Markets

A Deeper Look at the Payden/Kravitz Cash Balance Fund

By Larry Swedroe

Updated on: August 11, 2011 / 6:37 AM EDT / MoneyWatch

On Monday, we discussed whether the Payden/Kravitz Cash Balance Fund (PKCBX) was a good investment vehicle. According to the data (and the rather large expense ratio of 1.5 percent), it certainly looked like there were better alternatives available.

This prompted a call from some folks at Payden. I listened to their approach and some points they made. They wanted to make a few things clear:

The goal of the fund is to match the 30-year Treasury yield with tight tracking. They don't want to underperform or outperform the benchmark very much. The fund has a one-year investment horizon: Each January 1, it has a new target return based upon the average daily 30-year Treasury yield in December. Payden doesn't believe a static asset allocation can achieve this target.
The fund also has a goal of having low volatility. They pointed out that their fund had much lower volatility than the passive benchmark we created. (The benchmark was 10 percent S&P 500 Index and 90 percent Barclays Govt/Credit Intermediate Index.)
At Payden, they have a cash-balance plan, with 100 percent of the plan's assets invested in the fund.

Let's discuss Payden's last point first. One of my 11 principles for selecting an advisor is that the advisor practices what they preach. You shouldn't work with an advisor who isn't investing in the same vehicles he or she is recommending. Payden is definitely practicing what it preaches.

Regarding the other two points, it's true that the Payden fund had lower volatility than the passive benchmark. From 10/2008 thru 06/2011, the fund had an annualized standard deviation of 2.2 percent, while the benchmark had an annualized standard deviation of 4.0 percent. (Note that a 4.0 percent annual standard deviation isn't much greater than the 3.4 percent annual standard deviation of one-year Treasury securities for the period 1964-2010).

Over that same period, the fund returned 3.9 percent per year, while the benchmark returned 7.2 percent per year. The Sharpe ratio (a measure of risk-adjusted returns) was 0.495 for the benchmark and 0.477 for the fund. So the passive benchmark achieved higher risk-adjusted returns. Whether you're willing to give up 3.3 percent per year of performance in return for lower volatility and tighter tracking to a benchmark is a matter of preference, but my own view is that an annual standard deviation of 4.0 percent is quite low and worth the higher returns earned by the passive benchmark.

Photo courtesy of MoneyBlogNewz on Flickr.
More on MoneyWatch:
Is the Payden/Kravitz Cash Balance Fund a Good Investment Vehicle? Don't Panic: Stock Market Crises Are Normal Why the Market Is Behaving Badly Investors Continue Moving to Passive Management Goldman Sachs: Does It Add Value?
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