2014 Tom Madell, Ph.D.

Apr. 2014

Email: funds-newsletter@att.net

Mutual Fund/ETF Research Newsletter


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Model Portfolio Changes Beginning April, 2014

by Tom Madell

When I published my last Model Portfolios at the start of the year, at least several investors commented that my recommended allocation to stocks of 52.5% for Moderate Risk investors seemed inappropriately low.

Another investor commented in February that the stock market seemed to be "ignoring" my somewhat "pessimistic" outlook for stocks over the next year or more. I had to point out that one month's results, that is, February's, did not offer a long-term view of things to come. In fact, Feb. only barely "neutralized" a very poor Jan.

And March hasn't exactly been the kind of month that should inspire the bulls either. In total, the first three months of 2014, although hardly conclusive themselves, aren't pointing to much different than the low single digit gains for the entire year that we suggested possible in the Feb. Newsletter.

It is important to re-emphasize that I wasn't predicting that stocks would do badly this year. Rather, I was only stating that, according to historical data, the odds did not seem to favor good returns. In fact, as I pointed out to one person who seemed to be labeling me as almost a market bear, that my recommended allocation of 70% to stocks for investors who consider themselves as aggressive would hardly be the stance of a person with an overall bearish view.

So the question of a recommended allocation to stocks right now is a tough call to make. (But has it ever been an easy call?). The key for me is not to try to read any tea leaves and predict where stocks will be within a matter of months, or even over the

Model Portfolio Changes Beginning April, 2014, continued on page 6

Investors Tend to Choose Funds That Lag the Markets

By Tom Madell

In this article, I will show that the funds and ETFs most frequently chosen by investors do not, on average, have a particularly good long-term track record as compared to randomly chosen funds. In fact, over the last five years, investors could have achieved better returns instead by using a rather surprisingly simple method. This method will be described shortly.

If we roughly define those funds with the most investor assets as those most chosen by investors, we can then examine how well these choices have done down the road. Conveniently, every month, a list of the funds with the most investor assets is published in the Wall Street Journal. You can also find similar lists elsewhere online.

Let's look at the biggest stock and bond mutual funds and ETFs that investors were choosing five years ago. While not all investors will hold their chosen funds for that long, I found quite similar results to those discussed here when looking at investors' choices made just one year ago.

Stock Mutual Funds

Just over five years ago, investors had the most money in the following 25 stock mutual funds below, listed in order of assets under management (funds that are stock/bond combinations were excluded; ETFs are covered separately below).

The table also shows how well each fund performed over the following five years. As you scan the table, keep in mind that over the same period, the S&P 500 index with dividends reinvested, returned 23.00% (annualized) while the average return of all domestic diversified funds as reported in the Wall Street Journal was 22.30%.

continued on page 2 below

Page 2

Apr 2014

(Investors Tend to Choose Funds That Lag the Markets, continued from page 1)

Stock Mutual Funds with Most Assets, Mar. 2009   Stock Mutual Funds with Most Assets, Mar. 2009 (cont.)
5 Yr.
Tot. Ret.
Fund Name Fund
5 Yr.
Tot. Ret.
Fund Name
AGTHX 21.99% American Funds Growth Fund of Amer A DODFX 22.72 Dodge & Cox International Stock
FCNTX 22.66 Fidelity Contrafund FDGRX 27.20 Fidelity Growth Company
CWGIX 19.09 American Funds Capital World G/I A VFIAX* 23.00 Vanguard 500 Index Admiral
AIVSX 20.49 American Funds Invmt Co of Amer A VTSAX* 24.00 Vanguard Total Stock Mkt Idx Adm
VTSMX* 23.85 Vanguard Total Stock Mkt Idx Inv FMAGX 22.03 Fidelity Magellan
VFINX* 22.85 Vanguard 500 Index Inv FLPSX 25.95 Fidelity Low-Priced Stock
AWSHX 21.72 American Funds Washington Mutual A VIIIX* 23.03 Vanguard Institutional Index Instl Pl
AEPGX 17.37 American Funds EuroPacific Gr A VWNFX 22.62 Vanguard Windsor II Inv
VINIX* 23.00 Vanguard Institutional Index I VGTSX 17.34 Vanguard Total Intl Stock Index Inv
DODGX 25.93 Dodge & Cox Stock NYVTX 22.16 Davis NY Venture A
ANWPX 20.94 American Funds New Perspective A GFAFX 21.99 American Funds Growth Fund of Amer F1
FDIVX 18.02 Fidelity Diversified International FEQIX 22.15 Fidelity Equity-Income
ANCFX 21.78 American Funds Fundamental Invs A      
Note: Funds in tables with an "*" aim to match the S&P 500 or an index of the total US stock market; all data thru 2-28.

Only six out of the 25 funds, highlighted in green, or 24%, that investors most chose 5 years ago wound up beating the S&P 500 on a long-term basis, with 76% trailing the index. Of those six, 3 were index funds constructed to closely resemble the index or an index of the total US stock market. And 5 out of these six were either Vanguard or Fidelity funds. The remaining funds were nearly all managed funds that tended to trail the index by up to several percentage points, many of them American Funds that charge a hefty load.

The average performance for the 25 funds was 22.16%, slightly trailing the performance for all US diversified funds. In other words, the masses of investors' money, at least in terms of the most popular funds in early 2009, did no better (and actually, a tad worse) than the average fund which investors could hit upon by randomly selecting from the pool of all available US stock mutual funds.

True, many investors will not likely lament the above outsized returns of the last 5 years even if they did fall short of the more than 23% annualized returns achieved by the six funds shown that excelled. However, trailing the index by 1 or 2 or more percent per year can amount to a significant amount of money year after year. And if returns over the coming years fall back to something closer to, say, 8-10% per year, such a deficit would represent a significant percentage of one's overall return.

Stock ETFs

You might think that investors who chose ETFs 5 years ago would have made more savvy choices than those who picked mutual funds. After all, many knowledgeable investors argue that ETFs, rather than mutual funds, are better choices for investors.

The following table shows the 25 ETFs investors had the most money in five years ago, listed in order of assets under management. The table also shows how well each fund's market price performed over the following five years. Once again, keep in mind the 23.00% annualized return for the S&P 500 and 22.30% for the average mutual fund over the same period.

Stock ETFs with Most Assets, Mar. 2009   Stock ETFs with Most Assets, Mar. 2009 (cont.)
5 Yr.
Tot. Ret.
Fund Name Fund
5 Yr.
Tot. Ret.
Fund Name
SPY* 22.86% SPDR S&P 500 MDY 26.44 SPDR S&P MidCap 400
GLD 6.62 SPDR Gold Shares IVW 22.91 iShares S&P 500 Growth
EFA 17.73 iShares MSCI EAFE EWZ 7.06 iShares MSCI Brazil Capped
EEM 15.28 iShares MSCI Emerging Markets GDX -4.35 Market Vectors Gold Miners
IVV* 22.85 iShares Core S&P 500 XLE 18.41 Energy Select Sector SPDR
QQQ 28.09 PowerShares QQQ XLF 25.36 Financial Select Sector SPDR
IWF 23.83 iShares Russell 1000 Growth EWJ 11.29 iShares MSCI Japan
VTI* 23.98 Vanguard Total Stock Market IWB 23.41 iShares Russell 1000
IWM 26.49 iShares Russell 2000 IJH 26.68 iShares Core S&P Mid-Cap
DIA 21.24 SPDR Dow Jones Industrial Average SLV 9.58 iShares Silver Trust
IWD 22.86 iShares Russell 1000 Value IWR 27.60 iShares Russell Mid-Cap
FXI 10.10 iShares China Large-Cap SSO 44.01 ProShares Ultra S&P500
VWO 16.20 Vanguard Emerging Markets Stock Idx      
Page 3

Apr 2014

For the most popular ETFs of five years ago, 60% of the most chosen wound up trailing the S&P 500, while 40% were ahead. While this 40% exceeded the 24% for mutual funds, you can see that, overall, these ETFs' performance results tended to be more variable than the above 25 stock mutual funds. In fact, as a group, the average performance for the most popular ETFs was 19.86%, trailing the average for the popular mutual funds by 2.40%.

Clearly, investors on average in the biggest ETFs five years ago who held their investments through this half decade of a super bull market would have had a more mixed record of excelling and would have done more poorly than the mutual fund investors in relative terms. And although only a scant few of these investors could complain about their absolute performance, it might be surprising that the most popular ETFs of five years ago did not prove to be a more winning place to be for either savvy or ordinary investors who began flocking to these investment products in recent years while, at the same time, pulling back from mutual funds.

In all honesty, likely there was nothing wrong per se with these ETFs. Rather, by directing their choices at times to more narrow corners of the stock market, such as precious metals and more volatile foreign markets, some ETF investors wound up choosing areas that turned out not "the best places to be" over a significant period of time.

Bond Mutual Funds

Likewise, 5 years ago, investors had the most money in the bond mutual funds shown below listed in order of assets under management. In evaluating these funds' performances over the next 5 years, keep in mind that the average taxable bond fund returned 7.78% annualized through 2-28-14, as reported in the Wall Street Journal.

Bond Mutual Funds with Most Assets, Mar. 2009   Bond Mutual Funds with Most Assets, Mar. 2009 (cont.)
5 Yr.
Tot. Ret.
Fund Name Fund
5 Yr.
Tot. Ret.
Fund Name
PTTRX 7.37% PIMCO Total Return Instl VIPSX 5.98 Vanguard Inflation-Protected Secs Inv
PTRAX 7.10 PIMCO Total Return Admin VFSUX 5.21 Vanguard Sh-Term Investment-Grade Adm
ABNDX 7.13 American Funds Bond Fund of Amer A FBNDX 7.70 Fidelity Investment Grade Bond
PTTAX 6.92 PIMCO Total Return A FTBFX 8.34 Fidelity Total Bond
VBMFX 4.90 Vanguard Total Bond Market Index Inv PTTDX 7.10 PIMCO Total Return D
VFIJX 4.47 Vanguard GNMA Adm VBTSX 5.05 Vanguard Total Bond Market Index Signal
VFIIX 4.36 Vanguard GNMA Inv LSBDX 15.49 Loomis Sayles Bond Instl
DODIX 7.85 Dodge & Cox Income PTLDX 5.56 PIMCO Low Duration Instl
VBTLX 5.05 Vanguard Total Bond Market Index Adm AHITX 16.66 American Funds American Hi Inc Tr A
VTBIX 4.91 Vanguard Total Bond Market II Idx Inv PRCIX 6.22 T. Rowe Price New Income
VBTIX 5.08 Vanguard Total Bond Market Index I OIBAX 6.98 Oppenheimer International Bond A
VFSTX 5.10 Vanguard Sh-Term Investment-Grade Inv WACPX 11.57 Western Asset Core Plus Bond I
FBIDX 4.93 Fidelity Spartan US Bond Idx Investor      

Only 5 out of 25, or 20%, of the most popular mutual funds in terms of invested assets in early 2009 wound up outperforming the average bond fund after 5 years, while 80% trailed. The average annualized performance of these funds over the period was 6.06%. Here, the outperforming funds were from a variety of fund families, and noticeably, none from Vanguard.

While you might wonder why the average bond fund did so well as compared to many of the funds above and to the bond benchmark (typically, the AGG ETF shown in the table below), the reason appears to be that corporate and high yielding bond funds, of which there are many in the universe of bond funds, tended to excel. On the other hand, many "safety-oriented" investors preferred funds that had a higher proportion invested in government bonds which, while less risky, tended to underperform over the last 5 years.

Bond ETFs

The final table shows the 10 bond ETFs where investors had the most money 5 years ago. (Only 10 are listed since in 2009, even among the "biggest" bond ETFs, many were small as compared to big bond ETFs today.)

Bond ETFs with Most Assets, Mar. 2009   Bond ETFs with Most Assets, Mar. 2009 (cont.)
5 Yr. Tot.
Ret. Ann.
Fund Name Fund
5 Yr. Tot.
Ret. Ann.
Fund Name
TIP 5.99% iShares TIPS Bond ETF IEF 4.51 iShares 7-10 Year Treasury Bond
AGG 4.74 iShares Core Total US Bond Market HYG 15.82 iShares iBoxx $ High Yield Corp.
LQD 9.31 iShares iBoxx $ Investment Grade C SHV 0.10 iShares Short Treasury Bond ETF
SHY 1.08 iShares 1-3 Year Treasury Bond ETF TLT 4.86 iShares 20+ Year Treasury Bond
BND 4.83 Vanguard Total Bond Market BSV 2.66 Vanguard Short-Term Bond
Page 4

Apr 2014

As with the most popular bond mutual funds, only 20% or 2 out of the 10, outperformed the average bond mutual fund. The average return for these ETFs was 5.39% annualized which was, once again, less than the returns for either the most popular bond mutual funds or even the average of all taxable bond mutual funds.

The same reasons as for popular stock ETF underperformance appear to apply for bond ETF investors. Rather than choosing investments that tended to allow a manager pick a relatively broader swath of bond investments, ETF investors often chose to invest in a narrower band of bond market segments. Over the subsequent half decade, the segments chosen by the ETF investors, while perhaps appealing at the time, once again did not prove the best places to be. In many cases, good bond fund managers (vs. narrower indexes) were able to guide their funds' investments into more profitable directions as conditions changed.

Why Do So Many Investors Wind Up in Market-Lagging Funds?

Many of the most popular funds chosen by investors are from a slate of offerings from the largest fund providers which include, at the top of the list, Fidelity, Vanguard, and American Funds. And Fidelity and Vanguard are among the biggest providers of 401(k)s which therefore include a number of their own funds in the list of funds available within the ensemble. Meanwhile, American Funds are distributed widely by investment advisors and brokers.

But beyond high availability and visibility, many investors perhaps choose these mainstream funds because they have more confidence in well-known funds that in the past have had pretty good track records.

But, as shown by the data above, the most popular funds often do not wind up being better choices, and often worse choices, than perhaps those that could have been chosen merely by throwing darts at a listing all funds.

At the start of this article, I suggested a surprisingly simple method of selecting funds that had a better chance of beating the average fund, or better yet, even the market indexes. This method is suggested by using the same kind of data analysis as is provided above. That is, from a pool of potential selections, we looked at those which would have beaten the average fund, and even the stock and bond benchmarks as well.

As you likely are aware, both Vanguard, Fidelity, and a few other investment companies are known as providing a very good overall slate of funds. But here, let's just focus on these two fund giants; if interested, you can check out the comparative performance of other fund company slates on your own.

Starting with Vanguard, if you look at Vanguard's total lineup of stock funds you will see a much larger percentage of these funds beat the S&P 500 index or the average fund than the data shown above.

In fact, 29 out of 48 Vanguard stock funds that have existed for the entire 5 years returned greater than 23% annualized over the last 5 years - or 60% (This includes "Investor" share class shares only to avoid repetition with additional share classes.)

Likewise, if you look at Fidelity's much bigger lineup of stock funds, you will see that out of 115 funds listed on their website with 5 year track records, 65 beat the index, or almost 57% (excludes commodity, alternative fund categories, and a myriad of Fidelity additional share classes).

For stock ETFs, Vanguard had 19 out of 33, or about 58%, which beat the index. (Note though that Fidelity only has 10 ETFs of its own and none have a 5 year track record yet; they instead offer hundreds of iShares ETFs.)

With bonds, the story may not be quite as clear. Vanguard had 4 out of 14 bond funds (excluding munis) or 29% beating the return of the average fund shown above, vs. the 20% for the most popular funds that were chosen by investors. Fidelity had 7 out of 25 funds, or 28%, with 5 year records beating the average fund.

Given these more favorable odds of success, if you have access to these Vanguard or Fidelity funds as listed on their respective websites, it might make more sense to pick almost any fund from these slates rather just the best known funds, or other well-known funds from other fund companies. Of course, one should always exercise care in selecting one's specific choices.

But what if investors are locked into qualified plans such as 401(k)s that do not offer choices from these two best known fund families?

With stocks, perhaps most should invest in funds that mirror S&P index itself, or a fund that invests in the total U.S. market rather than attempting to pick from less diversified offerings that are often found in funds that focus on certain types of assets, sectors, or in many specialized ETFs. With bonds, perhaps they should search for managed funds that allow the manager to select and occasionally reshuffle which areas of the bond market to keep the most assets in, rather than for funds that prescribe a relatively fixed investment position. Finally, perhaps they should be sure to do some research to see which managed funds have outperforming track records over the last 5 years (or better still, even more), preferably achieved by the same on-going manager.

Page 5

Apr 2014

How Did This Newsletter's Picks Do Over the Last Five Years?

To be fair, I subjected my Newsletter's picks from approximately the same period five years ago to a similar analysis. But it must be remembered that we change our picks several times each year and do not assume that, under most circumstances, the best returns will result from merely buying and holding a portfolio, as the above data illustrates. (Note: A more complete re-cap of prior recommendation performance will be published on this site some time in early April. Please check back then.)

Stock Funds

At the beginning of the 2nd quarter in 2009, we recommended 6 stock funds, 5 of which were from Vanguard. Four of these 5 Vanguard funds beat their benchmarks, or in the case of the Vanguard 500 Index Fund, nearly equalled the 23% index return cited above for the same period.

The 6th recommended fund, which we recommended for 10% of a stock portfolio, turned out to the near perfect candidate for the TV show "The Biggest Loser." More on this fund in a minute.

The five Vanguard funds along with their subsequent 5 year annualized returns (through 2-28) are shown here:

-Vanguard Growth Idx (VIGRX) 23.73%
-Vanguard 500 Idx (VFINX) 22.85
-Vanguard Small Cap Growth Index (VISGX) 29.87
-Vanguard Small Cap Index (NAESX) 29.01
-Vanguard Internat. Gr. (VWIGX) 20.26 (Note: Appropriate benchmark would be an international index
  which returned 17.34.)
-Hussman Strategic Growth (HSGFX) -3.85

The last fund was Hussman Strategic Growth (HSGFX). Why did we pick this fund? At the time, stocks had just suffered through a wrenching bear market and HSGFX was one of the few funds around that was significantly outperforming the S&P 500 over the prior 5 years. But its investment strategies were particularly geared toward doing well in an underperforming market. As the market turned positive, the fund was destined to severely underperform. By Jan. 2010, we had completely removed the fund from our Model Portfolio.

Even with the assumed inclusion of this fund for the full five years, our equal weighted average annualized return for the 6 recommended stock funds was 20.3% annualized. And had one invested in these 6 stock funds in the specific percentage allocations we recommended, the return would have also been 20.3%.

Bond Funds

The following five funds were recommended beginning in April 2009 along with their subsequent 5 year returns:

-Vang. GNMA (VFIIX) 4.35%
-PIMCO Total Return (PTTRX) 7.36
-Vanguard Long Term Treasury (VUSTX) 5.62
-Vanguard Inflation Protected (VIPSX) 5.98
-Amer. Century Intl Bond (BEGBX) 4.45

Clearly, we, as investors described above also did, focused too heavily on funds with government as opposed to corporate bonds. So, none of our picks beat the return of the average bond fund and the average annualized equal weighted performance of all 5 funds was 5.55%, slightly better than the 10 most popular bond ETFs but slightly worse than the 25 most popular bond funds mentioned above. And the funds weighted as we recommended returned 5.29%.

Since we do change our picks on occasion, we gradually moved toward including more outright corporate and high yield bond funds in our Model Bond Portfolio. We typically invest our biggest bond allocation to PIMCO Total Return, a fund which allows the manager to decide which areas of the bond market seem most attractive; frequently, this has been in corporate bonds.


End of Investors Tend to Choose Funds That Lag the Markets


Please return to Page 1 if you haven't already read Model Portfolio Changes Beginning April, 2014

Page 6

Apr 2014

(Model Portfolio Changes Beginning April, 2014, continued from page 1)

next 12 months, but rather, to answer the question: should investors with a moderately long investment horizon continue to keep a relatively high allocation?

If one rarely changes their allocations, including not usually rebalancing, then perhaps a high allocation to stocks might be justified. After all, if you're going to keep your money just where it is for the next 5, 10, or even more years, stocks will likely be a better place than bonds or cash.

But, if you see yourself as changing your investments on occasion or even more frequently in response to changing market conditions, then keeping your allocation somewhat lower than normal seems appropriate to me. While disclaiming the ability of anyone to predict specific movements of stocks, it seems like there are much better odds that the market will meander or even underperform until there has been a significant correction.

I can't prove this, so we'll just have to wait and see. But by having taken some money off the table in the past few months, and perhaps a little more right now, I think that better buying (or even just holding) opportunities will appear after what could easily be a 10 to 20% correction, or more.

Realistically, I don't think the majority of readers do intentionally change their allocations much, if at all, from year to year. They just may let their investments rise or fall where they may. The allocation changes recommended in this Newsletter are for those who are concerned just how far investment values have risen over the last 5 years and are willing and able to act proactively in an attempt to protect themselves from downdrafts. All this should be undertaken with full knowledge that even if stocks do go down, they may not stay down long enough to have made a lower allocation worthwhile.

Overall Allocations to Stocks, Bonds, and Cash

For Moderate Risk Investors

Asset Current (Last Qtr.)
Stocks 50% (52.5%)
Bonds 27.5 (25)
Cash 22.5 (22.5)

For Aggressive Risk Investors

Asset Current (Last Qtr.)
Stocks 67.5% (70%)
Bonds 10 (10)
Cash 22.5 (20)

For Conservative Investors

Asset Current (Last Qtr.)
Stocks 25% (25%)
Bonds 40 (40)
Cash 35 (35)

Page 7

Apr 2014

Model Stock Fund Portfolio

Our Specific
Fund Recommendations

Fund Category

 Recommended Category
Weighting Now 
(vs Last Qtr.)
-Fidelity Low Priced Stock (FLPSX)


    12.5% (10%)

-Tweedy Brown Global Value (TBGVX) (C & M)
-Vanguard Internat. Growth (VWIGX) (A)
-Vanguard Pacific Index (VPACX) (A)
-Dodge & Cox International Stock (DODFX)  (A)
  (See Notes 1, 2, and 3.)


    27.5 (32.5)

-Vanguard 500 Index (VFINX)
-Fidelity Large Cap Stock (FLCSX) (A)
  (See Note 4.)

   Large Blend 

    20.0 (15)

-Vanguard Growth Index (VIGRX)
-Fidelity Contra (FCNTX)
  Large Growth
    10 (10)

-Vanguard US Value


    20.0 (17.5)

-Vanguard Financials ETF (VFH) (A)
-Vanguard Energy ETF (VDE) (M)
-Vanguard Consumer Staples ETF (VDC) (A)


    10 (15)

  1. Stock or bond funds with (C) are particularly recommended for Conservative investors; likewise, (M) for Moderate; (A) for Aggressive.
  2. ETFs (exchange traded funds) of the same category can be substituted for any index mutual fund in this table; e.g. Vanguard MSCI Pacific ETF (VPL) can be substituted for VPACX.
  3. Our Oct. '13 recommendation, Oakmark International I (OAKIX), is now closed to new investors. In its place, we now recommend Dodge & Cox International Stock (DODFX). Investors in OAKIX should continue to hold.
  4. Our Jan. '13 recommendation, Yacktman Fund (YACKX), is also closed; investors in YACKX should also continue to hold.

Comments on Our Changes Since January

Fidelity Low-Priced Stock Fund (FLPSX) appears to be an outstanding choice with highly favorable characteristics. Although the fund is considered in the Mid-Cap Blend category, its holdings also encompass a substantial position in large caps and it retains a value orientation which should be helpful.

We are reclassifying Vanguard Internat. Growth (VWIGX) as recommended for Aggressive, rather than Moderate Risk investors. The fund has a substantial position in Asia, a region that is more risky than the composition of other diversified international funds such as Tweedy Brown Global Value (TBGVX) that have much less in that region. International funds in general, including those that invest in Japan, have recently lost some of their luster, thus our downgrade. (An alternate fund to VPACX that may appeal to more Moderate Risk investors would be Vanguard European Stock Index (VEURX) ).

Large Value stocks continue to be the most undervalued domestic stock category and the category has started to show it may now pull ahead of Large Growth or Large Blend funds.

As we indicated in our Jan. Newsletter, as well as in this month's accompanying article also starting on page 1, it may be better for most investors to choose diversified funds than try to guess which sectors will outperform.

Page 8

Apr 2014

Model Bond Fund Portfolio

Our Specific
Fund Recommendations
Fund Category Recommended Weighting
Now (vs Last Qtr.)
-PIMCO Total Return Instit (PTTRX)
 (High minimum investm. outside 401k), or
-Harbor Bond Fund (HABDX) (1K min.)


    32.5% (40.0%)

-PIMCO Real Return (PRRIX)
 (High minimum investm. outside 401k), or
-Harbor Real Return (HARRX) (1K min.)


    5 (5)

-Vanguard Intermed. Term Tax-Ex. (VWITX)
 (see Note)

    15 (12.5)

-Vanguard Sh. Term Inv. Grade

  Short-Term Corp. 

    5 (0)

-Loomis Sayles Retail


    12.5 (12.5)

-Fidelity High Income (SPHIX)

  High Yield 

    15 (15)

-PIMCO Foreign Bond (USD-Hedged) Adm


    15 (15)

Note: Select a fund, if available, that has your own state's bonds for double-tax exemption.


PIMCO Total Return Instit (PTTRX) and other classes of the fund as well as HABDX) may be losing their mojo a little from prior years. (See the accompanying article which shows PTTRX came close to, but did not surpass, the performance of the average bond fund over the last 5 years.) In the past, there have been periods where the fund fell into a short-lived slump and we guess it may have underwent one recently. However, we feel other funds are now worthy of greater consideration.

Intermediate-term municipal bonds look relatively attractive to most investors compared to taxable government bonds or even Vanguard Total Bond Market (VBMFX) because their after-tax yields are generally higher with only slightly greater risk. We believe muni bond prices will continue to be supported by purchases of high income investors whose tax rates have gone up since Jan. 2013.

Although the potential return appears small, short-term corporate bonds should not be as vulnerable as longer-term bonds if interest rates rise or if the economy strengthens. VFSTX is a good alternative to cash.

PIMCO Foreign Bond (USD-Hedged) Adm represents a good opportunity to diversify away from U.S.-only bonds because U.S. interest rates may rise faster than those abroad. Its hedging may pay off if the dollar rises. Although the dollar has been falling lately, higher interest rates in the U.S. may cause the dollar to resume its longer-term rise since mid-2011.


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