To illustrate Hank's point, suppose you bought a 10 year Treasury on Jan 5, 1973, and held it though Aug 23, 1974. So you'd have purchased a bond maturing on Jan 5, 1983. Assume that coupon matched market yield (newly minted bond).
The yield on that semi-annual bond was 6.42%. On Aug 23, 1974, the yield on 10 year Treasuries was 8.15% (probably slightly lower for this bond as it was now an 8.4 year bond).
http://www.macrotrends.net/2016/10-year-treasury-bond-rate-yield-chart
Using 8.15% YTM, 6.42% coupon, and a bond calculator here, we get an ending price of $88.81. That is, the bond dropped in price by about 11%.
The yield on that bond was 6.42%/year. So over the period of 1.63 years the interest was about 10.5%. That makes the net return on the bond about -0.5% (more or less a wash), while the S&P 500 dropped from 119.87 to 71.55 (-40.3%).
http://www.davemanuel.com/where-did-the-djia-nasdaq-sp500-trade-on.php
If we were to go through another period of stagflation now, with 10 year T's yielding around 2.5%, and a similar 1.73% rise in rates, the calculator shows the price declining by 13.3% (lower coupon = longer duration). Then there's the lower interest this time around. 2.5% for 1.63 years returns just 4.1%.
So this time, the same rise in interest rates (seven 1/4 pt hikes at a roughly quarterly pace) would produce a bond loss of about 9%, vs. the previous experience of a wash (including interest). Bonds as "ballast" have the potential to hasten a ship going down.
One can certainly quibble with my calculations - I've made approximations that somewhat exaggerate the losses. I've not reinvested coupons (i.e. I just computed simple interest), and I've not accounted for the shortening maturity of the bond. Making these adjustments won't significantly affect the total bond return. You'll still lose a lot.
The US employment market is much tighter than it has been the past several years. Throw a couple of trillion dollars at it in infrastructure spending and tax cuts (read: more borrowing), and you may see interest rates go up both because of increasing inflation (spurring Fed action) and the increased borrowing.
That's not a prediction of what the government or economy will do. It's simply a case study of how bonds can harm a portfolio in a 70s-like stagflation, where the key difference is, as Hank pointed out, lower starting bond yields.
http://www.businessinsider.com/wall-street-worried-trump-1970s-stagflation-2016-11

Hi @00BY
Not sure who you are asking about this fund. I will note that this may indeed be an institutional offering.
I find very little info available, except past performance (the past 5 years put this fund near the top of the list) for category. The summary prospectus doesn't offer the normal data for a retail investor.
Are you able to purchase this fund?
Regards,
Catch

Hi @BobC
You noted: "OSTIX comes as close to buy-and-hold as any. Although it is not a high-yield fund, that is where M* puts it. It's downside protection is evident from its 2008 return vs the pure HY funds. I would not even want to own a pure HY fund because of this."
>>>My personal view of this fund from its current composition is a short-term high yield bond fund with a touch of AAA bond holdings and some form of "cash". My recall is during 2012 the composition of this fund moved away from a more diverse multi-sector bond fund. I do not have access to its composition from prior years. As to it being moved to HY within M*, they didn't have a "slot" to match, eh? OR that if most of the fund was moving to HY beginning in 2012, the proper slot may be appropriate.
For those wandering into this discussion and not familiar with prior years, I must presume that the downside protection you indicate in 2008 was from the fund having little exposure to HY bonds during most of or at the least during the last half of 2008.
From the current prospectus:
The Osterweis Strategic Income Fund invests primarily in income bearing securities. Osterweis Capital Management, LLC (the “Adviser”) takes a strategic approach and may invest in a wide array of fixed income securities of various credit qualities (e.g., investment grade or non-investment grade) and maturities (e.g., long term, immediate or short term). The Adviser seeks to control risk through rigorous credit analysis, economic analysis, interest rate forecasts and sector trend review, and is not constrained by any particular duration or credit quality targets. The Fund’s fixed income investments may include, but are not limited to, U.S. Federal and Agency obligations, investment grade corporate debt, domestic high yield debt or “junk bonds” (higher-risk, lower-rated fixed income securities such as those rated lower than BBB- by S&P or lower than Baa3 by Moody’s), floating-rate debt, convertible debt, collateralized debt, municipal debt, foreign debt (including emerging markets) and/or depositary receipts and preferred stock. The Fund may invest up to 100% of its net assets in dividend-paying equities of companies of any size – large, medium and small. Additionally, the Fund may also invest up to 100% of its assets in foreign debt (including emerging markets) and/or depositary receipts. The Fund’s investments in any one sector may exceed 25% of its net assets. The Fund’s allocation among various fixed income securities is based on the portfolio managers’ assessment of opportunities for total return relative to the risk of each type of investment.
As to M* categories in general. We all know not every fund will have a proper fit. Not unlike, FAGIX ; which is listed as a high yield bond fund. To the point of holding about 80% of the portfolio with HY bonds, this fund also usually has about 20% in equity and to further blend the mix; 15-20% of the total mix is also non-U.S.
FRIFX is another "stray" fund. Its performance will never show properly against the real estate category, as this fund maintains about a 50% mix of real estate related equity and bonds.
End of 2016 composition, OSTIX
The below is relative to the really nasty market melt period. Click onto OSTIX for the chart.
OSTIX SPHIX IEF Sept 11, 2008 thru Dec 18, 2008
Disclosure: our house is not invested in this fund
Anyone know how to find this funds holdings during 2008?
Regards,
Catch

@BobC,
My apologies for using M* charts and its limitations.
Using a different tool (Portfolio Visualizer) it looks like OSTIX under performed AGG for the two years you reference, but it has crushed AGG in many other years.

Some great comments from some great commenters...I appreciate @BobC downside concern, but my thought here is to employ a "buy and hold strictly for income" strategy. Certainly HY can have default risk, but from an income (taking coupon payments for income), is it possible to own a HY fund through these downturns and still come out the other side of these downturns with a uninterrupted income stream? Consider this as an alternative to an annuity; a monthly stream of income from dividends without touching the initial investment.
I also wonder if pairing OSTIX with a few other great bond funds would be another approach. Having a list of great bond funds is always helpful when diversifying a portfolio.
We are all told that holding individual bonds to maturity returns principal plus the coupon (outside of a default or haircut risk I would assume). I can imagine a low turnover, well managed (from default risk) bond fund coming pretty close to that scenario. The bond fund value will take a hit in a downturn, but so would an individual bond holding if sold during that downturn. The idea here is, as @Junkster points out, 25 years later his old girlfriend still wants to take him out to dinner. O.K. that might be a bit rich for Junkster's dietary requirements, maybe at least oatmeal at a diner.
Thanks @davidmoran with your choice FAGIX. I first heard of this fund from @Catch22. Great choice.
@Art, BUFHX is another good option. Could someone explain why most Buffalo Funds have an ER of 1.01% (probably my only knock). Could someone tell them .99% looks a hell of a lot cheaper.
No one yet has mentioned AGDYX (M*****,Bronze) which seems to be the out performer to many of the other recommendations made so far. Any opinions on AGDYX? HYB has also outperformed other HY bond fund compared below over the last 10 years.
HY Bonds (mentioned in this thread) over the last 17 years:

Here is a Closed End Fund in the HY category managed by Baring/Babson Barings Global Short Duration High Yield Fund BGH. Good run with oil. I took some profits from BGH last week.
Oil And Gas 18.03%
http://www.barings.com/funds/closed-end-funds/barings-global-short-duration-high-yield-fund
I have a small position here.I think the fund has a good manager.
HYOAX
https://az768132.vo.msecnd.net/documents/22438_2017_01_20_08_08_21_867.gzip.pdf
@Junkster said, I put an old girlfriend in that fund in early 1992 and she still holds it and thanks me every time we talk
I'm guessing you get a lot of Valentine's wishes.Thanks for all your wisdom over the years.

@MJG - John Bogle likes the Total Stock Market Index better as being broader. I'm not into indexing, so your S&P figures are fine with me. I guess my point is still valid that some investors will do better than that 32% loss (plus fees) and some worse during the next "average" bear market.
Here's where I have a problem: You said "I certainly concur with your observation that a diversified portfolio that includes a major set of bond holdings would greatly soften the blow of a negative equity marketplace. I followed that practice for many years."
No. That's not what I said. My observation was that your past practice (holding bonds as defense) is of less value today. Here's why. At the start of the last "Great Recession" in late 2007 the 10-Year U.S. Treasury yielded around 5%. http://money.cnn.com/2007/06/07/markets/bondcenter/bonds/index.htm?postversion=2007060717
Not only did that coupon provide an income stream during the worst of the stock market debacle, but the face value of those bonds rose during that period as rates declined, further softening the blow to investors like yourself.
Today that same bond yields less than 2.5%. That's a big difference in yield. And it doesn't bode well for investors during the next recession. I'm not the first to note it. Ed Studzinski pointed it out over a year ago in one of his commentaries and voiced similar concerns about the inability of bonds in this day and age to mitigate an investor's stock declines. But I digress ...
Good night and good luck.

The Perennial Obsession With Constantly Predicting Recessions
James Picerno @ The Capital Spectator from 6/5/2016
According to a variety of “experts,” the US has been on the cusp of a new contraction ever since the last recession ended more than seven years ago. Yet the US economy has continued to expand,Predicting otherwise, continually, is a staple among the usual suspects. The projections, however, are conspicuous only for being wrong, so far. In time, a new recession will strike. But forever seeing a new downturn around the next corner is a short cut to failure, whether you’re managing an investment portfolio or running a business. Unless, of course, you’re in the media business or selling books and newsletters that traffic in disaster scenarios.
As for rolling the dice by reading the headlines du jour, well, let’s just say that history hasn’t been kind to this approach, as the following examples from recent history remind:
Included :recession predictions during the past several years from Bill Gross to Larry Summers including this one that still has 15+ months for a possible outcome.
If [Donald Trump] were elected, I would expect a protracted recession to begin within 18 months.
Larry Summers, former Treasury Secretary, via The Washington Post, Jun. 5, 2016
https://www.capitalspectator.com/the-perennial-obsession-with-constantly-predicting-recessions/

Hi Hank,
Thank you for reading my contribution and for your comments.
I pulled the numbers I quoted from the Malkiel book that I referenced and added the 2007-2008 equity drawdown. On page 29 of the referenced work, Malkiel states that the returns are the S&P 500 records. I did not check that statement.
I certainly concur with your observation that a diversified portfolio that includes a major set of bond holdings would greatly soften the blow of a negative equity marketplace. I followed that practice for many years.
I would note that Buffett would disagree with the diversification that I practice. Recall that he recommended a 90/10 split in his favored portfolio with 90% committed to equity positions. That's not me, especially now.
Best Wishes and Good Luck

Thanks. Kinda weak articles and arguments, seemed to me, except the middle Israelsen one that starts in 01, bad case for US LC.
But sure for the 7Twelve. He is like Merriman and his Lazys.
Not sure how much deeper most need to go than this, though (Waggoner updated, from 2015):
... do international funds help your portfolio? In terms of return, it's hard to argue that they have, at least within most investors' experience. The past 25 years, large-cap U.S. funds have gained an average 691%, vs. 338% for international funds. U.S. funds have beaten international funds the past five, 10, 15, 20 and 25 years.
You could argue that European stocks are cheap, relative to U.S. stocks, which is quite true. But then again, they nearly always are, because they don't grow as rapidly. You could also argue that there are more foreign companies than there are U.S. companies, and that investing in them gives you broader market exposure. That's also true. Then again, companies in the S&P 500 get 46.2% of their earnings from overseas, and that's enough international exposure for anyone.
Why have U.S. investors rushed to international funds? In part because much of U.S. mutual fund purchases are controlled by financial advisers, and conventional wisdom is that a stock portfolio should have about 20% of its assets in international stocks. As of the end of November, about 25% of all garden-variety mutual funds were in international stocks, up from about 8.6% in 2000. Advisers have been doing their jobs.
Israelsen is one of those advisers, and his 01-15 data do look compelling. But who do you know (and who here?) who would want the same small amount in US LC as in REIT, cash, commodities, or NR?
Much less stick with it.
Not I.
And his is really an arg for very broad diversification, not for foreign, which is 17% of total (and note that that total = 93% of egg) and half of that foreign is EM.
(Trying to think what EM, NR, and commod vehicles there were in 2001.)

"Your advice regarding keeping several years cash on hand is valid."
I've always done this, but have to concede in hindsight that, never having needed to draw against that reserve, perhaps better use could have been made of the resource. Another imponderable- you just never know.

@MJG - You said, "In that historical timeframe, those 10 Bear markets declined an average of 32%"
You left me wondering which stock market(s) you are referring to. Is that the Total Stock Market Index (approximated by VTSMX), the Total World Stock Stock Index (approximated by VTWSX) or the S&P 500 Index (approximated by VFINX)? Perhaps it's an average of all three? Or, perhaps it refers to some other entirely different stock market index? Sorry if that's nit-picking, but not all bear markets follow the same pattern. Practically speaking, an individual's equity holdings might perform much better than that average 32% loss, or far worse - depending on the types of stocks held during the multiple year time-frame mentioned.
Another important consideration is that most investors' losses during past bear markets were to an extent mitigated as their bond holdings appreciated in value owing to falling interest rates which accompany most recessions. Coupon yields also contributed to the investor's total return. With the very low (actually extraordinarily low) yields on U.S. Treasuries today, that mitigating influence would be much less. Net-net, the "average" investor today would probably take a harder hit than he/she experienced during recent "average" past recessions. Of less significance, but worth noting, is that those "average" reported market losses exclude the additional hit from ongoing fund/investment fees, usually paid out of an investor's assets.
Your advice regarding keeping several years cash on hand is valid. I know other intelligent investors who do the same (though my approach varies somewhat). Thanks for sharing. Hope I haven't misrepresented your views or otherwise muddied the issue.

Hi Guys,
The upward pull of the equity marketplace is nearly irresistible. I say nearly irresistible because since 1953 the market has only experienced 10 recessions that occupied about 20% of a total period of over 550 months. In retrospect, it's a statistically healthy period of time that Burton Malkiel summarized in his "The Random Walk Guide to Investing" book.
In that historical timeframe, those 10 Bear markets declined an average of 32% and the decline lasted 10 months. The average 100% full recovery period absorbed another 21 months.
I interpreted these data to mean that I ought to keep a cash or near cash portfolio allocation that covers just under 3 years of possible needs. That safety factor surely decreased my portfolio return expectation, but that's the price for downside protection. It has served me well.
With that cushion, I don't worry much over daily or even monthly market action. Again from Malkiel, going back to 1926, the S&P 500 has delivered positive outcomes over 70%, over 90%, and over 97% of the time for periods of 1, 5, and 10 years, respectively. I like those odds.
Truth be told, I really don't worry about much of anything. What happens, happens well beyond my control.
I too agree that headlines often are misleading by design.
Best Wishes.

Umm ... Maybe that should read: "The title of this thread is misleading like most."
@John, I don't remember anyone ringing a bell and announcing in advance when past recessions were about to start. (But a lot of charlatans claimed credit after the fact). Usually it's the reverse case, with at least two quarters of negative growth rate in the rear-view mirror before economists make that call.
We've had pretty much a rocket ride upward since March 9, 2009 - 8 years. That's a long time. The Dow more than tripled during those years (albeit from very depressed levels). The one thing that is likely to trigger a slowdown is rising interest rates. And we'll have a clearer idea (I hope) of where the Fed intends to go with rates by week's end.

OSTIX is one of the best moves we made 14 years ago. Consistent, conservative, cautious management. M* still does not understand this fund, and that is fine by me.

Vanguard founder John BogleVanguard founder John Bogle.Vanguard:
"These active managers have a real business problem. They are losing money. Vanguard accounts for over 100% of the cash flow in the industry (since 2014). One firm. All the other firms in the industry together are losing money, losing cash flow. Of course they don't like it. I understand that. But it was never my design to build a colossus.
I'm a small-company guy, but I happen to have two great ideas. One is a mutual company, which is focused not on the management company shareholder but on the fund shareholder. That's the structural thing we bring to the table. And the strategic thing we brought to the table was the index fund. We created the first index fund, and it took 20 years before it started to catch on in, the mid-1990s, and now it’s dominating everything we say in this financial field, and it's changing it forever."
Business Insider Link to Interview:
businessinsider.com/vanguard-jack-bogle-401k-active-management-index-investing-2017-1

I continue to hold EM bonds, a pretty good slug. Served me well, even after I took a needed radical step some years ago in order to make-over my portf. Also hold a global bond fund. No more domestic "core" fund, though. I also get domestic bonds via my two balanced funds: PRWCX and MAPOX. Others referred to above are: PREMX and PRSNX. These two, combined, are 25.51% of portf. Reinvesting everything continues, still.

One problem I have with the data is its starting point (2000 market top). Index fund often get crushed in downturns in the market since these types of fund remain totally invested. Managed funds have the opportunity to make risk on/ risk off decisions. Moving the data backwards or forward three or four years would have improved the index funds long term performance compared to these managed funds.
Also, not considered by the author are low cost managed allocation funds. Vanguard has two fine choices, VWINX and VWELX.
Below are two charts that compare VWINX, VWELX and VTSMX over the 2000 - 20017 time frame and then a little further back. It illustrates that picking investment timeframes can make a huge difference in results. Timing plays a significant role with index funds since they don't manage market valuation risks, they are always fully invested.
This charts shows that buying at the top of the market is a real killer:

Compared to:

Tough time for active managers. Story on Bloomberg yesterday about TRP getting hit recently with large outflows.
Will the trend reverse? Dunno. I've read quite a bit recently (assorted interviews) that the investment tide is turning and indexes will enter a period of underperformance. Might draw money back to some successful active managers. The claim rests on the assumption that value (represented by some active managers) has lagged for years - and become undervalued - and that even indexes are subject to periods of euphoria - and hence overvaluation. Possibly this is simply active managers talking their shop. Who knows?
It's impossible to document the claim. And, no desire to get into a shouting match with the index disciples here of which there are several that I respect. Janus? I've never been enamoured by them. The arrival of BIll Gross certainly hasn't altered my perception. If they can afford to pay his "celebrity" rate, they're probably charging too much for their funds. :)
* Read "End of an Era" by Ed Studzinski in David's January Commentary. He addresses the fund flow (err ... outflow) issue. Among other brilliant observations is this one: "Often, as support staff and analysts are cut, it is the investment performance that continues to suffer as the investment research process becomes gutted. The other thing that happens is the quality of the personnel hired is ratcheted down (good enough) rather than the best available talent."

Presently feeling like a deer caught in headlights. Not doing much. Also elder princess not making her mind where she wants to go for College so trying to raise some cash for 4 years (yeah I'm going to keep all of it aside). Maybe she'll just go to the local school where she has full scholarship, maybe she won't.
So buying some more FPNIX and RPHYX with some of the money as lower risk play instead of keeping it all in cash. And now, just received proxy for voting to allow fund to purchase securities held by board and manager for FPNIX.
Hmm....thinking...