Why Bonds are more like Tom Hanks, not Rodney Dangerfield

This morning, we came across a piece by Fran Kinniry of Vanguard suggesting that bonds lack investors’ respect when it comes time to talk diversification, complete with the required Rodney Dangerfield/no Respect mention:

“Oh when I was a kid, I got no respect. I played hide and seek. They wouldn’t even look for me.”

– Rodney Dangerfield¹

Like the late comedian Rodney Dangerfield, bonds suffer from a chronic lack of respect. It seems that everyone is “playing hide and seek,” searching for the “best” diversifiers to include in client portfolios, and they aren’t even looking for bonds.

Now, saying bonds lack respect is a bit of a first world problem, the same way one might complain that they’re one iPhone model behind or can’t get that reservation to the hot restaurant in town until May (OMG), or this all too serious first world problem:

Meme -- cereal

Now, what if, as Seahawks cornerback Richard Sherman says – Money equals respect. Just how much respect/assets are in the un-respected bond sector:  try over $100 Trillion (with a ‘T’) in Corporate and Government debt worldwide…. Seems like more than a few people have “paid” their respect to the bond sector per this metric; more in fact, than have paid their respect to global stock markets – which have assets of “just” $69 trillion.

Global Financial AssetsSource: MarketWatch

But maybe we’re confusing Mr. Kinniry’s message. Maybe he’s saying they lack respect as a crisis period performer. That they get assets because of income and all that boring stuff, but not because of their performance during poor stock market periods (what we call ‘down capture’) in the business. Investment grade bonds, it turns out, have very good ‘down capture’ abilities – posting positive returns (on the average or the median, actually) during the worst months for U.S. Equities (the bottom-decile). Here’s Kinniry’s analysis:

Specifically, if we sort monthly equity returns into deciles and examine the worst periods, we find that high-quality bonds² have proven to be one of the best diversifiers for a portfolio. That’s pretty impressive, especially compared with the other asset classes that I get asked about, none of which has provided downside protection when investors arguably needed it the most.

Median Asset Class Performance(Disclaimer: Past performance is not encessarily indicative of future results)
Chart Courtesy: Vanguard 

Impressive numbers, to be sure… with investment grade bonds clocking in a monthly return of about 1% while US stocks were down about -6% on average.  And done with a method we haven’t seen before – looking at the performance during the worst months versus worst string of months (aka periods).  Our preference is to usually look at the periods themselves (see the investments in crisis periods infographic), as single months aren’t necessarily telling of the actual pain investors suffer through. And we couldn’t help but notice one investment class notorious for performing during stock market downturns was absent from the graph. Our specialty, managed futures.

Talk about no respect… managed futures got left out of a post about an investment class not getting respect.

Oh well, that’s easily corrected.  We took the liberty of adding Managed Futures (via the Barclayhedge CTA Index) to the table just to see where it would land (full disclosure – we sort of knew it would be #1). Here’s the redrawn table:

Median Chart with Managed Futures(Disclaimer: Past performance is not necessarily indicative of future results)
Managed Futures = Barclayhedge CTA Index

Based on our view, with a +1.73% median monthly performance during stocks’ bottom-decile performance, Managed Futures is the best performing asset class on the table during these tough times. We’ll be the first to say that past performance is not necessarily indicative of future results, but with just a few hundred billion in assets versus the $100 Trillion in bond markets – we’re not sure bonds aren’t getting more than enough respect, and managed futures isn’t getting enough (as voted on by hard earned dollars, Euros, and Yen).

Kinniry goes further – showing some recent results of bonds as a diversifier…

The chart below presents the results for the six trading days between August 17 and August 24, when the U.S. equity market returned –11% and caused some investors to panic. It wasn’t surprising to me that, once again, bonds held up fairly well, mitigating some of the losses from the equity portion of balanced investor portfolios.

Performance 2015 Volatility

(Disclaimer: Past performance is not encessarily indicative of future results)
Chart Courtesy: Vanguard 

And it’s almost like Vanguard was reading our minds on that one, because we posted some daily and monthly returns for Managed Futures as a whole, and some individual programs that did particularly well during that specific August tumble in the markets.  If want true apples to apples, we turned to the Newedge CTA Index and found it recorded a +1.28% over the six days highlighted by Vanguard. Again, this puts Managed futures near the front of the line.

August 2015 Asset Class Performance Bonds(Disclaimer: Past performance is not necessarily indicative of future results)
Managed Futures = Newedge CTA Index

One final note about diversification and crisis period performance. We know from 2007/2008 that crisis periods are caused by unknown factors, so called ‘black swans’; meaning, the next market crisis likely won’t look anything like the last one. It’s hard to envision what that would look like, but not hard to imagine a scenario where the next stock market crisis is caused by bond prices declining as interest rates rise. Bonds will always have a place in portoflios. Heck, with $100 Trillion of them out there, you’ll be hard pressed to avoid them even if you had the desire. But it’s a worthwhile exercise to ask yourself what will happen to your portfolio if bonds cause the next stock market decline, instead of cushioning it.

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Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.