3 Reasons to Invest using the 3Twelve Total Bond strategy
The 3Twelve Total Bond Strategy
What is 3Twelve?
3TWELVE MAY BE THE FIRST PASSIVE, EQUALLY WEIGHTED FIXED-INCOME STRATEGY
3Twelve Total Bond is an equally weighted, passive strategy that invests in each major taxable bond category. The strategy, which seeks total return from income and capital appreciation, is for advisors and investors looking to build a well-diversified fixed income strategy with a single investment. It uses 12 major bond asset classes in an effort to enhance performance and reduce risk.
We believe that a diversified portfolio of short to intermediate duration bonds should be a staple in investors’ portfolios – and in greater, not lesser percentages as the population ages and interest rates increase.
Additionally, rising interest rates may be nothing to fear with 3Twelve. From 1980 through 1999, the 10-Year Treasury bond has risen at least 2% five times. In each period, the 3Twelve strategy (as measured by an equal-weighting of Governments, Mortgages, and Corporates - the core of 3Twelve) outperformed both 7-10 Year and 30-Year Treasuries.
3Twelve may be a first. We are not aware of any fully-diversified, equally-weighted, index-based bond strategy today - besides 3Twelve. Among the 300+ fixed income ETFs, for example, there is not one that mirrors the Barclays Global Aggregate Bond index - an index closest to 3Twelve. Secondly, no multi-sector income fund equally-weights all of the twelve taxable bond categories. Third, equity indexing is common; fixed-income indexing is not. This may not be justifiable when most active managers under-perform benchmarks.
The back-tested performance of 3Twelve has been competitive. Why is this? We believe that when you equally-weight, overlooked assets have a chance to make a bigger contribution to returns. Also, 3Twelve Total Bond is not a “yield chaser.” Yield chasing can be dangerous when investors replace reliable bond income with dividends from stocks, Master Limited Partnerships (MLPs), REITS, and other riskier assets.
Demand in the fund industry is measured in inflows. Since 2000 the Multisector and World bond categories (where 3Twelve fits) were the fastest growing taxable bond fund categories through 2018. Bond mutual funds received $2.2 trillion in net inflows and reinvested dividends from 2009 through 2018.
10 Years Ended 2018 in $ Billions
The 3Twelve Bond Map
The twelve major asset categories in the global bond universe are the model for the equally-weighted 3Twelve Total Bond strategy.
Below left are the total assets, in trillions, in each category as of Q1 2018.
BEFORE EQUAL WEIGHTING
Global Bond Fund Universe
WITH EQUAL WEIGHTING
3Twelve Total Bond
Primary sources: Bank for International Settlements; Fitch Ratings, Inc.; Investment Company Institute; S&P Capital IQ; S&P Dow Jones Indices; Securities Industry and Financial Markets Association; and the U.S. Department of the Treasury, Bureau of the Fiscal Service. 25 secondary sources are from investment industry, research, and media.
Why a Total Bond Portfolio?
The industry has never created a diversified equally-weighted global bond fund, in part, because bonds are perceived to have lower dispersions of returns than stocks. This is not true. For example, there was significant dispersion of returns within the 12 major taxable fixed-income categories in 2019:
Bond Dispersion of Returns 2019
From 2.21% to 23.15%
We believe adding each of the major 12 assets to the portfolio and equally- weighting may be the reasons why 3Twelve has outperformed industry benchmarks.
Past performance is no guarantee of future results. Investors cannot invest in an index. Indexes--Federal Agency: BBgBarc US Agency TR, Conv/Pref: ICE BofA Convertible Bonds All Qualities, US Inv Grade Corp: BBgBarc US Credit TR, MBS: BBgBarc GNMA TR, Leveraged Loan: S&P/LSTA U.S. Leveraged Loan 100 TR, Emer Mkt: JPM EMBI Global Core TR, Non-US Corp: S&P International Corp Bd TR, TIPS: BBgBarc US Treasury US TIPS TR, Cash: BBgBarc US Treasury Bill 1-3 Mon TR, US High-Yield: BBgBarc US Corporate High Yield TR, Non-US Gov: BBgBarc Global Treasury Ex US TR, US Tsy: BBgBarc US Treasury 7-10 Yr TR. Each index was equally-weighted at approximately 8.3% each. Source: Morningstar.
Rising rates, or market volatility?
You need to shorten maturities AND diversify widely.
- Andy Martin
“The 3Twelve Strategy” is back-tested by equal-weighting Twelve underlying indexes, funds, and ETFs which represent the asset classes. In as much as TIPS were first traded as a security in 1998 (first full year), the only way one can model the strategy longer term is to compare with the “3 Asset” strategy which is composed government, Corporate, and Mortgage backed bonds, equal-weighted. There has been a high correlation between the returns of the 3Twelve strategy and the 3 asset strategy, but there is no guarantee that this will continue. Indexes are not investable. Past performance is no guarantee of future returns.