rerun of the 1970s.

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Re: Does Vanguard have contrarian funds ?

Postby nisiprius » Tue Mar 21, 2017 7:32 am

redhat33 wrote:I am worried about a crash so where can I dump a significant Vanguard portfolio in to once I see signals of a pullback or recession? I do not want to ride out a 20% pullback? Too old!
To begin by answering your question as directly as possible: no.

1) Vanguard does not have any mutual funds that are specifically designed to go up when the stock market crashes.

2) I haven't familiarized myself with all of Vanguard's description of their actively managed funds. Vanguard does have perfectly good actively managed funds that are well-regarded (e.g. good Morningstar "analyst" ratings) with low costs. Doubtless some of the managers of these funds have a contrarian streak to them. The Vanguard Windsor fund's description sounds contrarian to me:
Throughout its history, the fund has sought to be ahead of the market, investing in stocks that are temporarily out of favor, but that the fund’s advisors believe will eventually become profitable investments.


Before I continue, though, I want to say that I think you are being greedy. Stocks are risky. They deliver what is called the "equity risk premium," return that is a reward for taking risk. If there were easy, effective strategies that any attentive investor could use that would let them exit stocks once they "see signs of a pullback or recession," that would mean they could get the risk premium without really taking the risk. I personally just don't believe this is possible in any major or important way. I acknowledge the possibility of eking out some small risk reduction, like perhaps declining only 50% when the stock market as a whole declines 52% but I don't see that as important. Now, if we look at three mutual funds--the Vanguard Windsor fund I just mentioned; Fidelity Contrafund which sort of suggests "contrarian" in its name and invests "in securities of companies whose value FMR believes is not fully recognized by the public;" and the Janus Contrarian Fund, which has "contrarian" in its name... and, since you "do not want to ride out a 20% pullback," let's look at 2011, when the stock market actually did drop by about 20%.

Source
Image

The Vanguard Total Stock Market Index Fund, and thus the stock market as a whole (yellow) dropped -20%.

Fidelity Contrafund (orange) only dropped -17%. But it certainly didn't go up, and if combined in a portfolio with other stock funds would certainly not have offset them. And, honestly, -17% is pretty tough, too, isn't it? You lost 1/6th of your money instead of 1/5th.

The other two funds fell more. Windsor lost -21%, Janus Contrarian lost -22%.

But, really: -17%, -20%, -21%, -22% are more alike that different.

In short, "contrarian" funds are not funds that move contrary to the market as a whole, and do not provide bear market protection.
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Re: Does Vanguard have contrarian funds ?

Postby nisiprius » Tue Mar 21, 2017 8:20 am

OK, I want to state this very carefully. There are some mutual funds that are designed to go up when the market goes down. I think investing in any of them is a very, very, very bad idea, but they exist and they do what they say. Vanguard does not offer any funds like this.

Why is it a bad idea? Because they also go down when the market goes up. There isn't any magic, and because they have high expenses and because of other considerations about the way they work, if you mix them in a portfolio with regular stock funds the basic effect is a drag--much worse than the effect of simply cutting back stock allocation and increasing bond allocation.

If you actually could spot a crash coming, then not only could you avoid it by going to all bonds or all cash, yes, you could make a lot of money by going further by switching to one of these other funds.

Here are examples of two such funds: the Prudent Bear fund, BEARX, and the ProShares Short S&P 500 ETF, SH. Again, let's look at 2011, same time range as above. Blue is the Vanguard Total Stock Market Index Fund; Orange is BEARX, green is SH, and as you see, yes, they did exactly what they were advertised to do, and if you'd been able to switch into them just before the correction and then sell them in the few months during the correction, you'd have made money, just as you'd have made money by picking the right lottery numbers.

source
Image
So, why are they a bad idea? Let's carry the chart forward to the present:
Image

Now, here's the real key. Let's suppose that we would like to cut our declines in half by using one of these funds, say BEARX, together with Total Stock. To do this, we need to use about 2/3rd Total Stock and 1/3rd BEARX. But we could also cut our declines about in half by using a 50/50 mixture of Total Stock and Total Bond. I'm going to compare the results using PortfolioVisualizer; I'm going to use a year range of 2011-present. I'll use 50/50 stocks/bonds as Portfolio 1, and for Portfolio 2 I'll start with 67% Total Stock and 33% BEARX and hand-tune the allocation until I get as close as possible to the same "max drawdown." (For comparison, 100% Total Stock had a "max drawdown" of 17.74%).

Portfolio 1, blue, is reducing risk the "dumb way," just using bonds, 50/50 Total Stock, Total Bond.
Portfolio 2, red, is reducing risk by using a bear fund instead of bonds. I found by trial and error that 63.6% Total Stock, 36.4% BEARX gave exactly the same drawdown. The rest of the curve tells the story.

Source
Image

In short, if you truly were able to time the market with precision, anticipating declines a few months in advance and switching into them at the right time, and then, equally important, selling at the right time, sure, you could make money when all the stay-the-course Bogleheads were losing money. But if you can't do that, then just adding a fund like BEARX or an inverse ETFs like SH, buying them and holding them in the vague believe they will somehow help in market crashes, is a really awful thing to do, much worse than just cutting back your stock allocation and leaving it there.
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Re: Does Vanguard have contrarian funds ?

Postby Valuethinker » Tue Mar 21, 2017 9:07 am

nisiprius wrote:OK, I want to state this very carefully. There are some mutual funds that are designed to go up when the market goes down. I think investing in any of them is a very, very, very bad idea, but they exist and they do what they say. Vanguard does not offer any funds like this.

Why is it a bad idea? Because they also go down when the market goes up. There isn't any magic, and because they have high expenses and because of other considerations about the way they work, if you mix them in a portfolio with regular stock funds the basic effect is a drag--much worse than the effect of simply cutting back stock allocation and increasing bond allocation.e.


My general understanding is that although they move negatively with daily market moves, that doesn't mean they move negatively if we are in a longer term bear market? This is to do with the derivatives strategy by which they are constructed, I believe.

It struck me as quite a good way to risk wiping out your entire principal.

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Re: Does Vanguard have contrarian funds ?

Postby lack_ey » Tue Mar 21, 2017 10:09 am

Valuethinker wrote:
nisiprius wrote:OK, I want to state this very carefully. There are some mutual funds that are designed to go up when the market goes down. I think investing in any of them is a very, very, very bad idea, but they exist and they do what they say. Vanguard does not offer any funds like this.

Why is it a bad idea? Because they also go down when the market goes up. There isn't any magic, and because they have high expenses and because of other considerations about the way they work, if you mix them in a portfolio with regular stock funds the basic effect is a drag--much worse than the effect of simply cutting back stock allocation and increasing bond allocation.e.


My general understanding is that although they move negatively with daily market moves, that doesn't mean they move negatively if we are in a longer term bear market? This is to do with the derivatives strategy by which they are constructed, I believe.

It struck me as quite a good way to risk wiping out your entire principal.

Bear market funds / short bias funds and daily inverse funds are not the same thing. With the former you're usually looking at an actively managed portfolio that could have a range of outcomes, it might not be consistently heavily net short, and the average net exposure may be significantly less than -100%. It really depends. The short positions are held longer than a day and it's not rebalanced back daily.

The daily inverse funds are maybe more what you're thinking about.

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Re: Does Vanguard have contrarian funds ?

Postby David Jay » Tue Mar 21, 2017 10:55 am

I see this is your first post. Welcome to the forum!

If you can't take a 20% drop, then how about a 30/70 asset allocation. Worst annual performance since 1926 is -14.2% (that was 1931), according to this Vanguard web page: http://vanguard.com/us/insights/saving- ... llocations

even a 40/60 has a worst case of -18.4% (also in 1931)
Last edited by David Jay on Tue Mar 21, 2017 11:01 am, edited 1 time in total.
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Re: Does Vanguard have contrarian funds ?

Postby David Jay » Tue Mar 21, 2017 10:56 am

redhat33 wrote:I am worried about a crash so where can I dump a significant Vanguard portfolio in to once I see signals of a pullback or recession? I do not want to ride out a 20% pullback? Too old!


Also, you can't wait until you see the signs of a pullback. It is already too late. You need to do this proactively with a change in asset allocation.

Here is the classic quote by John Bogle about trying to anticipate when the market will go up or down:

“The idea that a bell rings to signal when investors should get into or out of the stock market is simply not credible. After nearly 50 years in this business, I do not know of anybody who has done it successfully and consistently. I don't even know anybody who knows anybody who has done it successfully and consistently." - John Bogle
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

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Re: Does Vanguard have contrarian funds ?

Postby Chuck » Tue Mar 21, 2017 2:37 pm

A 20% pullback today would be a smaller loss than selling in January 2016 and remaining in cash or bonds until today.

It's really easy to shoot yourself in the foot making a "defensive" move.

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Re: Does Vanguard have contrarian funds ?

Postby Theoretical » Tue Mar 21, 2017 2:59 pm

whodidntante wrote:Vanguard's market neutral fund is poorly run, so I would pass on that even if you're willing to put up the quarter million buy-in. AQR has better options. You can sometimes buy AQR funds at Fidelity without an advisor. I haven't checked recently.


Not anymore. They fired AXA Rosenberg in 2010 and the fund now works as intended. It's now exclusively run by VG's Quant group, and its most notable for momentum and quality exposure with some value (though not statistically significant with monthly returns). It's also extremely tax-efficient and has virtually no stock or bond correlation to speak of.
Last edited by Theoretical on Tue Mar 21, 2017 3:19 pm, edited 2 times in total.

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Re: Does Vanguard have contrarian funds ?

Postby BanditKing » Tue Mar 21, 2017 3:08 pm

Valuethinker wrote:The problem is if the next bear market is precipitated by fears of rising inflation (rather than a banking-property financial crash, or the dot com crash of 2000-03) then long Treasury Bonds won't do well i.e. in a rerun of the 1970s.


So what's the appropriate hedge in such an environment? *curious*

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Re: Does Vanguard have contrarian funds ?

Postby Theoretical » Tue Mar 21, 2017 3:16 pm

The usual choices are short-term TIPS, I Bonds, commodities funds, and possibly unhedged international bonds.

For a retirement portfolio, a long TIPS ladder has undeniable appeal.

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Re: Does Vanguard have contrarian funds ?

Postby asif408 » Tue Mar 21, 2017 3:25 pm

I don't think Vanguard has any specific contrarian funds, but if you want to be a contrarian you can pick the funds that have performed the worst over the last 5-10 years. Maybe international developed markets, emerging markets, precious metals, & energy funds? Those have all had very low single digit to 0% returns (or even significant negative returns in the case of precious metals) over the last 5-10 years. Of course, if you don't want to ride out a 20% pull back these probably won't help that, as they are just as susceptible to market declines. You have to hold more cash and/or safe short to intermediate government bonds to do that. So pick your poison: lower risk and likely lower returns (using more bonds) or higher risk and likely higher returns (with more risky stocks).

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Re: Does Vanguard have contrarian funds ?

Postby whodidntante » Tue Mar 21, 2017 11:34 pm

Theoretical wrote:
whodidntante wrote:Vanguard's market neutral fund is poorly run, so I would pass on that even if you're willing to put up the quarter million buy-in. AQR has better options. You can sometimes buy AQR funds at Fidelity without an advisor. I haven't checked recently.


Not anymore. They fired AXA Rosenberg in 2010 and the fund now works as intended. It's now exclusively run by VG's Quant group, and its most notable for momentum and quality exposure with some value (though not statistically significant with monthly returns). It's also extremely tax-efficient and has virtually no stock or bond correlation to speak of.


I'm glad they improved it.

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Re: Does Vanguard have contrarian funds ?

Postby Noobvestor » Wed Mar 22, 2017 12:06 am

redhat33 wrote:I am worried about a crash so where can I dump a significant Vanguard portfolio in to once I see signals of a pullback or recession? I do not want to ride out a 20% pullback? Too old!


Well if I wanted a 'contrarian' fund at Vanguard for stocks, I'd go with EDV - extended-duration treasuries. Those bad boys could do amazing in a stock crash. Of course, if it's an inflationary situation they could crash right alongside stocks, too. Best bet: have an allocation to stocks and bonds in advance that takes care of your concerns for a downturn. I'm 60/40 FWIW.
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Re: Does Vanguard have contrarian funds ?

Postby Valuethinker » Wed Mar 22, 2017 8:42 am

lack_ey wrote:
Valuethinker wrote:
nisiprius wrote:OK, I want to state this very carefully. There are some mutual funds that are designed to go up when the market goes down. I think investing in any of them is a very, very, very bad idea, but they exist and they do what they say. Vanguard does not offer any funds like this.

Why is it a bad idea? Because they also go down when the market goes up. There isn't any magic, and because they have high expenses and because of other considerations about the way they work, if you mix them in a portfolio with regular stock funds the basic effect is a drag--much worse than the effect of simply cutting back stock allocation and increasing bond allocation.e.


My general understanding is that although they move negatively with daily market moves, that doesn't mean they move negatively if we are in a longer term bear market? This is to do with the derivatives strategy by which they are constructed, I believe.

It struck me as quite a good way to risk wiping out your entire principal.

Bear market funds / short bias funds and daily inverse funds are not the same thing. With the former you're usually looking at an actively managed portfolio that could have a range of outcomes, it might not be consistently heavily net short, and the average net exposure may be significantly less than -100%. It really depends. The short positions are held longer than a day and it's not rebalanced back daily.

The daily inverse funds are maybe more what you're thinking about.


Thank you for that-- clearly I did not understand the distinction.

Seems to me, though, that there will be a problem with bear market funds/ short bias funds, as an investor. You don't know what they might do, because you don't know their actual style at any given moment?


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