siamond wrote: jbolden1517 wrote:
That's going to be too low a correlation. What about 50% EM stock, 50% INTL bonds.
I do have data for the last 20 years. The green box JPM-EMBI is the index that Schwab's fund (VanEck) is tracking.
http://www.lazardnet.com/us/docs/sp0/20 ... nvestmentF
Thank you, great pointer, much better than Barclays or Citi. JPM-EMBI matches reasonably well the (very few!) years of the corresponding Vanguard fund (VGOVX), and this index does provide pretty good EM Bonds history, starting from 1994.
As to the previous years, trying to fill the gap 1985 to 1993, the best I found is 1/3rd EM, 1/3rd HY, 1/3rd Int'l Bonds.
That's interesting. That makes sense. Sort of captures all the aspects of EM bonds, nicely. Good to see that worked. Definitely better than Intl bonds.
siamond wrote: Yes, VERY clunky, but definitely a better match for std-deviation and correlation with JPM EMBI for known years than other things I tried. => side note: this made me understand why SIP (and other folks) are eager to use EM Bonds, as this asset class has an interestingly low correlation (e.g. less than 0.5) with pretty much everything else. I learn something every day with this forum!
That is interesting. I would have figured it would be a higher correlation given the liquidity requirements. I might want to pick up some of that VanEck fund for myself.
siamond wrote: So... I cobbled together an extended JPM EMBI data series starting from 1985. And assigned the 7% EM Bonds to it. And lo and behold, the SIP results are indeed improved, and now it's roughly on par with my Tilt2 portfolio. And I guess that if I were to address the more minor issues (e.g. better MBS mapping, etc), this would improve a tad further. Then the big thing remains 'fundamental' vs. 'classic' value, but let's stop short of re-opening this discussion (please!). Note that one could of course also use 'fundamental' funds in a regular tilted asset allocation (some Bogleheads definitely do that).
Agreed. There is a discussion about market weight vs. strong value tilt (basically avoid crappy stocks) and there is a discussion about how best to implement strong value tilts. The discussion about how best to implement strong value tilts is rather complex and likely to get more complex as value tilting methodologies get more sophisticated. I wouldn't want to trust backtesting here. My personal opinion is for passive use a variety of passive methods or just pay the 100 basis points and go with a quality value house mutual fund. I like Schwabs 3 factor model (sales, cash flow, dividends) as being a nice mixture which is why they are the largest chunk of my portfolio. Goldman Sachs multi-factor funds are really interesting for forward going portfolios. OTOH Goldman Sachs has a well deserved reputation for screwing over their clients, so while I hold some I don't recommend them for value investors who might not be paying attention nor for a core.
siamond wrote: I also tried to replace the 9% money market 'cash' by TBM, which makes the whole thing even better - just saying! This is the part of the SIP portfolio I really don't understand.
I can explain and it presents a good example of where Vanguard is outstanding relative to the competition. Vanguard may be incompetent but they never have mixed motives. Bogleheads tends to focus on mutual fund fees because Vanguard literature focuses so much on those. But those have come down a lot. The only people making huge profits running mutual funds are those companies driving their funds into the ground with 2.2% ERs and declining assets. No one is really making much money anymore on new funds as ETFs eat the industry. The deep discounters are now mainstream so there is no money to be made on transactions. Fidelity and Schwab now have to offer $5 stock trades and live on 25 basis point 12b-1 fees and even those margins are under increasing pressure. Being a brokerage is a bad business to be in right now which is why so many of them are diversifying into value adds, being sold off to get themselves value adds or just merging into successful brokerages. For the big houses the profits in the brokerage industry are much larger on the sellside than the buyside. And even for them the profits on the buyside are mostly from things like mid-business lending. Everyone talks about the 1% account management fees but the big brokerages end up having to provide so many services and have such a high cost of client acquisition that they don't make huge profits there. (I know this is shocking for Bogleheads but stay with me on this).
The way the big houses really make money from their buyside clients is using them as a way to offload securities from the sellside clients and pick up the 6% commission on a success for an issuance. Think about how much 30 basis points annually on the entire USA corporate bond market is. And then remember that many of these big houses also make a sizable chunk (though a much lower percentage) of the global bond market as well for countries without a sophisticated sellside.
Charles Schwab has gotten to the size that they can start thinking of competing on the sellside and is restructuring themselves slowly to be more like the big brokerage houses. Just as Charles Schwab was an early innovator in discount buyside brokerage they hope to be a discounter (but not deep discounter) for sellside brokering. To do that though they need to be easily able to deploy hundreds of millions if not billions of dollars into assets of their choosing for their clients on a regular basis. Charles Schwab built their business on DIY investors. They don't have pension funds under management, they aren't managing endowments, they don't have wealthy investors.
SIP and the ETFs are I believe a strategic product. They do a few core things to advance this goal.
1) It brings complex investment management in house. Schwab has to run funds. That means expensive software and the in house expertise to write it, especially big data and quantitative expertise. If forces them to make market in a high volume security (their ETFs) and gain the experience in doing this kind of billion dollar selling. They are practicing with the ETFs learning the skills they will need to be a big sellside house when mistakes are cheap not billions of dollars in loses.
2) It gets Schwabs desks doing heavy volume. Charles Schwab is learning how to handle billions in daily transactions without say calling Merrill and asking their desks to handle it.
3) It gets Schwab having large quantities of lendable funds so they can fund their in house desk.
4) It brings in a client base who is not DIY and as their assets grow might become good candidates for their full service financial advice (who of course is going to advise them to buy securities Schwab's trading desk is having trouble offloading).
The cash position isn't invested in bonds because Schwab wants it invested in their trading desk. They need their desk to be able to comfortably hold a $3b bond issue for 10 days. Right now they would have to borrow. But if they get say $500b in SIP of that gets them up to $30b in floating funds for their desk.
SIP is unique among the robo-advisors in that it doesn't charge a fee. The Schwab ETFs are cheap there is no money to be made there directly. Their own trading desk can make profits from rebalancing but that's a small percentage of assets under management. The cash on the other hand.
They still don't have a big derivatives business which is the last component for a sellside house. But they have a neat subsidiary: http://www.optionsxpress.com/
. What do you think all those 20 year olds whom Schwab is teaching to short options will want to buy in 20 years? It ain't gonna be TSM. At least a good fraction of them are going to want to move up to more complex and sophisticated products and Schwab can move up to complex and more sophisticated products right along with them. And now they have the cash to be able to write those sorts of complex derivatives.
So IMHO that's the reason for the cash position. A good chunk of the reason SIP exists at all is for that cash position. SIP is a great product. But it is a great product because its maker has another agenda.
siamond wrote: Bottomline: SIP is basically a somewhat complicated value-y asset allocation, with a few interesting subtleties in terms of diversification and play on correlations. Although one can construct a simpler tilted portfolio with regular Bogleheads principles that would have performed more or less the same. As Ladygeek said, the Schwab robo-adviser essentially acted as an adviser with its own (possibly good) ideas on how to construct an asset allocation. While the 'robo' automation makes the relative complexity of the portfolio much more bearable.
Agree with all.