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waffle
Explorer ○

Downside protection?

Some highly regarded funds like FPACX, OAKBX, SGENX I heard offer very good downside protection during down markets but lag in up markets.

If markets go up 8 years out of every 10 years or so. What is the point of such funds?

Why would I lag for 8 years so that I can go down less for 2 years?

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10 Replies
kwk75wi
Explorer ○

Re: Downside protection?

Some investors just don't want see their portfolio value drop too much, losses scare some people.

Some people don't need to take a lot of risk with the money they expose to the stock and bond markets.

For some retirees, ie those taking money out of their portfolio vs accumulators, big drops in portfolio value can have a real impact.

And so on.

(Some people don't base their portfolio on how it performs relative to some market, benchmark, etc., they may base their portfolio on their personal financial plan for example.)

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chang
Valued Contributor

Re: Downside protection?

Of the three funds you mentioned, I owned FPACX and OAXBX for 10-15 years, but sold both in the last 2 years for various reasons. Among other things, I do not believe they provide much if any “downside protection”.

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BD
Explorer ○

Re: Downside protection?

There are many people who would like to reduce downside exposure.   Some funds and ETFs accomplish this goal better than others. Take a look at USMV.  It has done far better, in its short life, than any of the funds you mentioned.  The index it follows lost around 25% in 2008, compared to 53% for SPY.  But nobody knows how it will do in a future crash. How do you.protect yourself?  I would say asset allocation matters more than fund  selection.  I know i owned FMIHX for years on the theory of downside protection. Outcome was ok. Better than most of your funds, but lot worse than USMV.  

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steelpony10
Participant ○○

Re: Downside protection?

      Past is never prelude to the future. Spend down investors need to take less risk which may lead to less return. You seem to have got by ok. I have a different view of markets. Since 1968 in order, I’ve seen 14 bad years, 16 good years, 11 bad years, now 10 good years, so what do you think is next? That’s why I live on yield.

steelpony10
Participant ○○

Re: Downside protection?

    Thank you marymary.

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jrlfunds
Explorer ○

Re: Downside protection?

I use upside/downside capture ratio for most of my fund selections.  Names mentioned frequently here FMIHX, FPACX, PRWCX, VWINX and others are part of my portfolios.  But, what I've realized is that the downside protection is likely real but also somewhat small.  2008 was my best year for investing in the last 25 years on a RELATIVE basis.  Still didn't feel great though obviously, and anchoring too much on the "next 2008" is probably a behavioral mistake that will cost you plenty over the years.

Another realization is to put the downside protection in other areas of the portfolio and not focus on reducing the equity downside.  Small positions in Alts (market neutral-M&A variety only, Long-Short Credit, Options-Based).  Avoiding long-short equity, Multi-Alternative, particularly the ones that haven't delivered in their quest ever.

https://www.morningstar.com/articles/849269/a-new-way-to-approach-alternative-funds 

This M* paper shows which categories have delivered the goods and which haven't (see alpha by category table).  I disagree that non-trad bonds should have been in the study, and believer they are an OK asset class and the paper concludes that as well. Also, I have read elsewhere on the M&A versions of market neutral (Lipper uses different fund categories to help here) are much better performers on a risk adjusted basis, so the number in the summary table would be higher for those.  Don't know why Vanguard Market Neutral is Silver rated, don't start there.   5000% long, 5000% short and it hasn't worked out, imagine that.

What is missing is managed futures which is having a good 2019 but a very, very bad last 5 years.  I'd add a large negative number to the summary table, like a -3 or -5 or something.

In closing, the best way to avoid getting hit is to not be standing in front of the punch to begin with.

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retiredat48
Participant ○○○

Re: Downside protection?


@waffle wrote:

Some highly regarded funds like FPACX, OAKBX, SGENX I heard offer very good downside protection during down markets but lag in up markets.

If markets go up 8 years out of every 10 years or so. What is the point of such funds?

Why would I lag for 8 years so that I can go down less for 2 years?


I am pretty much in agreement with your thesis here.

I seldom consider previous downside performance, as to me it usually simply means a lesser volatile fund.  I want best performance over the longer term, and that usually means slightly more downside risk.  Further:

--for younger accumulators, you want to seek volatility, especially in 401.k's, which is dollar cost averaging investing.  More volatility means HIGHER RETURNS IN THE LONG RUN.

--Often, actively managed funds do a little better in downside protection because they carry cash balances to meet redemptions, etc...or strategically add to cash.  However, this cash balance becomes a drag on the upside/recovery.  It is why index funds, which never have a cash balance, often do very well on upsides.  And if your actively managed fund is not beating its index counterpart on the upside, switch into the index fund!

I agree with others that portfolio asset allocation is the place to take into account your overall risk concerns.  

For instance a pro guru financial writer (Larry Swedroe) kept a portfolio of 85% municipal bonds; 15% small cap stocks...as a very safe portfolio.  By going to higher volatility small caps, he could use a lesser stock allocation, getting the same performance bang for the buck, so to speak. 

For retirees, strategically shift to more income/dividend producing funds, which will improve your downside risk as well (dividend yields provide a buffer). 

So forget downside risk...focus on your allocation and the types of funds you need.  And I recommend you select from the top performing funds, by category,  for past 3-6 months, which almost always means greater downside risk, not less, but usually provides the best performance.

Best wishes...

R48

 

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BrianG
Participant ○

Re: Downside protection?

@jrlfunds wrote:

In closing, the best way to avoid getting hit is to not be standing in front of the punch to begin with.

+1

Brian


 

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Sheryldell
Explorer ○○○

Re: Downside protection?

@retiredat48 

What is your resource for finding your list of  "top performing funds , by category, for the past 3 - 6 months" ?

 

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retiredat48
Participant ○○○

Re: Downside protection?


@Sheryldell wrote:

@retiredat48 

What is your resource for finding your list of  "top performing funds , by category, for the past 3 - 6 months" ?

 


Start with Yahoo Finance.

May have to navigate some to find the rankings.  

 

R48

 

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