Short lists and explanations in 2nd half below.
I invest for total return, not income. That leads to the question I keep asking myself, so why invest in bonds at all, when equity does better over the long term?
One reason is diversification - one never knows what will do better from one year to the next. Using bonds for this purpose is a bit like buying insurance. It costs you money (bonds won't do as well long term), but it provides protection against short term drops in the worst case.
I buy that, but only to a limited degree. So I'll use more aggressively managed bond funds that include areas like high yield that are more equity-like. (That is, I favor core plus and multisector over vanilla core funds.) I'm not giving up quite as much in return, but I'm also not getting quite the diversification benefit that a vanilla fund would provide. It's how I choose to position myself on the risk/reward curve. Each person has his or her own comfort level.
With that same nod to aggressiveness, I also use bond funds as cash alternatives. Obviously this is a different type of bond fund from those used for total return.
General attributes I would like the funds to have :
- Low costs. Really important in bond funds, where correlation between performance and cost is high.
- Convenience, but I'll only pay a little for that. I've no problem paying $5 to Fidelity to buy more of a TF fund. On a $5K purchase, that comes out to 0.
1%, often less than the cost of owning a different fund that's NTF, especially over longer periods of time.
Personal dislikes:
- Leverage. I'm fine with
100% exposure to risk with my investment. Don't give me
150% risk exposure.
- MBS. The fact that there are several pricing models shows that these are hard to value. More important is that with their built in call options (early payoffs), they behave badly when yields shift quickly. A rise in rates causes borrowers to hold on to their mortgages, thus increasing duration and amplifying the drop in bond price. (Negative convexity.) A side effect is that duration numbers for these securities can be deceptive. They're good diversifiers in a broad bond fund; I just don't want a fund hooked on them.
Macro observation: I almost never time markets. But one must pay attention to the fact that we've had a 35-40 year decline in interest rates that has begun to reverse. IMHO the question is how fast and how far that will go, but not if. This makes it important to watch how interest rate risk is handled.
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Core plus funds (nothing without some blemishes):
- BCOIX - good performance, low cost. Flexible with credit risk (i.e. it's core plus), it can't do much about duration. "The Advisor attempts to keep the duration of the Fund’s portfolio substantially equal to that of its benchmark."
- MWTRX - you used to be able to get MWTIX with a $25K min at Schwab. Now it's $
100K. Retail class is slightly pricey. Years ago, managers contrasted their fund with Pimco Total Return by saying that they had the luxury of focusing on issue selection, while Gross was limited to macro calls due to the size of his fund. Now MWTRX is bloated and performance has declined over the past three years. Still fine management.
- DODIX - cheap, good performance, flexible on credit risk, defensive on interest rate risk. All positive. Not a fund I would have thought of as core plus (my impression was more vanilla), but upon closer look has a nice mix of securities. Main concern is its increasing popularity and girth.
- WCPNX - just started looking at this (see
MFO thread for others' thoughts). Slightly pricey (0.6
1%), but FWIW, NTF. More importantly, I was impressed a few years ago (last time I looked) with Weitz Short-Intermediate (now Weitz Short Duration) fund WEFIX. Same managers here. I also like that this fund has a somewhat short duration. Needs more research.
- EIBAX - Gaffney's been there for 2.5 years. She didn't do well at her first EV charge EVBIX. Perhaps she was trying too hard to prove herself, but she got overly aggressive, loading up with equities and commodities. This is a tamer fund, though still wild. Hard to even call it a core plus, given that it's allowed 35% in junk and 35% in foreign. That describes a multi-sector fund, leading us to ...
Multi-sector funds (the usual suspects) - used for manager-allocated exposure to junk and foreign bonds.
- PIMIX - sharp manager, great past performance, but with qualifications I've already noted, like leverage and a fondness for MBS. Also, what happened to all the voices who seem to cry out "mean reversion"? (Here though, there are specific market conditions that one can point to that suggest lower returns going forward.)
- LSBDX - a manager who claims experience in investing the last time interest rates rose; that raises succession as a concern. Ridiculously volatile, but acceptable to me for something this far out on the portfolio risk curve (aggressive multisector). I like that it has shortened its duration. A quirk in its prospectus allows unlimited Canadian investment, perhaps a way to increase non-dollar exposure without going overseas.
- FSICX - an easy buy if you use Fidelity, else costly. Generally solid fund.
"Enhanced cash"-ish bond funds - used as buffer for equity investments (to draw from when funds have dropped in value)
Muni funds - you need to go out at least a couple of years in duration to get yields high enough to justify skipping the bank account.
- BTMIX - a young fund, but with a solid management team that's been around a long time
- VMLTX - Vanguard = low cost, conservative management
Taxable funds
- RPHYX - pricey, but with a unique strategy that keeps it sufficiently ahead of banks to justify the risk. I still don't think it scales, so it is good that this is closed.
- FPNIX - I've followed this since the Rodriguez days, when you couldn't get it without a load. Now you can, but Atteberry may have tamed the fund a bit too much. Where else do you find interest only derivatives used so extensively for defensive purposes? That dates back to Rodriguez.
