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Howdy and Bond Classification?

edited September 2011 in Fund Discussions
I know Catch categorizes his bond allocation like this, but can someone explain what the difference is between Diversified and Multi-Sector? I don't know whether I am missing any meaningful distinction between these two categories or not.

Sorry, I have not been much of a participant lately, but the board software does not work well on my work computer and usually early morning or lunch at work is my best time for viewing. Hope everyone has been surviving the roller coaster OK. I'm still sitting with a pretty high cash allocation (~45%) and was able to make a few $s during the downturn and bounce back playing some blue chips. Unfortunately, I missed out on the gold rush when I dumped GLD back in April-May timeframe.


  • Multi-sector bond funds, unlike diversified ones, does not necessarily includes all sectors all the time.
  • Hi, Gandalf!

    I'm not sure whether the term "Diversified" comes from. "Multi-sector" is a Morningstar category designation, and almost all of the multi-sector funds tend to be riskier than the typical bond fund. An article in their Five Star Investor tried to screen for multi-sector bonds which are steady enough to serve as core holdings, and they found only three (including T. Rowe Price Spectrum Income RPSIX). The rest went searching for opportunities (in e.m bonds, high-yield corporates, CMBS or wherever) that made them more volatile than one normally expects in fixed-income investing.

    Morningstar does not have a "diversified" category, but generally considers "intermediate-term bond" as the home of the safe and steady (which is to say, diversified) funds.

    As a marketing term, of course, Diversified and Multi-sector mean precisely what the marketer wants them to mean. (I keep thinking of Fidelity Blue Chip, which had a huge slug of non-blue chip stocks, the logic being that they were "tomorrow's blue chips").

    For what it's worth,

  • M*: "[T]here are no strict definitions about what constitutes a core holding. Both index trackers and out-of-the box holdings -- such as Third Avenue Value (TAVFX) [which M* classifies as a supporting player, not core], which hunts far and wide for cheap stocks and, in some cases, bonds -- can make worthy cores."
    Morningstar, The Short Answer: What's a Core Holding, Anyway?"

    So I don't put much stock in M*'s core classification; M* itself says it is "squishy". That said, I find only two bond funds that M* calls "core" and "multi-sector" - the TRP fund David mentioned, and PIMCO Income in all its half-dozen plus forms.

    Typically, "investment grade" bond funds invest only domestically, eschew junk bonds, and don't have inflation-protected or floating rate securities (at least not much). It's hard for me to consider these much more diversified than an S&P 500 fund, that invests only domestically, eschews small caps, and doesn't own convertible stock (I believe).

    I can't comment on how Catch is using the term "diversified bond fund". What passes in the press for diversified funds avoid large chunks of the market. At a minimum, I'd look for "Core Plus" or "Total Return" funds that hew more closely to Barclays US Universal Index than to Barclays US Aggregate Bond Index, the former including Barclays US Aggregate, Corporate High-Yield, Investment Grade 144A Index, Eurodollar Index, US Emerging Markets Index, and the Non-ERISA eligible portion of the CMBS index; in other words, all US dollar-denominated bonds including high yield and emerging market as well as US investment grade. You don't get currency exposure that way, but you do get exposure to all markets.

    Some examples: Baird Core Plus (BCOIX), Janus Flexible Bond (JAFIX), Metropolitan West Total Return (MWTIX).

    Another M* article that you might find helpful is Finding Flexible Bond Funds That Earn Their Keep. The gist is that truly flexible bond funds are typically classified as multisector, and it is because of their "lattitude to invest across a wider range of fixed-income securities, potentially including domestic and foreign issues and bonds from across the quality and maturity spectrum ... [that they are] less predictable than the standard core fund."

  • hi Gandalf - separate issues, but there was an excellence article on bond funds/privatized funds that was posted a few days back

    the problem w/ your bond fund

    I think Catch use that phrase, in my opinion, is to 'spread' all the risks of his bond funds/ETFs to all classes
  • Guys, I appreciate those thoughful answers. It is clearer to me now.

  • Howdy Gandalf,

    The "diversified" question is a good one. When I first started posting the portfolio at FA, I considered how to attempt to present an overview of the funds by a "category".

    This is not an easy consideration; based upon the nature of many equity and bond funds.

    Of course, we attempt to know what our monies are invested into when we use a large cap vs a small cap fund; and the same quidelines apply to the bond funds.

    The usual prospectus for many funds follows a 80% investment position in a given area, with the exception of the other 20%. I suppose this is a type of guideline as to the basic nature of a fund.

    In 2010, we were invested for about 6 months; in FLBIX, which was perhaps our most "near pure" bond fund/index....Long Treasury bonds....period.

    In reality, almost all of our bond funds have enough style latitude to all be mixed breeds to some extent; although the mixes of other bond types may be limited.

    Without a doubt, some of our bond funds; regardless of naming, are mixed breeds.

    FSICX, is a good example of a multi-sector holding and this is well defined in the prospectus. The "total" bond funds are another story, as to what may or may not be used; and one may find a leaning towards Treasury issues with one fund, while another leans towards the mortgage issues area.

    This situation is also found in many equity funds, eh? FLPSX is a good example of this. Some may presume the name implies smaller and cheap priced companies; and this is not totally incorrect. While this fund holds mostly sm/mid cap; it does range from mega to micro cap holdings.

    Perhaps I will rethink the "descriptions". The addition and ease of use of the ticker links here at MFO allows us to readily have a good overview of a fund; and allows the viewer to draw their own conclusion of what is or is not a diversified fund.

    I watch several ETF's as market sector guages throughout the day; as time allows. While not scientific, one may get a feel for what the etf's do, vs some mutual funds.
    Of particular note, since the market moves beginning at the first of August; and the strong performance of the Treasury area since this date; I was not surprised that Bill Gross announced that PTTRX did not hold many Treasury issues and had missed the move. I could sense this with the performance of this fund; and could also have a clue as to our other bond funds that apparently were holding more Treasury issues, as their returns were "more" positive and in line with Treasury issues performance.
    As we only know what a fund may hold relative to the last prospectus, we sure don't know what holdings have changed in the 3 months since the last official report.

    Take care of you and yours and thank you for the question.


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