Ferri's 60-20-20 Bond Portfolio

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BetaBreaker
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Ferri's 60-20-20 Bond Portfolio

Post by BetaBreaker » Sat Apr 20, 2013 6:41 pm

In a recent discussion about the oddities of the Barclays Aggregate Bond Index used by the Total Bond funds, Rick Ferri mentioned a possible way to get around its 70% (approx) in government bonds. I believe his suggestion was the following:
-- 60% in the Total Bond Market Index Fund
-- 20% in the Vanguard High-Yield Corporate fund
-- 20% in the Treasury Inflation Protected Securities fund
I'm just wondering if anyone can breakdown what that would leave for an allocation between Treasuries, agencies, mortgages, corporate and the rest?
Any other suggestions?

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Re: Ferri's 60-20-20 Bond Portfolio

Post by LadyGeek » Sat Apr 20, 2013 6:53 pm

That would be this post: Re: Jack Bogle: We need to fix the bond index

This thread is now in the Investing - Theory, News & General forum (theory).
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Re: Ferri's 60-20-20 Bond Portfolio

Post by Angst » Sat Apr 20, 2013 7:23 pm

BetaBreaker wrote:In a recent discussion about the oddities of the Barclays Aggregate Bond Index used by the Total Bond funds, Rick Ferri mentioned a possible way to get around its 70% (approx) in government bonds. I believe his suggestion was the following:
-- 60% in the Total Bond Market Index Fund
-- 20% in the Vanguard High-Yield Corporate fund
-- 20% in the Treasury Inflation Protected Securities fund
I'm just wondering if anyone can breakdown what that would leave for an allocation between Treasuries, agencies, mortgages, corporate and the rest?
Any other suggestions?
Well, the quickest route to your answer is probably going to be to go to Vanguard's website yourself, pull up each of the three funds, look at the holdings for each one and multiply the respective categories you're after by the appropriate Ferri weight. Then report back the totals.

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Re: Ferri's 60-20-20 Bond Portfolio

Post by G-Money » Sat Apr 20, 2013 9:20 pm

Angst wrote:
BetaBreaker wrote:In a recent discussion about the oddities of the Barclays Aggregate Bond Index used by the Total Bond funds, Rick Ferri mentioned a possible way to get around its 70% (approx) in government bonds. I believe his suggestion was the following:
-- 60% in the Total Bond Market Index Fund
-- 20% in the Vanguard High-Yield Corporate fund
-- 20% in the Treasury Inflation Protected Securities fund
I'm just wondering if anyone can breakdown what that would leave for an allocation between Treasuries, agencies, mortgages, corporate and the rest?
Any other suggestions?
Well, the quickest route to your answer is probably going to be to go to Vanguard's website yourself, pull up each of the three funds, look at the holdings for each one and multiply the respective categories you're after by the appropriate Ferri weight. Then report back the totals.
Right. To get you started, here's the relevant page for TBM. https://personal.vanguard.com/us/funds/ ... =INT#tab=2. So you would multiply those percentages by .6, and add the corresponding vales of TIPS and HY, both multiplied by .2.

IMO, the end result is not radically different than TBM or Intermediate term index by themselves.
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Re: Ferri's 60-20-20 Bond Portfolio

Post by BetaBreaker » Sat Apr 20, 2013 9:50 pm

Using .6 and .2 as multipliers, the Ferri 60-20-20 portfolio came up with:
Treasury/Agency: 26.5%
Government Mortgage-Backed: 14.5%
Industrials: 7.6%
Finance: 4.7%
High-Yield Corporate: 4%
TIPS: 4%
Foreign: 3.4%
Utilities: 1.6%
Commercial Mortgage-Backed: 1.2%
Asset-backed: 0.2%

Of course, Total Bond doesn't have TIPS or High-Yield Corporates. It has (according to Vanguard's site):
Treasury/Agency: 44.1%
Government Mortgage-Backed: 24.2%
Industrials: 12.6%
Finance: 7.8%
High-Yield Corporate: 0%
TIPS: 0%
Foreign: 5.7%%
Utilities: 2.6%
Commercial Mortgage-Backed: 2%
Asset-backed: 0.3%
Other: 0.7%

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Re: Ferri's 60-20-20 Bond Portfolio

Post by Random Musings » Sat Apr 20, 2013 9:57 pm

BetaBreaker wrote:Using .6 and .2 as multipliers, the Ferri 60-20-20 portfolio came up with:
Treasury/Agency: 26.5%
Government Mortgage-Backed: 14.5%
Industrials: 7.6%
Finance: 4.7%
High-Yield Corporate: 4%
TIPS: 4%
Foreign: 3.4%
Utilities: 1.6%
Commercial Mortgage-Backed: 1.2%
Asset-backed: 0.2%

Of course, Total Bond doesn't have TIPS or High-Yield Corporates. It has (according to Vanguard's site):
Treasury/Agency: 44.1%
Government Mortgage-Backed: 24.2%
Industrials: 12.6%
Finance: 7.8%
High-Yield Corporate: 0%
TIPS: 0%
Foreign: 5.7%%
Utilities: 2.6%
Commercial Mortgage-Backed: 2%
Asset-backed: 0.3%
Other: 0.7%
60/20/20 does not add to 100 - Tips should be basically 20% and hi-yield a lot more than 4%.

RM
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Re: Ferri's 60-20-20 Bond Portfolio

Post by BetaBreaker » Sat Apr 20, 2013 10:15 pm

Or, another way to look at it (Ferri Vs. Total Bond):
-- Treasury/Agency: 30.5% (with TIPS) vs. 44.1%
-- Corporates: 17.9% (with high-yield) vs. 23%
-- MBS: 15.9% vs. 26.2%
(Not sure how to classify foreign)

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Re: Ferri's 60-20-20 Bond Portfolio

Post by WhiskeyJ » Sat Apr 20, 2013 10:53 pm

Random Musings wrote: 60/20/20 does not add to 100
On my calculator it does... :confused

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Re: Ferri's 60-20-20 Bond Portfolio

Post by G-Money » Sun Apr 21, 2013 4:44 am

How did you get only 4% TIPS? My guess is you simply multiplied 20% TIPS by .2. If you got the idea from my post, perhaps I wasn't clear enough.

You need to go to the same page I linked earlier for both the TBM fund and HY. The page will show you how much of each of those funds is invested in Treasuries, industrials, foreign bonds, etc. Multiply each of THOSE values by .2, and add to what you previously calculated for TBM.

To make it easier, I would assume that TIPS is 100% Treasuries, or very, very close. That would mean 100% * .2 = 20%. Added to the 26.5% Treasuries you got for (TBM Treasuries *.6), that comes to 46.5%.

Don't take my word for it, though. See those pages and do the math yourself. You could do the same thing with thise funds to see the relative weighting of the funds' holdings by credit quality instead of industry. Then compare the results to just TBM and Intermediate-term index. Good luck.
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Re: Ferri's 60-20-20 Bond Portfolio

Post by nedsaid » Sun Apr 21, 2013 11:34 am

I love TIPs and have had them for years, but I wonder if 50% of a bond portfolio in these instruments is too much. Particularly now that some of these have negative real yields. These have been very popular investments and I have wondered if it is time to perhaps cut back.
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Re: Ferri's 60-20-20 Bond Portfolio

Post by Rick Ferri » Sun Apr 21, 2013 12:00 pm

G-Money wrote:To make it easier, I would assume that TIPS is 100% Treasuries, or very, very close. That would mean 100% * .2 = 20%. Added to the 26.5% Treasuries you got for (TBM Treasuries *.6), that comes to 46.5%.
That's the correct answer. My idea back in early 2000s was to have about 50% in guaranteed governmen and 50% diversified among everything else (corporate and mortgages, high yield). This is skewed at the moment now that Fannie Mae and Freddie Mac are owned by the government, but I don't expect that to continue indefinitely.

The advantage of a total bond market index funds is that it's very cheap and low credit risk due to the high amount in government bonds. The disadvantage is the the government controls how the portfolio is allocated by issuing more debt and taking over private companies that have debt (Fannie and Freddie).

I've looked at slicing and dicing Treasuries, agencies, mortgages and corporate bonds in the past, but there has been no benefit to doing from a return perspective, and it's a higher cost strategy. Jack is making the case that there is a benefit today in deciding how you should allocate your bonds rather than the government deciding through a TBM.

I believe the 20% TIPS / 60 TBM / 20 high yield mix offers adequate diversification without complication and higher cost. Others may disagree.

Rick Ferri
Last edited by Rick Ferri on Sun Apr 21, 2013 12:05 pm, edited 1 time in total.
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Re: Ferri's 60-20-20 Bond Portfolio

Post by nedsaid » Sun Apr 21, 2013 12:05 pm

Whoops, I misread the original post. Yes, I would be comfortable with TIPS being 20 percent of a bond portfolio.

TIPS are a bit harder for me to conceptualize as there is another factor built in. Most bonds have a fixed payout where the TIPS principle increases with inflation. These are harder to value.

I sure would not pile into these right now, but I have them as part of my diversification program.
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Re: Ferri's 60-20-20 Bond Portfolio

Post by Gort » Sun Apr 21, 2013 12:07 pm

Rick Ferri said "I believe the 20% TIPS / 60 TBM / 20 high yield mix offers adequate diversification without complication and higher cost."
Too bad the high-yield corporate fund is still closed to new investors however.
Maybe it's open to Flagship level investors???

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Re: Ferri's 60-20-20 Bond Portfolio

Post by bayview » Sun Apr 21, 2013 12:30 pm

Rick Ferri wrote:
G-Money wrote:To make it easier, I would assume that TIPS is 100% Treasuries, or very, very close. That would mean 100% * .2 = 20%. Added to the 26.5% Treasuries you got for (TBM Treasuries *.6), that comes to 46.5%.
That's the correct answer. My idea back in early 2000s was to have about 50% in guaranteed governmen and 50% diversified among everything else (corporate and mortgages, high yield). This is skewed at the moment now that Fannie Mae and Freddie Mac are owned by the government, but I don't expect that to continue indefinitely.

The advantage of a total bond market index funds is that it's very cheap and low credit risk due to the high amount in government bonds. The disadvantage is the the government controls how the portfolio is allocated by issuing more debt and taking over private companies that have debt (Fannie and Freddie).

I've looked at slicing and dicing Treasuries, agencies, mortgages and corporate bonds in the past, but there has been no benefit to doing from a return perspective, and it's a higher cost strategy. Jack is making the case that there is a benefit today in deciding how you should allocate your bonds rather than the government deciding through a TBM.

I believe the 20% TIPS / 60 TBM / 20 high yield mix offers adequate diversification without complication and higher cost. Others may disagree.

Rick Ferri
So for those of us with access to TSP as well as to Vanguard funds, your formula might break out to something like this? -ish??:

46.5% G fund (equivalent of 20% TIPS and 26.5% Treasuries in TBM)
33.5% investment-grade corporates and MBS
20% high yield

I had sort of blundered across this breakdown a while back, although not so high in high yield, through a general dissatisfaction with the F fund. I'd rather have my Treasury allocation (including TIPS equivalent) in G fund and break out the rest in corporates. (I'm pretty much ignoring trying to split out MBS for now in the interest of simplicity, especially since they're already represented some in Vanguard investment-grade intermediate- and short-term funds.)

--and yes, for the non-Ricks, I do understand that high yield might be better regarded as equity equivalent.
The continuous execution of a sound strategy gives you the benefit of the strategy. That's what it's all about. --Rick Ferri

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Re: Ferri's 60-20-20 Bond Portfolio

Post by Rick Ferri » Sun Apr 21, 2013 1:24 pm

I do understand that high yield might be better regarded as equity equivalent.
That is not true. High yield is a fixed income investment that has higher price volatility and a high return expectation than investment grade corporate bonds. They are not the same asset class as equity. At times they do have a high correlation with equity like every other riskier asset class (commodities, real estate, etc.) This does not mean these asset classes are equity equivalents. There have been dozens of conversation on this forum where people have said that high yield bonds are equity and that concept has been shown to be wrong time and again.

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Re: Ferri's 60-20-20 Bond Portfolio

Post by G-Money » Sun Apr 21, 2013 1:27 pm

Rick Ferri wrote:My idea back in early 2000s was to have about 50% in guaranteed governmen and 50% diversified among everything else (corporate and mortgages, high yield). This is skewed at the moment now that Fannie Mae and Freddie Mac are owned by the government, but I don't expect that to continue indefinitely.

The advantage of a total bond market index funds is that it's very cheap and low credit risk due to the high amount in government bonds. The disadvantage is the the government controls how the portfolio is allocated by issuing more debt and taking over private companies that have debt (Fannie and Freddie).

I've looked at slicing and dicing Treasuries, agencies, mortgages and corporate bonds in the past, but there has been no benefit to doing from a return perspective, and it's a higher cost strategy. Jack is making the case that there is a benefit today in deciding how you should allocate your bonds rather than the government deciding through a TBM.

I believe the 20% TIPS / 60 TBM / 20 high yield mix offers adequate diversification without complication and higher cost. Others may disagree.

Rick Ferri
Thanks for the background, Rick. As always, appreciate your insight.

If the original goal was to have 50/50 govt/everything else, what are your thoughts about switching Vanguard Intermediate-term bond index fund (VBILX) instead of TBM? VBILX is 50/50 govt/corps. Same maturity, only slightly longer duration. ER of .11 vs. .10. Primary difference is no MBS. Adding 20% each of TIPS and HY still maintains the same 50/50 ratio.

I suppose my question boils down to: is it more important to maintain the 50/50 ratio or exposure to MBS?
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Re: Ferri's 60-20-20 Bond Portfolio

Post by Gort » Sun Apr 21, 2013 3:33 pm

Gort wrote:From the Morningstar interview, Bogle says the following: "...I wouldn't go all the way to corporates. I'd keep these Treasury positions. So, if we don't have an index fund that accurately reflects the total bond market for U.S. investors, you maybe take half of that and put it in a corporate-bond index fund."
Wouldn't Vanguard's Intermediate-Term Bond Index fund (VBIIX) closely approximate Bogle's suggestion? VBIIX has 50% Treasuries and 50% Corporate bonds. How come there's not much discussion on this forum about VBIIX?

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Re: Ferri's 60-20-20 Bond Portfolio

Post by bayview » Sun Apr 21, 2013 3:37 pm

Rick Ferri wrote:
I do understand that high yield might be better regarded as equity equivalent.
That is not true. High yield is a fixed income investment that has higher price volatility and a high return expectation than investment grade corporate bonds. They are not the same asset class as equity. At times they do have a high correlation with equity like every other riskier asset class (commodities, real estate, etc.) This does not mean these asset classes are equity equivalents. There have been dozens of conversation on this forum where people have said that high yield bonds are equity and that concept has been shown to be wrong time and again.

Rick Ferri
Yes, thanks; I actually wrote that in an attempt to head off one of those convo's at the pass, which is why I wrote "for the non-Ricks." :D
The continuous execution of a sound strategy gives you the benefit of the strategy. That's what it's all about. --Rick Ferri

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Re: Ferri's 60-20-20 Bond Portfolio

Post by ps56k » Sun Apr 21, 2013 4:33 pm

Just stumbled across this thread - as the subject line caught my eye...

I happen to have thse - sort of -
VBMFX - total bond
VIPSX - TIPS
VWESX - LT Corp vs the High Yield VWEHX

I was looking at the portfolio of my VWESX compared to the (closed) VWEHX
and it seemed that the Long Term Inv Grade fund was doing better...

1,3,5 yrs were better - only the 10yr was almost even.
Also, for me, and a little less risk,
the value of the highest slices & ratings within the portfolio was interesting...
The High Yield had 26% with Ba3 rating
The LT Corp had 22% with A3 rating.

SO - guess I'm happy with my VWESX...

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Re: Ferri's 60-20-20 Bond Portfolio

Post by Bradley » Sun Apr 21, 2013 4:51 pm

60-20-20 :happy

Below is the growth of $10,000 over 10 years as of 4/19/2013


Vanguard High-Yield ...........................VWEAX...............$21,251

Vanguard Inflation-Protected Secs.......VAIPX...................$18,412

Vanguard Total Bond Market ...............VBTLX.................$16,432





DFA Five-Year Global Fixed-Income....DFGBX................$14,714

DFA Short-Term Government...............DFFGX.............$13,945

DFA Two-Year Global Fixed-Income.....DFGFX..............$12,598

LWAS/DFA Two-Year Gov.....................DFYGX............$12,576

DFA One-Year Fixed-Income................DFIHX.............$12,539

LWAS/DFA Two-Year Fixed Income......DFCFX...............$12,534
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Re: Ferri's 60-20-20 Bond Portfolio

Post by Rick Ferri » Sun Apr 21, 2013 5:03 pm

I learned a long time ago that when an equity firm decides to manage fixed income products that it's usually wise to avoid those products. This is why large institutional investors hire DFA for their equity management and not fixed income. Ironically, it's advisers who flock to DFA for fixed income, which should tell you something about advisers.

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Re: Ferri's 60-20-20 Bond Portfolio

Post by Dale_G » Sun Apr 21, 2013 5:33 pm

Rick failed to mention that DFA employs:

1. Screens to avoid call risk (optional for the less sophisticated)
2. Block trading (apparently no one else does this)
3. Patient trading (apparently no one else does this either)

These three factors clearly explain the superior performance as I have showed many times in the past. Sell Vanguard High Yield short and add a little small value and you will be golden.

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Re: Ferri's 60-20-20 Bond Portfolio

Post by EDN » Sun Apr 21, 2013 6:46 pm

Rick Ferri wrote:I learned a long time ago that when an equity firm decides to manage fixed income products that it's usually wise to avoid those products. This is why large institutional investors hire DFA for their equity management and not fixed income. Ironically, it's advisers who flock to DFA for fixed income, which should tell you something about advisers.

Rick Ferri
This of course isn't true. Many of DFAs oldest fixed income funds are very short-term and very high quality in nature and very well diversified (globally, for example) for those who prefer to "take their risk in equities" and want more liquidity, for example. And over the last 10 years yields have come way down and junk bond spreads have narrowed considerably, so of course short-term high quality bonds have trailed riskier fare. Lets not forget, however, this higher return hasn't been a free lunch, with junk bonds losing an unbelievable 20+% in 2008!

DFA also has a few intermediate funds, Int'd Government is similar to Vanguard Int'd Treasury--both of which are outstanding. DFA Investment Grade is similar to Total Bond Index but can shift maturities and credit around the TBM average based on term/credit spreads and has averaged about 1% more per year than TBM over the last few years. DFA TIPS has averaged a little more than half that much outperformance relative to Vanguard TIPS over the last 6-7.

Both families have very good passive/structured bond portfolios that aim to do slightly different things. Of course Rick is wrong about his opinion regarding DFA bond funds. To the extent they aren't used more by institutional investors, it simply reflects their tendency to hold longer-term debt.

Eric

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Re: Ferri's 60-20-20 Bond Portfolio

Post by Bradley » Sun Apr 21, 2013 7:54 pm

EDN wrote:
DFA also has a few intermediate funds, ...........................DFA Investment Grade is similar to Total Bond Index

Eric


DFA Investment Grade....................DFAPX inception date 3/02/2013. M* has no “Rating & Risk” data because it’s so new.
You can sum up any active fund manager’s presentation at an investor conference in one sentence: “We’re doing well, all things considered.”

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Re: Ferri's 60-20-20 Bond Portfolio

Post by EDN » Sun Apr 21, 2013 8:02 pm

Per the comment above, that shows how $10k in a combo of riskier Vanguard bond funds (noteably Vanguard HY) grew compared to much safer fixed income, it offers another chance to compare "risk in bonds" vs "risk in stocks". If ever there was a decade where the former had a chance of outpacing the later, it would be the last 10 years--junk bond spreads were cut in half (hurting higher quality bonds) and yields fell by about 60% (which hurt shorter-term bonds).

For some, their "core" bond strategy is TBM. HY Bonds grew to about $5,500 more than TBM.
I'd opt for the even safer DFA 5YR Global (1-5 yrs, AA or better and globally diversified). HY Bonds grew to about $6,500 more than 5YR bonds.

In 2008, the spread in losses between HY and the two high quality bonds was more than -25%!

Alternatively, we see $10k in US small value (DFA US Targeted Value) grew to $9,500 more than TSM. Int'l small value grew to $11,500 more than Developed Int'l Index, and EM value outperformed EM Index by about $14,000.

So "bond risk" gained you an average of $6K over reasonably safe bonds. "Equity risk" averaged about $11,000---about double.

But for all the additional return from equities, USSV was down 3% less than TSM in '08, ISV was down -0.1% more than Developed Int'l, and EM Value lost -1.1% more than EM Index.

"Risk in equities" has stood the test of time like precious few other concepts in finance.

Eric

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Re: Ferri's 60-20-20 Bond Portfolio

Post by EDN » Sun Apr 21, 2013 8:13 pm

Bradley wrote:
EDN wrote:
DFA also has a few intermediate funds, ...........................DFA Investment Grade is similar to Total Bond Index

Eric


DFA Investment Grade....................DFAPX inception date 3/02/2013. M* has no “Rating & Risk” data because it’s so new.
It's over 2 years old. Simulations show a variable credit/maturity approach add about 1% higher returns relative to a static bond index (1975-2010). Since March 2011 inception, net of fund fees, it has beaten Barclays Agg by 1% per year. Exactly what you'd expect.

Current durations of the fund/index are 5.3 and 5.2 respectively, despite the index having a 0.9 year longer maturity. DFAPX currently holds more in A/BBB bonds (but all investment grade, no junk) because credit spreads are wide. If they were narrow, DFAPX would have a greater than index exposure to government debt (and greater than index exposure to shorter term bonds when yield curves are flat to inverted). No callable bonds or mortgage debt has/will also lead to outperformance.

This approach is probably what Bogle is referring to when he says TBM needs to be improved.

Hope that helps.

Eric

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Re: Ferri's 60-20-20 Bond Portfolio

Post by EDN » Sun Apr 21, 2013 8:27 pm

Another really unique/interesting strategy they've been managing is their "World exUS Government Bond Fund". It too is intermediate term, and offers excellent diversification to their US Government Bond fund (#1 ranked Int'd Government fund for the last 15 years, has actually outperformed Vanguard HY Corporate). You just never hear as much about these funds because of the popularity and eye-popping returns of their equity strategies.

But for those of us who have strong exposure to small and value globally, this fund allows us to significantly lower overall portfolio risk without having to concentrate in US-only bonds.

Unlike the contribution from "variable credit" that has led Investment Grade to outperform TBM by 1% per year, World exUS Government has outperformed the Citigroup 1-30 YR World exUS Government Index by 1% a year using a "variable maturity approach", targeting the developed government bond markets with the steepest yield curves and specifically the steepest point of each market yield curve within that country. Significant value-added you simply cannot get by sticking with a more risk/concentrated US-only bond approach.

Clearly, variable maturity and credit offer an attractive alternative to bond indexing or individual bond ladders.

Eric
Last edited by EDN on Sun Apr 21, 2013 8:35 pm, edited 1 time in total.

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Re: Ferri's 60-20-20 Bond Portfolio

Post by Rick Ferri » Sun Apr 21, 2013 8:35 pm

EDN wrote:
Rick Ferri wrote:I learned a long time ago that when an equity firm decides to manage fixed income products that it's usually wise to avoid those products. This is why large institutional investors hire DFA for their equity management and not fixed income. Ironically, it's advisers who flock to DFA for fixed income, which should tell you something about advisers.

Rick Ferri
Of course Rick is wrong about his opinion regarding DFA bond funds. To the extent they aren't used more by institutional investors, it simply reflects their tendency to hold longer-term debt.

Eric

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Re: Ferri's 60-20-20 Bond Portfolio

Post by LadyGeek » Sun Apr 21, 2013 8:40 pm

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Re: Ferri's 60-20-20 Bond Portfolio

Post by Bradley » Sun Apr 21, 2013 8:41 pm

EDN wrote:
In 2008, the spread in losses between HY and the two high quality bonds was more than -25%!


Eric

In 2009, the spread in gain between HY (VWEAX ) and DFA 5 yr Global DFGBX was in excess of 35%!

Bradley
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Re: Ferri's 60-20-20 Bond Portfolio

Post by EDN » Sun Apr 21, 2013 8:52 pm

Rick Ferri wrote:
EDN wrote:
Rick Ferri wrote:I learned a long time ago that when an equity firm decides to manage fixed income products that it's usually wise to avoid those products. This is why large institutional investors hire DFA for their equity management and not fixed income. Ironically, it's advisers who flock to DFA for fixed income, which should tell you something about advisers.

Rick Ferri
Of course Rick is wrong about his opinion regarding DFA bond funds. To the extent they aren't used more by institutional investors, it simply reflects their tendency to hold longer-term debt.

Eric

Hmmm. I was born at night, but not last night.

Rick Ferri
Sometimes I'm not so sure!

PS--the amount that advisors vs institutions have in DFA bond funds as a percentage of their total DFA assets isn't that different. And by the looks of Harvard and Yale, I'm guessing they and their trustees wish it was more!

Eric
Last edited by EDN on Sun Apr 21, 2013 8:58 pm, edited 2 times in total.

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Re: Ferri's 60-20-20 Bond Portfolio

Post by EDN » Sun Apr 21, 2013 8:56 pm

Bradley wrote:
EDN wrote:
In 2008, the spread in losses between HY and the two high quality bonds was more than -25%!


Eric

In 2009, the spread in gain between HY (VWEAX ) and DFA 5 yr Global DFGBX was in excess of 35%!

Bradley
I'd hope so, HY suffered devastating losses at just the wrong time in 2008. A total blood bath like nothing we'd ever seen from "bonds". What was the spread between HY and EM Value in 2009? Can you look that up for me?

Eric

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Re: Ferri's 60-20-20 Bond Portfolio

Post by Rick Ferri » Sun Apr 21, 2013 9:09 pm

EDN wrote:The amount that advisors vs institutions have in DFA bond funds as a percentage of their total DFA assets isn't that different. And by the looks of Harvard and Yale, I'm guessing they and their trustees wish it was more!

Eric
DFA used to make it easy to find this information. They used to breakout the amount being managed by advisers and for institutions for each asset class. I looked for an hour the other day and couldn't find the breakdown.

Institutions seek out the best in class for each investment category. They'll seek DFA for value investing and other firms for fixed income investing. There are always exceptions, though.

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Re: Ferri's 60-20-20 Bond Portfolio

Post by EDN » Sun Apr 21, 2013 9:27 pm

Rick Ferri wrote:
EDN wrote:The amount that advisors vs institutions have in DFA bond funds as a percentage of their total DFA assets isn't that different. And by the looks of Harvard and Yale, I'm guessing they and their trustees wish it was more!

Eric
DFA used to make it easy to find this information. They used to breakout the amount being managed by advisers and for institutions for each asset class. I looked for an hour the other day and couldn't find the breakdown.

Institutions seek out the best in class for each investment category. They'll seek DFA for value investing and other firms for fixed income investing. There are always exceptions, though.

Rick Ferri
That could be why do many of your comments re: DFA are inaccurate! :P

I can find it in 60 seconds--advisors have 28% of their DFA assets in bonds, institutions have 16%. So this comment is clearly wrong:
This is why large institutional investors hire DFA for their equity management and not fixed income
Btw, I could just as easily explain those minor differences as individuals hold more short-term debt than institutions (and DFA has historically had more short-term options). [Snarky comment removed by admin LadyGeek] Both institutions and RIAs have a fiduciary standard to use what they believe are the best available options. As my data above shows, the "take the risk in bonds" crowd might be skating on some pretty thin ice!

[Personal attack removed by admin LadyGeek]

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Re: Ferri's 60-20-20 Bond Portfolio

Post by Rick Ferri » Mon Apr 22, 2013 9:11 am

Advisors have 28% of their DFA assets in bonds, institutions have 16%.
Thanks for proving my point.

Rick Ferri

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Re: Ferri's 60-20-20 Bond Portfolio

Post by Bradley » Mon Apr 22, 2013 10:52 am

EDN wrote:............ HY suffered devastating losses at just the wrong time in 2008. A total blood bath like nothing we'd ever seen from "bonds".
Eric


“devastating losses” ??? Eric, you crack me up.


I have already provided the data that shows VWEAX (Vanguard’s Hy Yield )outperformed DFGBX ( Dimensional’s 5yr Global Fixed ) in excess of 44% over the past 10 years. Tough to characterize one year performance as devastating in context and without cherry picking time period.

As 10% of a buy hold rebalance strategy, in a well constructed portfolio, it is an overreach to characterize a fleeting 21% dip as devastating especially when the largest single allocation to fixed and portfolio as a whole VBTLX ( Vanguard’s Total Bond Fund ) returned 5.15% in 2008. In comparison DFA’s 5 year global returned 4.02% and DFA SCV lost 36.79%. Funny you do not characterize that as devastating.

You have provided many informative posts which we all appreciate and hope you continue. They may be more effective without injecting personal bias/emotions. Remember, there are many roads to Rome and most members embrace the same core beliefs.

Bradley
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Re: Ferri's 60-20-20 Bond Portfolio

Post by EDN » Mon Apr 22, 2013 11:21 am

Rick Ferri wrote:
Advisors have 28% of their DFA assets in bonds, institutions have 16%.
Thanks for proving my point.

Rick Ferri

[Response to personal attack removed by admin LadyGeek]
Rick,

I don't think I insulted you in any way. If I did, please provide the example and I am happy to apologize. That is never my intention. My assumption, however, is that you find it insulting that someone would question your opinions. My comments are simply designed to correct mistakes you have made.

For example, my participation in this thread was to comment on this opinion you offered:
This is why large institutional investors hire DFA for their equity management and not fixed income. Ironically, it's advisers who flock to DFA for fixed income, which should tell you something about advisers.
We of course now know without a doubt that you were wrong in this statement. You yourself said you didn't know that to be the case and what's more, didn't even know where to go to find out how right/wrong your opinion was, per this comment from you:
DFA used to make it easy to find this information. They used to breakout the amount being managed by advisers and for institutions for each asset class. I looked for an hour the other day and couldn't find the breakdown.
So, as I often do, I have to respond with facts to explain where you have gone wrong. In this case, you wanted to say that institutions do not use DFA for fixed income, while advisors "flock" to them, in effect insulting those of us who do use DFA for some fixed income as if we've made some huge error in judgement.

--Yet, there is only about a 10% spread between the exposure institutions have to DFA bond strategies (as a % of DFA assets) and the exposure advisors have. And, clearly, institutions do in fact use DFA for fixed income.
--Second, according to this paper from Vanguard (https://advisors.vanguard.com/VGApp/iip ... tInvesting), endowments only have on average 15% of their portfolios in fixed income, which is almost exactly the % of bond assets held by institutional investors at DFA! So not only do they use DFA for bonds, their usage is almost exactly average as a percent of their typical investment policy.

Finally, I certainly do not promote my business here and it is amusing that you would try to pin that on me. I don't, for example, start threads advertising articles I have written with links back to my website on a daily basis. You can insult me all you want by calling the firm I run a "DFA business", but it doesn't bother me a bit. I know when you resort to this, or silly "kool-aid" comments, it is the equivalent of waiving the white flag. Your comments were wrong, we see that now, that's all. I'm happy to absorb the insults to expunge incorrect opinions from the board.

Eric
Last edited by EDN on Mon Apr 22, 2013 11:51 am, edited 1 time in total.

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Re: Ferri's 60-20-20 Bond Portfolio

Post by EDN » Mon Apr 22, 2013 11:38 am

Bradley wrote:
EDN wrote:............ HY suffered devastating losses at just the wrong time in 2008. A total blood bath like nothing we'd ever seen from "bonds".
Eric


“devastating losses” ??? Eric, you crack me up.


I have already provided the data that shows VWEAX (Vanguard’s Hy Yield )outperformed DFGBX ( Dimensional’s 5yr Global Fixed ) in excess of 44% over the past 10 years. Tough to characterize one year performance as devastating in context and without cherry picking time period.

As 10% of a buy hold rebalance strategy, in a well constructed portfolio, it is an overreach to characterize a fleeting 21% dip as devastating especially when the largest single allocation to fixed and portfolio as a whole VBTLX ( Vanguard’s Total Bond Fund ) returned 5.15% in 2008. In comparison DFA’s 5 year global returned 4.02% and DFA SCV lost 36.79%. Funny you do not characterize that as devastating.

You have provided many informative posts which we all appreciate and hope you continue. They may be more effective without injecting personal bias/emotions. Remember, there are many roads to Rome and most members embrace the same core beliefs.

Bradley
Bradley,

I am glad you appreciate my contributions. Thank you.

To clarify, DFA 5YR Global Fund (one of the two "high quality bond" comparisons I made, the other Vanguard TBM) underperformed Vanguard HY by 3.8% over the last 10 years, and any portfolio $ that was taken from bonds to fund HY suffered about a 25% greater decline than had it been left alone. Instead of taking more risk in bonds, one could have taken more risk in stocks. DFA US Targeted Value fund, for example, outperformed the Total Stock Index by 3.9% per year over the last 10 years. Any portfolio $ than was taken from TSM to fund SV suffered a smaller loss in 2008 than had it stayed with TSM, -33% for SV vs -36% for TSM. So adding HY from the bond side increased risk exponentially, adding SV from the stock side barely moved the dial, while delivering a higher overall portfolio return.

Or, looked at another way, for every 10% you took away from 5YR Global to fund HY, you could have taken 4% away and put in US SV. The 10% HY allocation cost the portfolio -2.5% in additional losses in 2008 (-25% higher loss than ST bonds X 10% allocation), US SV cost the portfolio -1.2% (-30% greater loss than ST bonds X 4% allocation).

Any way you slice it, it's ugly.

But that is just the last 10 years, where we know the "perfect storm" for HY occurred relative to shorter term high quality bonds -- interest rates declined and junk spreads came in considerably. What if we go back 15 years where interest rates have still declined (benefitting the longer duration HY fund), but credit spreads were unchanged?

Over the last 15 years, Vanguard HY outperformed global short-term high quality by a razor thin 1.2% per year. DFA US SV, on the other hand, outperformed TSM by 4.3% per year. So for every $1 taken from TSM to fund SV, one received about 4X the compensation as one would have gotten from shifting a $ from safe to risky bonds! And, of course, the contribution of risk to the portfolio was much higher going from safe-->risky bonds than it was safer stocks-->riskier stocks.

And that is just within US markets! Over the same 15 year period, adding Int'l SV resulted in +4.9% per year higher than TSM returns, EM Value a whopping +8.4% per year higher than TSM returns.

For sure, "risk in bonds" is a raw deal.

And please don't mistake this for some DFA-based argument. I only mention them because you referenced the funds in your above post. Of course the case is the same if we look at Vanguard -- keeping duration the same with say Vanguard Int'd Treasury and also looking at Vanguard SV Index. Since the inception of the later, both have outperformed Vanguard HY. That has to be about the most frustrating reality an investor can face -- extreme amounts of risk (-25% greater than market declines in 2008) without any higher returns over time to show for it. Mr. Market certainly likes to test our resolve!

Of course, he is only partially to blame, the Vanguard HY fund is more investment grade oriented than the actual HY index, yet due to poor active management, found a way to lose almost as much as the index in 2008 (while coming up over 2% per year short over the last decade in returns).

Eric

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Re: Ferri's 60-20-20 Bond Portfolio

Post by Rick Ferri » Mon Apr 22, 2013 11:52 am

Eric,

I don't insult you. I disagree with you.

A large majority of your posts site DFA research. That's fine, except that it's well known that an adviser is needed to buy DFA funds, and you make it very clear in your posts that you're one of the advisers. Anyone who disagrees with had better standby for insults.

I don't have your opinion that DFA is the answer to all things investing. They're just another fund company, and no fund company is everything to everyone in every asset class. DFA has good products and they have not so good products. They began as an institutional equity shop and equities remains their forte today. It's widely know that institutional investors favor a managers strong point, and this is why they seek DFA for equity management and not fixed income products. It's a logical way to do business.

It's the advisers who pushed fixed income at DFA. They wanted to create "All DFA fund" portfolios because they found exclusivity sells. There were better fixed income funds already on the market yet advisers didn't care. The advisers have even asked for commodity produces that neither Fama or French or half the people at DFA believe in.

DFA delivered on all of these retail products - and I would too if I were running their business. AUM pays the bills.

This is my opinion, and you're entitled to your own.

Rick Ferri
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Re: Ferri's 60-20-20 Bond Portfolio

Post by EDN » Mon Apr 22, 2013 12:17 pm

Rick Ferri wrote:Eric,

I don't insult you. I disagree with you.

A large majority of your posts site DFA research. That's fine, except that it's well known that an adviser is needed to buy DFA funds, and you make it very clear in your posts that you're one of the advisers. Anyone who disagrees with had better standby for insults.

I don't have your opinion that DFA is the answer to all things investing. They're just another fund company, and no fund company is everything to everyone in every asset class. DFA has good products and they have not so good products. They began as an institutional equity shop and equities remains their forte today. It's widely know that institutional investors favor a managers strong point, and this is why they seek DFA for equity management and not fixed income products. It's a logical way to do business.

It's the advisers who pushed fixed income at DFA. They wanted to create "All DFA fund" portfolios because they found exclusivity sells. There were better fixed income funds already on the market yet advisers didn't care. The advisers have even asked for commodity produces that neither Fama or French or half the people at DFA believe in.

DFA delivered on all of these retail products - and I would too if I were running their business. AUM pays the bills.

This is my opinion, and you're entitled to your own.

Rick Ferri
Rick,

Many of my comments are on multifactor investment topics. Much of that strand of asset pricing research has been conducted by those with an affiliation with DFA. In the cases where I mention the funds in particular, it is either in a response to someone else who has already brought them up, or an asset class where no index exists or the indexes are weak. In any case where I've disagreed with your views on investment policy, I provide extensive research I have conducted myself independently to confirm/deny your claims. Where DFA or others have already done the work and I agree with it, I'll cite that as well.

I agree with you that no company, DFA, Vanguard, or anyone else is perfect. But from there you proceed to say things that just aren't true:

#1--Of the institutional assets at DFA, 16% are in fixed income funds. Looking at all college endowments in this country, they have an average of 15% in fixed income. Why would that number be higher? It is advisors who tend to use more DFA equity funds than bond funds -- as the average advisor allocation is more like a 60/40, not the 72%/28% equity/fixed split for advisor assets at DFA.

#2--I'm not aware of the bond funds DFA created that were duplicates of what was already on the market, or where better ones existed. Different ones existed, that's it. Please provide examples of this. I showed above, for example, how DFA bond strategies were different than what was on the market, so you'll have to correct me where you think I was mistaken.

You might not like short-term bonds, but others do. Eugene Fama, for example, has 100% of his fixed income money in DFAs bond funds designed after his term structure research.

Finally, I think you hype the "DFA exclusivity" thing way too much. It comes across more like insecurity. The last half-dozen advisors who've been profiled in the WSJ in the monthly MF report that have DFA funds in their mixes also have, if memory serves, 4-6 other fund families, and they aren't even 100% passive! PIMCO, alternative assets, and other garbage are common place. I think you are living in a world from 10 years ago.

Bottom line, there are some things we can agree to disagree about, but when there are actual facts that refute your opinions, I'm going to provide them. Don't take offense to them, new facts are how we learn.

Eric

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Re: Ferri's 60-20-20 Bond Portfolio

Post by Bradley » Mon Apr 22, 2013 12:31 pm

EDN wrote:
To clarify, DFA 5YR Global Fund (one of the two "high quality bond" comparisons I made, the other Vanguard TBM) underperformed Vanguard HY by 3.8% over the last 10 years
Eric




Eric,

Below is the M* reference which will provide you with the correct data. Vanguard’s HY ( VWEAX ) has actually outperformed DFA’s 5yr global by 3.91% not the 3.8% you claim. 3.91% per year over 10 yrs amounts to a growth of wealth in excess of 44% between the oft cited DFA fund vs Vanguard’s HY.

http://performance.morningstar.com/fund ... ture=en-us



In case you missed an earlier post let me leave you with some actual performance data as opposed to your what if scenarios.





Below is the growth of $10,000 over 10 years as of 4/19/2013


Vanguard High-Yield ...........................VWEAX...............$21,251

Vanguard Inflation-Protected Secs.......VAIPX.................$18,412

Vanguard Total Bond Market ...............VBTLX.................$16,432





DFA Five-Year Global Fixed-Income....DFGBX................$14,714

DFA Short-Term Government...............DFFGX.............$13,945

DFA Two-Year Global Fixed-Income.....DFGFX.............$12,598

LWAS/DFA Two-Year Gov.....................DFYGX............$12,576

DFA One-Year Fixed-Income................DFIHX.............$12,539

LWAS/DFA Two-Year Fixed Income......DFCFX...............$12,534



We understand not to look at products in isolation and that DFA employs patient trading, gains revenue from lending securities, is not forced into trading, has some smart employees, but..................... I have nothing to add to this thread.



Bradley
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Re: Ferri's 60-20-20 Bond Portfolio

Post by EDN » Mon Apr 22, 2013 1:11 pm

Bradley wrote:
EDN wrote:
To clarify, DFA 5YR Global Fund (one of the two "high quality bond" comparisons I made, the other Vanguard TBM) underperformed Vanguard HY by 3.8% over the last 10 years
Eric
Eric,

Below is the M* reference which will provide you with the correct data. Vanguard’s HY ( VWEAX ) has actually outperformed DFA’s 5yr global by 3.91% not the 3.8% you claim. 3.91% per year over 10 yrs amounts to a growth of wealth in excess of 44% between the oft cited DFA fund vs Vanguard’s HY.

http://performance.morningstar.com/fund ... ture=en-us

In case you missed an earlier post let me leave you with some actual performance data as opposed to your what if scenarios.

Below is the growth of $10,000 over 10 years as of 4/19/2013


Vanguard High-Yield ...........................VWEAX...............$21,251

Vanguard Inflation-Protected Secs.......VAIPX.................$18,412

Vanguard Total Bond Market ...............VBTLX.................$16,432

DFA Five-Year Global Fixed-Income....DFGBX................$14,714

DFA Short-Term Government...............DFFGX.............$13,945

DFA Two-Year Global Fixed-Income.....DFGFX.............$12,598

LWAS/DFA Two-Year Gov.....................DFYGX............$12,576

DFA One-Year Fixed-Income................DFIHX.............$12,539

LWAS/DFA Two-Year Fixed Income......DFCFX...............$12,534

We understand not to look at products in isolation and that DFA employs patient trading, gains revenue from lending securities, is not forced into trading, has some smart employees, but..................... I have nothing to add to this thread.

Bradley
Bradley,

Thank you for the 0.1% correction. As I am sure you agree, that doesn't change the conclusions I provided at all. As you are into growth of $10k comparisons, I thought you'd like this one (in ascending order) over the last 10 years:

ST Global Bonds = $14,702
HY Junk Bonds = $21,002 <---------- "Bond Risk" netted $6,300 additional value and cost -25% in greater 2008 losses

US Total Stock = $22,423
US Small Value = $31,720 <---------- "Stock Risk" in the US netted $9,297 additional value and had 3% less losses in 2008

Developed Market Index = $23,592
Int'l Small Value = $31,720 <----------"Stock Risk" in Int'l netted $8,128 and cost 0.1% additional loss in 2008

Emerging Markets = $42,074
Emerging Value = $54,817 <----------"Stock Risk" in EM netted $12,743 additional value and cost an additional -1.1% loss in 2008

When you see it visually like that, laid out before you, it really illustrates the point. And this in a period where size/value premiums were average, yet interest rates declined and credit spread compression was anomalously high. Image if rates rise or spreads widen!

By the way, in the comments prior to yours, I didn't see DFA funds mentioned once. I'm not sure who you were responding to or the point you were trying to make with the data (that higher risk ---> higher return maybe)? In any event, it allowed us to once again study how much more efficiently risk is rewarded on the stock side than the bond side, so whatever the reason it was worth it. Thanks

Eric

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Re: Ferri's 60-20-20 Bond Portfolio

Post by YDNAL » Mon Apr 22, 2013 1:35 pm

BetaBreaker wrote:In a recent discussion about the oddities of the Barclays Aggregate Bond Index used by the Total Bond funds, Rick Ferri mentioned a possible way to get around its 70% (approx) in government bonds. I believe his suggestion was the following:
-- 60% in the Total Bond Market Index Fund
-- 20% in the Vanguard High-Yield Corporate fund
-- 20% in the Treasury Inflation Protected Securities fund
I'm just wondering if anyone can breakdown what that would leave for an allocation between Treasuries, agencies, mortgages, corporate and the rest?
Any other suggestions?
I believe that IF as an investor you want to use something other than BarCap Agg, then build your own, and don't try to reinvent the wheel by using BarCap Agg then adding TIPS and HY.
For Vanguard VBMFX (BarCap Agg), Morningstar wrote:
VBMFX (BarCap Agg) -- Vanguard HY VWAHX
AAA 72.59
AA 4.49 -- 30%
A 11.64 -- 43%
BBB 11.28 -- 13%
(Don't be led to believe BarCap Agg doesn't have some of what Vanguard considers HY)


Fixed Income Sectors:
Government 43.94
  • U.S. Treasury 36.51
    U.S. Treasury Inflation-Protected 0.08
    U.S. Agency 3.44
    Non-U.S. Government 1.68
    Other Government Related 2.23
Corporate 21.22
Securitized 26.50
Municipal 0.85
Cash & Equivalents 7.49

http://portfolios.morningstar.com/fund/ ... ture=en-us
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Re: Ferri's 60-20-20 Bond Portfolio

Post by EDN » Mon Apr 22, 2013 1:48 pm

BetaBreaker wrote:In a recent discussion about the oddities of the Barclays Aggregate Bond Index used by the Total Bond funds, Rick Ferri mentioned a possible way to get around its 70% (approx) in government bonds. I believe his suggestion was the following:
-- 60% in the Total Bond Market Index Fund
-- 20% in the Vanguard High-Yield Corporate fund
-- 20% in the Treasury Inflation Protected Securities fund
I'm just wondering if anyone can breakdown what that would leave for an allocation between Treasuries, agencies, mortgages, corporate and the rest?
Any other suggestions?
Beta,

I've gotten your post off track, so let me try to give you some advice to help in your efforts. INSTEAD of just farming out your fixed income exposure to TBM, I'd suggest you instead think more critically about bond investing. Specifically:

1) what role do you want bonds to play in your portfolio (dampen risk, provide liquidity, lower inflation risk, or generate income, increase current portfolio returns)?
2) know what factors drive fixed income returns -- maturity and credit.

With this simple framework, you can find a mix that works for you. That, it a sense, is what Jack Bogle is saying with his critique of TBM -- he just isn't convinced a government bond heavy allocation is right for everyone.

Next, lets talk about the tools for the job. Lets not just try to build the same shed our neighbor has, lets make our own.

Dampen Risk/Provide Liquidity
ST Bond Index
ST Treasury Index
Int'd Treasury Index

Lower Inflation Risk
ST Bond Index
ST TIPS
Int'd TIPS

Generate Income
ST Investment Grade
Int'd Investment Grade
LT Investment Grade

Increase Portfolio Returns
Int'd Investment Grade
LT Investment Grade
HY Bonds

So that is the menu, you'll want to pick the items that work best for you.

Let's say you want lower risk and liquidity -- use TBM as your "core" while adding ST Bond Index or ST Treasury

Lets say you want lower risk but don't need liquidity -- use TM as your "core", while adding ST or Int'd Treasury

Lets say you want lower risk and inflation protection -- use TBM as your "core" while adding ST or Int'd TIPS

Lets say you want higher portfolio returns -- use TBM as your "core" while adding Int'd Investment Grade and/or HY Bonds (assuming you are unwilling to adjust the stock equation)

Don't worry about what others say. We know where returns come from, and we know what good funds are to target those risks. You just need to decide what risks are OK for you, which are not, and what funds will target those appropriately. If there are some structural factors in TBM that you don't like, you can substitute for Int'd Bond Index in the above equation.

Eric

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Re: Ferri's 60-20-20 Bond Portfolio

Post by aramv » Fri Aug 18, 2017 4:46 am

Rick Ferri wrote:
Sun Apr 21, 2013 5:03 pm
I learned a long time ago that when an equity firm decides to manage fixed income products that it's usually wise to avoid those products. This is why large institutional investors hire DFA for their equity management and not fixed income. Ironically, it's advisers who flock to DFA for fixed income, which should tell you something about advisers.

Rick Ferri
On that note, what do you think of new VCORX ?

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