Portformer Performance during the Coronavirus Market Correction

As the effects of COVID-19 have spread through the globe and have driven down risk assets and bond yields everywhere, we wanted to check in with our clients to see how our suggested ETF alternatives have fared during this sell-off. Certainly no one started the year worried that a pandemic would be the black swan to hurt the global economy. Although there are historical periods we can compare to the current situation, such as perhaps Spanish Flu, SARs / MERs and even Black Friday or 9/11, they somewhat don’t seem to capture the breadth and speed of the impact of Coronavirus has had on financial markets and the daily lives of billions of people.

Portformer Scores were calculated in a bull market and have outperformed in this bear market

The 2019 vintage Portformer fund replacement scores were calculated using data from 2014-2018. We have found our replacements to be robust to changing market regimes, across instrument types (mutual funds vs ETFs), Lipper Ratings, Fund AUMs, and sectors.

Across 546 funds analyzed in our clients portfolios, our ETF alternatives have increased returns by 2.9% and reduced drawdowns by 2.7%.

List of top 15 ETFs that have outperformed Mutual Funds during the Coronavirus market sell-off

We looked at 546 mutual funds and ETFs analyzed by our clients and compared against our top Portformer ETF replacements. Some of the YTD return improvements have been striking.

1. $DFVIX DFA International Value Portfolio III;Inst ⇒ $IOO: +16.43% ytd
2. $DTMIX DFA Tax-Managed DFA International Value Port;Inst ⇒ $IOO: +16.17% ytd
3. $VASVX Vanguard Selected Value Fund;Investor ⇒ $SPY: +15.89% ytd
4. $DODWX Dodge & Cox Global Stock Fund ⇒ $MGC: +13.54% ytd
5. $DFSIX DFA US Sustainability Core 1 Portfolio;Inst ⇒ $VOOG: +13.47% ytd
6. $VWNDX Vanguard Windsor Fund;Investor ⇒ $XLG: +12.60% ytd
7. $OAKGX Oakmark Global Fund;Investor ⇒ $SPY: +12.22% ytd
8. $DFEOX DFA US Core Equity 1 Portfolio;Institutional ⇒ $JKE: +12.15% ytd
9. $TVFVX Third Avenue Value Fund;Investor ⇒ $SPHB: +11.88% ytd
10. $FMIYX FMI International Fund;Institutional ⇒ $VT: +11.39% ytd
11. $DFRSX DFA Asia Pacific Small Company Portfolio;Inst ⇒ $EPP: +10.80% ytd
12. $DEMSX DFA Emerging Markets Small Cap Portfolio;Inst ⇒ $AOR: +10.68% ytd
13. $DIHRX DFA Internatnl Hi Relative Profitability Ptfl;Inst ⇒ $NORW,ROBO: +10.68% ytd
14. $BEMIX Brandes Emerging Markets Value Fund;I ⇒ $AOA: +10.58% ytd
15. $OAYMX Oakmark Fund;Advisor ⇒ $MGC: +10.49% ytd

Since early 2019, we have helped financial advisors and their clients find lower cost and higher quality alternatives to their existing mutual fund and ETF investments. The performance of our alternatives have performed well and the outperformance has often exceeded the fee savings alone. The higher performance comes not just from the explicit cost of fees, but from the implicit costs of higher turnover, higher transaction costs, inferior portfolio construction, higher cash drag, taxes or any number of other factors.

There is a myth in the mutual fund industry that actively managed funds perform better in a crisis because humans are able to better weather the storm. Unfortunately this isn’t seen in the data. Of course there are exceptions; however, a good actively managed fund should operate efficiently during both up-markets and down and have reasonable fees to justify their performance.

Evaluating the performance of our top alternatives for our top client positions

We evaluated the period from Jan 2nd to March 12th. This period coincided with the increase in virus-related deaths, and the progression of the coronavirus into a pandemic. We can see here in the relationship between Google Trends searches for Coronavirus and the S&P 500 ($SPY) that there definitely was an impact.

During this time, across our funds held in our clients’ portfolios, we can evaluate the relative performance of our ETF alternative (we call it the Portformer Replacement) and see that on average it has increased returns by 2.9% and reduced drawdowns by 2.7%.

For example, if a client had Fidelity – FMI International Institutional (FMIYX) in their portfolio, our Portformer Replacement is Vanguard Total World Stock ETF (VT). We show below the relative outperformance of each of the 544 tickers. We can see that on average we have outperformed consistently during this period, although there is a large dispersion.

A closer look at the distribution of returns

Another way to look at the results is to simply look at the returns as of March 12th in a histogram form. Here we see that the alternatives not only outperformed on average, buth that each alternative had a high probability of outperformance.

Comparing across Instrument Type and Fund Size

These box plots below show that regardless of the size of the firm or whether our client initially held an ETF or Mutual Fund, we were able to identify better performing alternatives during this recent market correction.

Comparing across Lipper Scores

We also do not find a strong relationship between a Mutual Fund’s Lipper Score and our ability to identify a higher quality alternative.

Did the magnitude of the Replacement Score matter?

We typically suggest that financial advisors investigate any of their holdings that have a 90 or greater replacement score since there is strong statistical evidence that there is a close match. In this case the outperformance doesn’t seem to correlate with the fund’s replacement score.

Does the fund strategy matter?

Here is where we start to see some segmentation in the results. We can bucket each of the Mutual Funds by their Category and order them by their median YTD relative performance. We see that most Portformer Replacement Candidates outperformed, especially so in global, multi-asset and value-type strategies. Some bond funds and growth funds did underperform.

Quick look at the laggards

We can see from the above box plot that our recommendations in the following categories underperformed the others

• Growth (Small, Large, Large Foreign, Mid Cap)
• Bond Funds (Intermediate Core and Miscellaneous)

Here are the timeseries of the relative performance from each of the categories

The relative outperformance of growth funds is essentially zero over this period with no obvious anomalies.

These 32 bond funds are interesting. The very negative relative return here comes from the dramatic outperformance of the PIMCO Real-return fund vs the TIP Inflation ETF. This is perhaps due to the longer duration exposure of the PIMCO fund and the dramatic move in rate we’ve seen. Here’s a snapshot from Portformer comparing $PRAIX vs $TIP (inflation ETF) and $TLH (iShares 10-20 Year Treasury Bond ETF). We can see it has more recently tracked the long duration ETF and the TIPs fund themselves.

Moreover we see some erratic moves from March 9th to March 12th when our Portformer Alternatives underperform suddenly and then reverse. This is likely due to the large deviations from NAV experienced by some bond funds. These were reported here:

• Vanguard’s $55bn fixed income ETF hit by price dislocation (FT)
• Panic sell-off shows limitations of junk bond ETFs (ETF Stream)

Here is a closer look at just the Intermediate Core Bond Funds and you can see this deviation from NAV clearly.

We will continue to watch these 11 tickers closely to see how bond illiquidity continues to drive deviations between these funds.

List of Intermediate Core Plus Bond Funds and their Portformer Alternatives

• (BCOIX vs AGG) Baird Core Plus Bond Fund;Institutional
• (DBLTX vs AGG) DoubleLine Total Return Bond Fund;I
• (FTBFX vs AGG) Fidelity Total Bond Fund;Fidelity Total Bond
• (HABDX vs AGG) Harbor Bond Fund;Institutional
• (PTTAX vs AGG) PIMCO Total Return Fund;A
• (PTTRX vs BIV) PIMCO Total Return Fund;Institutional
• (MAHQX vs BLV) BlackRock Total Return Fund;Institutional
• (PDBAX vs BLV) PGIM Total Return Bond Fund;A
• (DODIX vs IGLB) Dodge & Cox Income Fund
• (DCFFX vs TLT,ILTB) Destinations Core Fixed Income Fund;I
• (MWTRX vs VGIT) Metropolitan West Total Return Bond Fund;M

During these difficult times, please let us know how we can help. My team and I are around to help you and your clients navigate these markets.

Best,

Sean and the Portformer Team