Diversifying with Bond Funds Here is what David Giroux, the wunderkind manager of one of the best asset allocation funds, PRWCX, said in a recent M* interview about rising interest rates and duration:
"So, now, everybody's convinced the yields are going to go up 1% to 2%, but not above 2%. We'll see. What I would tell you about rates today is that the risk/reward on Treasuries or IG [investment grade] is so poor, it gets a situation where if rates stay static, you make very, very low returns. If rates revert back to more normalized levels, you lose a lot of money. And if rates go down, you don't have a lot of room for rates to go down. So, it's really hard to get a really great return. [...] even if rates rose 100 bps over two years, you made zero return. [...] So, as a result of that, we have a very short duration in our fixed-income portfolio, probably the shortest duration we've had since I've been running this strategy.
Our duration today is 1.5 years, just because that skew is so negative on a lot of traditional fixed income. [...] So, this is a time to be short duration in your fixed-income portfolio. [...]"
Since I basically agree with Giroux's current outlook, I will not invest in "reliable" intermediate core/core plus bond OEFs at this time. Rather, I am using multi-sector OEFs like RCTIX, TSIIX, or even PIMIX, which have excellent risk/reward profiles but durations of less than 3.0.
This may be off-topic, but I have also been investing in alternative funds like ARBIX, a "market neutral" fund according to M*, that has exhibited a bond-like low risk profile with a SD of 2.97% and a Sortino Ratio of 2.38. Its YTD total return is 1.43% and its 3-year return is a pleasing 6.23%. During the recent market crash, the fund lost 3.1% during the month of March, and over its 3.5 year history its largest monthly loss was 0.38% in November 2018. So far, so good.
These are very uncertain times and, as another poster said, "with rising interest rates in 2021, it seems that [...] Investment Grade Intermediate bond oefs are struggling". Hence, I have decided to look at other low risk opportunities outside the conventional bond OEF box.
Good luck,
Fred
Shout-Out to @hank Thanks to you both for responding. I may have another way to contact Hank as we spoke about another matter a couple of years ago.
Small Caps @MikeW Thanks for the heads up. It looks intriguing. I found a brief article on Kiplinger’s from December 2020 about DSCPX:
Davenport Small Cap Focus (DSCPX) Clobbers the Broader MarketIt shows it fell right between the two Paradigm funds performance-wise for the past five
years. The only concern I have is that its higher turnover (v. PFSLX) might be more of an issue for a taxable account.
Port Viz This is such a great tool. I do have to substitute some of my funds with Vanguard comparable to get it to go back far enough. For example FXAIX only goes back to 2011 or 2012 while VFIAX back to 2000 I believe. I like backtesting porfolios that includes 2008. This can be challenging or impossible if you have a fair number of "newer" funds or funds less than 13 years old.
Diversifying with Bond Funds PIMIX still has the highest Sharpe ratio, lowest drawdown and no down yearsThe following performance graph is from PIMIX's 2009 statutory prospectus. You can take it on faith that this is for the institutional class shares for calendar year 2008 or you can find it yourself on p. 58 of the
21MB prospectus. 
Forecasting Never. Works It's interesting but not news. People have known for decades now how difficult it is for active funds to beat the benchmark with any consistency--and the consistency part is perhaps not dicussed enough. My problem is with the basic assumption, i.e., forecast, that stocks themselves will always be a good investment and this assumption is implicit in the decision to index the benchmark, and in investing in many active funds that rigidly adhere to a particular stock-driven investment style. The indexing decision assumes that the benchmark itself isn't really dynamic, that the S&P 500 today or better yet the Russell 3000 is really the same as it was yesterday, last year, ten or fifty years ago and plunking one's money into it at any point in time in the future will always be a good choice. What we know is historically it has been a good choice in the past most of the time. But there are a periods of time--periods of extreme over- and under-valuation--where it's been a terrible or terrific choice. One could argue that now is one of those times. Moreover, no one knows what the future will bring and the data-set for stocks overall is extremely limited versus human history, and a grain of sand in biological, or worse, geologic history. There is nothing particularly scientific in other words in assuming that in the long run stocks go up. All we know is in the past stocks have gone up.
Forecasting Never. Works @observant1 thanks for sharing the spiva pdf. Page 4 is interesting - the table shows that over a 15 year period, 92.35% of all Large Cap Growth equity funds failed to beat their benchmarks. I guess that is what you and others are trying to say. I understand that data and agree it’s not easy and there’s a strong compelling case to just index.
If you choose some active LC growth funds and set and forget them for 15
years, 92.35% of the time you will be disappointed as they won’t beat their benchmarks. Since you and I own active funds, aren’t we saying that by using our tools, we think that we can maneuver in and out of these funds before we are disappointed and thereby beat the benchmarks? Not often - just when performance “consistently” underperforms.
I don’t mean to be simplistic, it’s just that I was an index only investor for a number of
years and I’m constantly second guessing myself since owning active-despite positive results. This discussion and the feedback is helpful to me.
Diversifying with Bond Funds PIMIX had a sizable drawdown in 2020, -11.3% and finally recovered for the year. So the risk aspect is higher than expected. Performance-wise the fund is way way too big and trailed other bond funds for last several years.
PRSNX had a smaller drawdown and recovered quicker. 2020 was a unusual year where the boring total bond index fund performed quite well. Will see how bonds will do this year with higher inflation, but Fed will keep rate flat for another year.
Pretty much disagree with your take on PIMIX (though I know most share it). The bond market is enormous. While funds having billions in assets can't take advantage of niche opportunities like a very small fund can, most of the funds discussed here are in that same boat. That's OK if what you're looking for in bonds is mostly stability with some decent distributions. Go ahead and compare PIMIX to many of the funds mentioned here back to January 2016. PIMIX still has the highest Sharpe ratio, lowest drawdown and no down
years. The same holds mostly true back to 2009 (except PIMIX was down a modest 5.47% in 2008). Hartford strategic may look great now but it suffered a hair-raising 21% drawdown and was also down 17% in 2008. There are no free lunches here. If you want to take on more risk it's simple, a no-brainer really, DHHIX.
Small Caps M* currently places FSMAX in the Mid Blend category but in the Mid Growth style box.
Category placements are based on three
years of style box data.
This article discusses recent fund style box moves at M*.
LinkIt appears that Fidelity, Lipper, and M* all use different criteria for determining fund categories.
Sometimes certain funds won't fit neatly within the available categories.
For example, M* classifies NWFFX as a Diversified Emerging Markets fund but developed markets comprised 48.7% of its assets as of September 2020.
These type of anomolies can make fund category comparisons challenging.
Forecasting Never. Works This is a good discussion. If we ignore bonds for the moment. Buffett and the Index proponents say don’t try and beat the market. Just own the market. Most say an S&P 500 or Total Market Index.
Ok, so if we ignore bonds (for diversification or income etc) and we just consider equity funds.
Is it not possible to find equity funds that consistently best the S&P 500 or TSMI on a long term basis? Not sometimes but consistently? Over 10-20 year periods. Maybe they miss 1 or 2 years but over the life... they beat the S&P. The BFGFX did for 14 years. I don’t own this fund.
That’s my goal. Identify and invest in mutual funds that outperform the S&P 500. Yes I look at APR vs peers BUT... if the smartest investors in the world like Buffet and Bogle... advise to just index... that’s my real benchmark. So, even though some funds may handily outperform their peers, if they don’t consistently beat the S&P and I’m not using it for diversification purposes (like a bond fund or allocation), then I look elsewhere. Thoughts on this strategy for equity funds?
Forecasting Never. Works PRBLX's poor years against its large-blend benchmark were 2017 especially, but also 2015 and 2016. Yet another strong fund overall.
Forecasting Never. Works What I'm saying is the funds that routinely beat their bogeys and/or the S&P are relatively easy to find because they pretty much do it ALL THE TIME.
No, they aren't easy to find and no they don't do it all the time.
https://spglobal.com/spdji/en/spiva/article/us-persistence-scorecardIn fact, if you include 2008 into any stock benchmark comparison and go until 2021, you probably won't find a single large-cap blend fund that beat the S&P 500 every calendar year. Even the best managers have fallow periods and performance tends to be lumpy. I doubt you've looked at the truly long-term history of most funds and I doubt you've made apples-to-apples comparisons for funds investing in similar style/size stocks to the benchmark. FLPSX is an exceptional fund, but it is not a fund to compare to the S&P 500, but to a mid-cap value benchmark currently and shifting benchmarks throughout its history, but almost never large-blend like the S&P 500 I bet. And it too has had lagging
years versus its Morningstar benchmark, 2016 notably. In fact, if you look at the three-year period of January 1, 2014 through December 31, 2016 of FLPSX versus the IWS mid value index ETF, you would've seen IWS produce a 32% return versus FLPSX's 17%--a significant underperformance during a three-year period. And yet FLPSX remains a great fund.
Forecasting Never. Works It's really not that hard to beat the market. Simply BUY the funds in the smaller percentile that ALWAYS do.
OK, that's funny, like saying It's easy to get a 100 on a test. Just don't get anything wrong.
Hmmm...it's not intended to be funny, rather instructional.
What I'm saying is the funds that routinely beat their bogeys and/or the S&P are relatively easy to find because they pretty much do it
ALL THE TIME.
FIND them. BUY them. Repeat.
HINT: Perform screens to identify the funds that are 5* funds for 3, 5 and 10
years, appear at/near the top of the screens in ALL of those columns and the 1-yr, YTD and Life of Fund columns. Dig a little deeper with your DD,
especially regarding the PM(s), and select the very best.
Fido even assists investors by identifying "Fund Picks from Fidelity." You can probably even routinely beat their bogeys and/or the S&P if you just bought those.
But no, I'm not inclined to spoon feed them here. Several though are littered throughout my posts. If you swing and miss on one, not to worry as you likely blew away their bogeys and the S&P with the others.
Just don't EVER think you can pick THE ONE fund that's the best. Select 2-3 in each cat and if you did it properly, you very likely scored BIG on at least one or two of them. How many mistakes you think you could have made and STILL outperformed bogeys/S&P if you would have JUST bought and held FLPSX (see my prior post) from its inception?
Many investors have been coded to think that this is either impossible or will take too much of their time. And that's unfortunate.
Diversifying with Bond Funds M* portfolio lists PTIAX maturities with 30% over 20 years and 20% between 15 and 20 so likely duration is high
Forecasting Never. Works @JonGaltIII Great post.
It's a tired old debate that at best provides confirmation bias to those who
want to believe it or just don't want to
try to beat the market.
To wit: I own 11 dedicated, actively managed stock funds. All 11 easily beat-to-blow away their bogeys. 10 of 11 do the same vs the S&P, the only one being a SCV fund that I bought last year. This scenario has been the case with my port for about 40
years now.
When I say blow away, I mean blow away....
I don't own it any more, but take a look at FLPSX, which I bought near its inception and owned (as my only fund for about five
years circa early 90's and) all the way up to the last couple of
years.
Value of $10K, 12/27/89 to Current:VFINX: $208,480
S&P 500 TR: $215,986
FLPSX: $495,523
Note: There are no typos there and your eyes are NOT deceiving you.
True, LOTS of funds fail to beat their bogeys and many come nowhere close to matching the S&P. That's why
statistically writers can truthfully pump out hair-on-fire (Thanks, Dick!) articles like these.
It's really not that hard to beat the market. Simply BUY the funds in the smaller percentile that ALWAYS do, or at least ALWAYS do over time.
Also, use of the word "NEVER" is usually not a good idea in these contexts. LOTS of PMs and analysts last year predicted Small Caps, Value, Foreign and EMs were places to be this year. So far, they weren't right, they were very right.
Forecasting Never. Works Thanks for sharing. If I understand the premise of the article - it's really about Index Funds vs. Active Management. It makes a compelling case for just investing in the S&P 500 Index and not trying to find the "hot hand" or chase a portfolio manager because they can't consistently beat the Index 95-97% of the time. It's what Warren Buffett is doing with his money when he passes away.
I understand the Index vs. Active discussion and I own some index funds. I agree that it's very difficult to have a portfolio that consistently beats the S&P over the long term.
Using MFO Premium ... let's take BFGFX as an example. The fund has been around for 14 years. It's +4.8 to the S&P over the life of the fund. It's APR has never trailed the S&P in it's history and last year it beat the S&P by 96.7 and +31.7 the year before.
Would it be safe to assume that this fund is part of the 3-5% that found a way to beat the S&P 500 Index (at least over the last 14 years)? What am I missing? Or is that the point? We won't be successful at trying to beat it over the long term. Genuine ?
Diversifying with Bond Funds Look closely at interest rate risk, usually measured by duration. Be wary of anything over 5 years avg duration. It is the reason I left a couple possible bond OEFs off my list.
Note that PTIAX does not publish its duration. Spoke to them years ago and was told the reason is basically to protect us average investors from ourselves. Interest rate risk is not completely/accurately measured by avg duration and the firm does not want its avg duration to be incorrectly interpreted as a measure of PTIAX's interest rate risk.
Disclaimer: LT owner of PTIAX and comfortable with whatever avg duration it has, albeit largely unknown.
