The Monthly Flexible Income Portfolio

The Monthly Flexible Income Portfolio (MFIP) is a model fixed income portfolio appearing on page 3 each month in NoLoad FundX newsletter. This is our most conservative model portfolio, consisting mostly of bond funds and ETFs. It may hold a small position in certain funds from the Class 4 listings. The MFIP may be used on its own or in conjunction with equity portfolios such as the Monthly Upgrader Portfolio (MUP) to form a balanced portfolio. Similar to the fixed income portfolios DAL Investment Company manages for our clients and shareholders, the MFIP steers investors among various areas of the fixed income market seeking favorable returns with moderate risk.

  • Easy to Follow – Only an hour or so a month is all you need to apply the clear monthly instructions on which funds to sell and which to buy.
  • A Real-World Portfolio – Includes funds that are widely available on broker platforms and incorporate a 90-day hold to avoid typical broker restrictions or fees.
  • A Focus on Risk – Our primary goal is low volatility, rather than purely total return. A lower correlation to interest rates than a purely bond portfolio.

Bottom Line: Performance

The Upgrading approach, as applied in the Monthly Flexible Income Portfolio (MFIP) has provided satisfying returns over the years, with only moderate risk. The MFIP exceeded the returns of the Vanguard Total Bond Market Index over the entire four calendar year period it has been appearing in NoLoad FundX. Although it did not outperform in every period, when it did outperform, it did so by a wide enough margin to far surpass the benchmark over time.

An investor that started following the MUP with a $100,000 account in January of 2006 would have ended the decade with $131,950, a return of almost 32%. Had you bought the index instead and held it for that time, you would have gained $123,450, or 23.45%. That’s a difference of $8,500.

How to Follow the MFIP

Each month, we tell you exactly which funds to buy and sell. Some subscribers may find it difficult to own this many funds – especially as part of a balanced portfolio. While there are often opportunities to consolidate positions, the risk level of a less diversified portfolio can be significantly higher. Try to keep your bond sector allocations in line with those shown in the MFIP.

If a fund is not available at your broker, you can generally find a substitute among the Class 5 listings (pages 13 and 14 in NoLoad FundX) – but many funds are less similar than their names imply. If you are unable to purchase a fund, email us at issue@fundx.com and we may be able to steer you to a good alternative.

Expect to be Different - Your portfolio will likely differ slightly from the current MFIP. That’s OK. DAL has hundreds of private client accounts and they all vary to some extent because of cash flows and the timing of each purchase. Nevertheless, we find most fixed income accounts run along these guidelines will have similar performance over time. We expect subscribers will also have somewhat different portfolios, depending on when they started following the MFIP, which broker they use, and the size of their portfolios.

Types of Funds Used in the MFIP:

Ultra Short, Short Term & Intermediate Term – Bond funds have different maturities. The shorter the average duration of a bond fund, the less the fund’s NAV will fluctuate with interest rates. A longer maturity, on the other hand, typically means higher volatility.

Floating Rate Funds – Also known as “bank loan” or “loan participation” funds, these invest in loans of fairly short duration, resulting in interest rates that vary with market conditions. These funds tend to have higher credit risk, and may have higher yields.

Strategic – Bond funds that can “go anywhere.” These funds are harder to categorize because their managers can vary the duration, credit quality and even geographic region.

High Yield – Funds that invest in high-yield, or “junk” bonds, carry more risk since the bonds are issued by companies with questionable creditworthiness.

Emerging Markets – These funds invest in bonds issued by companies and governments of developing economies.

World – Bond funds that invest in mature overseas economies.

Low Volatility Class 4 Funds – The MFIP may invest in a less volatile sub-set of funds from Class 4. We believe these equity funds have similar risk profiles to bond funds, but are not necessarily correlated to interest rates.

How We Manage Risk

The MFIP limits exposure to certain bond funds whose duration and credit quality imply greater risk. Unlike the Monthly Upgrader Portfolio (MUP), which targets constant allocations to our equity risk classes, the MFIP sets upper limits on its exposure to various bond risk types such as high yield and emerging market bonds. If those areas are not performing well, the MFIP will abandon those funds and invest in lower-volatility short-term bond funds.

The only unlimited area of the bond market for the MFIP is also the safest – short-term bond funds. If all other areas are doing poorly, the portfolio may move to 100% short-term bonds.

Frequently Asked Questions

Q. Why does the MFIP hold so many funds?
At first glance, it may look like the portfolio is holding similar funds. But following the flexible income strategy means investing in funds with a range of maturities, investment styles, asset types and credit qualities. Because different positions have different risk characteristics, we limit the size of certain positions, while taking larger positions others. For example, we are not willing to exceed 30% in high-yield bond funds, or 15% in foreign bond funds, but we will go 100% in short term bond funds if those are performing best. That’s because short-term bond funds typically have lower risk than high yield or foreign bond funds. Perhaps more importantly, holding more funds allows us to make changes more incrementally, turning over a smaller portion of the portfolio at a time.

Q. What if I hold a smaller account?
If you’re unable to spread your account over this number of funds, take fewer positions. You may choose to combine assets intended for a particular type of fund (short-term bonds, for example) into one or two funds.

Q. Does the MFIP pay monthly income?
The objective of the flexible income strategy is not current income. Our goal is total return with similar volatility to the Barclays Aggregate Bond index and limited correlation to stocks or bonds. Some of the underlying funds may make monthly income distributions, but the portfolio isn’t focused on providing investors with monthly income.