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Why is M* so negative on IOFIX?

Price, People and Parent "pillars." IOFIX. Not even neutral. Definitely NEGATIVE... Hmmmmm. Performance and Process are rated NEUTRAL.
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  • edited September 1
    No clue. I don't have a premium membership or a back door so I can see what you're seeing. All I can say is that I have been pleased with my investment in the fund.
  • Without reading the review, my guesses would be high fees, low liquidity of underlying portfolio, an asset class that’s shrinking and narrow expertise of management. But fees first and foremost.
  • There's nothing to read beyond what Crash posted, and that's the point.

    Here's M*'s description of the AI methodology it uses
    https://www.morningstar.com/content/dam/marketing/shared/research/methodology/813568-QuantRatingForFundsMethodolgy.pdf

    The idea is that you train a classifier (positive, neutral, negative) for a pillar based on some of the funds that analysts have rated. You train another classifier on a different subset of the data, and so on. Then you run all these classifiers and see what the majority thinks.

    Here's a simpler page on how this part of the process works:
    https://towardsdatascience.com/understanding-random-forest-58381e0602d2

    The bottom line is that even if you could get an explanation out of each classifier, what you're doing is polling a lot of classifiers ("pseudo-analysts") to get a consensus. There's no explanation for why some classifiers voted one way, while a larger number voted another.

    Regarding the ratings themselves, Charles gave a fine writeup at the beginning of last year, explaining why the price pillar (1.5% vs. 0.85% category average) and the parent pillar are viewed negatively.
    https://www.mutualfundobserver.com/2018/02/lightning-in-a-bottle-alphacentric-income-opportunities-fund-iofix-february-2018/

    I think Lewis is on the right track regarding performance and process. While the fund is classified as multi-sector bond, by its own description it is a fund that is focused on a small niche. So while its niche has done well in the past (relative to the universe of investments open to multi-sector funds), its fortunes may shift as other investments in the multi-sector universe begin to look better.
  • "... It attracted more capital in last quarter of 2017 than in the first six quarters of its existence. It ended the year with $1.6B, five times the level it started the year..."
    Jeepers. Is that a lotta "dumb money," then? Thanks for replying, all of you. I track IOFIX but don't own it. I own PTIAX, which is not quite the same animal, but in the same ballpark, right?
  • edited September 4
    Crash said:

    "... It attracted more capital in last quarter of 2017 than in the first six quarters of its existence. It ended the year with $1.6B, five times the level it started the year..."
    Jeepers. Is that a lotta "dumb money," then? Thanks for replying, all of you. I track IOFIX but don't own it. I own PTIAX, which is not quite the same animal, but in the same ballpark, right?

    I fail to see what relevance the last quarter inflows in 2017 has to do with now September 2019. IOFIX has trounced every bond fund in the multi sector, emerging market, high yield corporate and high yield muni, as well as the non traditional bond categories over the past three years with a 10.50% annualized return. There is no close second. I would think the dumb money is the money still waiting to initiate a position. When that occurs it may be time to run for the hills. In the meantime, its compelling story of being heavily invested in the ever shrinking legacy non agency rmbs arena continues.

  • At the beginning of every mutual fund prospectus is generally a little seemingly innocuous sentence: Past performance is no guarantee of future results. So what if it's been hot in the past? The only question that matters to anyone reading this right now is--Will it continue to be? Time and again, fees or all-in costs have been the strongest most consistent indicator of future performance. Are low costs always the best predictor? No, that's why people come to this site. But Morningstar is absolutely right to ding this fund for charging a 1.5% expense ratio on $3.3 billion in assets when bond funds that specialize in non-agency debt can be had for much less.
  • They can afford a much bigger "BOAT" !!!!!
    Derf
  • edited September 4

    At the beginning of every mutual fund prospectus is generally a little seemingly innocuous sentence: Past performance is no guarantee of future results. So what if it's been hot in the past? The only question that matters to anyone reading this right now is--Will it continue to be? Time and again, fees or all-in costs have been the strongest most consistent indicator of future performance. Are low costs always the best predictor? No, that's why people come to this site. But Morningstar is absolutely right to ding this fund for charging a 1.5% expense ratio on $3.3 billion in assets when bond funds that specialize in non-agency debt can be had for much less.

    To each their own. Over two and a half years in March 2017 here at MFO I said IOFIX has been a “wonder to behold since inception”. In 50+ years in the game have never once looked at a fund’s expense ratio. Long ago in my book I wrote about exploiting the new fund effect. I used actual real money trading examples from new funds from Strong and INVESCO. I would have hated to have seen the expense ratios of these new funds.

  • IOFAX , the A-shares which I own, have an exp ratio of 1.75%. What is the difference if it clearly performs more consistent with higher returns than say a fund like PONAX? Ride the momentum until it ain't. When it ain't, move on.

    I was happy to heed Junksters suggestion. Been my only domestic bond fund for a while.
  • edited September 5
    I cite detailed studies in my book by the Charles Schwab Center for Investment Research and also by Kobren Insight Group on the validity of the new funds effect. Also provide real time trade results on the new funds effect. Of course this was from what is now a mostly bygone era. But the effect is still there in some cases. A recent example being EIXIX - new fund in a hot sector. I would hate to think where I might be now had it not been for exploiting the new funds effect in the late 90s.

    You must bring out the worst in me as I have never mentioned my book in all my years on this forum. I detest those that pander their books on forums. Most especially that master marketeer of his 1001 investment books on the Bogleheads site.

    https://www.amazon.com/How-Trade-Living-Gary-Smith/dp/0471355143
  • @Junkster,

    I gave my copy of your book to my son about a year, or so, ago. Thank you for the amazon link because I ordered another copy (today) to replace the one I gave away.

    Old_Skeet
  • Hi @Junkster
    As some of us have known who you are, for a number of years; there is no reason to feel you are pandering with the announcement. You have, with your book; benefited investors in the past and will continue to do so into the future; as well with your thinking and sharing here at MFO.
    Hats off to you and thank you.
    Catch
  • Did any of you IOFIX/IOFAX fans catch the prospectus @Ted just posted for another Alpha Centric fund? Go to alphacentricfunds.com to see a fairly bizarre/agressive/innovative lineup of offerings. Now they are proposing a hedge fund in the wraps of a MF (i.e.; a wolf in sheep’s clothing) to invest in the healthcare and life sciences sector. As this sector has been the absolute pits since the end of last year, you cannot fault AC for jumping on the bandwagon.
  • edited September 5
    @BenWP - the prospectus link for the new AC fund was posted by The Shadow.

    The way I read their investing strategies seems to indicate that they can use hedging when they deem it appropriate. That really isn't much different than many other funds.

    From the proposed prospectus:
    "Principal Investment Strategies:

    The Fund seeks to achieve its investment objective by investing in healthcare related companies that the Fund’s investment sub-advisor, LifeSci Fund Management LLC (the “Sub-Advisor”) believes to have potential to appreciate in value. Under normal market conditions, the Fund will invest at least 80% of its net assets plus borrowings for investment purposes in the securities of companies in the life sciences and healthcare sectors. The Fund will invest in the equity securities, primarily common stock, of these companies and may also invest, from time to time, in exchange traded funds (“ETFs”) that primarily invest in these companies. The Fund defines life sciences and healthcare companies to include those companies that are expected to derive 50% or more of their revenue from life sciences and healthcare related products and services. These companies may include development stage companies. The Fund may invest up to 15% of the Fund’s net assets in private and other companies whose securities may have legal or contractual restrictions on resale or are otherwise illiquid such as initial public offerings, mezzanine financing offerings and other structured transactions. The Fund may invest in securities of companies of any market capitalization and may invest without limitation in securities of companies domiciled outside the United States either directly or through American Depositary Receipts (“ADRs”).

    The Fund concentrates its investments (i.e., invests more than 25% of its assets) in the biotech and pharmaceutical; health care facilities and services; and medical equipment and devices industries, collectively.

    For hedging purposes or when the Sub-Advisor anticipates significant price changes due to company or market moving events, the Fund may also invest in inverse ETFs and purchase and sell call and put options on equity securities of life sciences and healthcare companies."
  • Mark said:

    @Ben - the prospectus link for the new AC fund was posted by The Shadow.

    I am not BenWP ( not a bad feller to be mistaken for). I am just plain Ben. Different person.
  • My apologies Ben. I will edit my last post. Thank you.
  • edited September 6
    I hope to visit Garrison Point in November and update our profile
  • OMG, @Mark, I just assumed the slew of links was posted by @Ted. My bad, once again. @The Shadow (and his/her friends) know(s) and I bow in reverence to his/her expertise. The latter allusion is another key to my age. I humbly accept the apologies as proffered. For a good read on mistaken identity, try Oliver Sacks', "The Man Who Mistook His Wife for a Hat."

    I have not read all the AC prospecti, but I skimmed info on the various investment strategies the firm offers. I am not schooled enough to know if these efforts are "cutting edge" or if they are just so much fluff or window dressing. It strikes me, though, that they may be trying to appeal to the investor who is afraid of missing out (our friend FOMO, rears his head again) on some technological innovation very few of the general public probably understand. I'm a humanities major/professional and I don't know one robot from another, but I'm sure someone is going to make a bundle on them. Therefore, maybe I'd better get on board.

    Here's a summary of another of their funds:
    "The AlphaCentric Symmetry Strategy Fund utilizes a specifically constructed and repeatable set of investment building blocks designed to capture the available risk premiums during periods of broad economic growth, as well as during periods of economic growth risk." I call BS. I don't know one ETF, CEF or MF that purports to hold "repeatable sets of investment building blocks." For all I know, they're Legos. You get the idea without me ranting any further.

    I realize that people I respect here on MFO have had great success in IOFIX and I hope others who might dip a toe into AC's other funds will have similar stellar returns.
  • edited September 6
    In a hurry to get out on the trails so don’t have time to check but regarding @BenWP’s thoughtful post above...... aside from IOFIX haven’t some of the AlphaCentric funds been dismal performers with one or two already liquidated?
  • AlphaCentric's record as an advisor is pretty awful. IOFIX is only fund with any kind of AUM. Catalyst's record is not much better (though MBXIX is interesting). Both families are associated with Jerry Szilagyi. I honestly wish Garrison Point could find a way to be its own advisor.
  • edited September 7
    @junkster I was writing about funds back when those studies on new funds came out and a few things come to mind:

    1. In the 1990s many new small cap and growth funds were launched that benefitted from extra IPO allocation to hot dot.com stocks like Pets.com and
    Webvan. Van Wagoner , Turner Microcap Growth, Strong and Janus funds come to mind. Some of them ultimately got in trouble for juicing their new fund returns with more shares of these IPOs than other funds at the shop and not acknowledging that it was IPOs doing the heavy lifting and that once the funds grew in size the IPO effect wouldn’t last. In fact, many of those IPOs subsequently flamed out. In any case, times have changed and we no longer have a 1990s IPO market for new funds to benefit from.

    2. I am fairly certain those Kobren and Charles Schwab studies did not adjust for survivorship bias. I would have to check but I did write about them back then—favorably too I believe—and I recall no mention of survivor bias. Please provide any evidence of the new fund effect that adjusts for survivor bias today if you have it. I doubt there is any evidence for it as I see bad new funds liquidated every day. In fact, their liquidations are tracked here. Nor is this to say I am against new funds. But I think newness must be accompanied with additional quantitative and qualitative research, the kind David does on this site. Fees should be part of that research in my view, and there is far more evidence of fees importance to performance than the new fund effect.

    3. Think of the kind of fund this is and what it’s investing in—non-agency debt. That debt has in the past become extraordinarily illiquid during times of market stress. And funds that invested in it have been crushed due to illiquidity. I suggest MFOers look up the Regions Morgan Keegan funds if they doubt the risks of a liquidity crunch. Such a sector is not the best fit for a mutual fund that must provide daily liquidity in my view especially if the fund concentrates in that sector to a high degree over more liquid mortgage bonds. The sector meanwhile is shrinking each year.

    4. At $2 billion in assets this fund collects $30 million in fees a year. At $3 billion it collects $45 million. The team required to investigate this one sector of the market must be highly compensated with that fee. Are they earning it with good Individual security selection or by concentrating in the riskiest sectors of the mortgage market more so than their lower cost peers. Regions Morgan Keegan once had a great record too before the housing bust by taking such risks.

    5. In a highly illiquid sector money managers often use a pricing system called fair value for estimating securities value in the portfolio. That can make the fund seem a lot more stable than it actually is and hides risk. It also creates an incentive for fraud in how securities prices are marked.
  • "a pricing system called fair value for estimating"

    i.e.- a pricing system that allows us to claim whatever value is desired to make our stuff look good.

    @LewisBraham- I have little doubt that everything that you said is reasonable. But Junkster is an old hand, and if he can make money treading where most of us should not more power to him.
  • edited September 7
    @OldJoe I don’t doubt that Junkster and others have made money on IOFIX. How could they not given its performance? My point is that Morningstar is not wrong for being suspect of the fund. In fact, it gives me more faith in Morningstar’s process that they are willing to look beyond performance in their ratings to consider other factors such as fees. Just because a fund is performing well doesn’t make it a suitable investment for all people or even most people. Ratings should reflect that.
  • edited September 7

    @junkster I was writing about funds back when those studies on new funds came out and a few things come to mind:

    1. In the 1990s many new small cap and growth funds were launched that benefitted from extra IPO allocation to hot dot.com stocks like Pets.com and
    Webvan. Van Wagoner , Turner Microcap Growth, Strong and Janus funds come to mind. Some of them ultimately got in trouble for juicing their new fund returns with more shares of these IPOs than other funds at the shop and not acknowledging that it was IPOs doing the heavy lifting and that once the funds grew in size the IPO effect wouldn’t last. In fact, many of those IPOs subsequently flamed out. In any case, times have changed and we no longer have a 1990s IPO market for new funds to benefit from.

    2. I am fairly certain those Kobren and Charles Schwab studies did not adjust for survivorship bias. I would have to check but I did write about them back then—favorably too I believe—and I recall no mention of survivor bias. Please provide any evidence of the new fund effect that adjusts for survivor bias today if you have it. I doubt there is any evidence for it as I see bad new funds liquidated every day. In fact, their liquidations are tracked here. Nor is this to say I am against new funds. But I think newness must be accompanied with additional quantitative and qualitative research, the kind David does on this site. Fees should be part of that research in my view, and there is far more evidence of fees importance to performance than the new fund effect.

    3. Think of the kind of fund this is and what it’s investing in—non-agency debt. That debt has in the past become extraordinarily illiquid during times of market stress. And funds that invested in it have been crushed due to illiquidity. I suggest MFOers look up the Regions Morgan Keegan funds if they doubt the risks of a liquidity crunch. Such a sector is not the best fit for a mutual fund that must provide daily liquidity in my view especially if the fund concentrates in that sector to a high degree over more liquid mortgage bonds. The sector meanwhile is shrinking each year.

    4. At $2 billion in assets this fund collects $30 million in fees a year. At $3 billion it collects $45 million. The team required to investigate this one sector of the market must be highly compensated with that fee. Are they earning it with good Individual security selection or by concentrating in the riskiest sectors of the mortgage market more so than their lower cost peers. Regions Morgan Keegan once had a great record too before the housing bust by taking such risks.

    5. In a highly illiquid sector money managers often use a pricing system called fair value for estimating securities value in the portfolio. That can make the fund seem a lot more stable than it actually is and hides risk. It also creates an incentive for fraud in how securities prices are marked.

    #1 pretty much sums it up and very close to what I wrote in my book. Half my profits in 98 and 99 came from the new fund effect in tech and small cap growth because of allotments to hot IPOs. I can think of a few new funds from Janus and INVESCO that were up 15% to 25% in a month. Even used Strong’s new high yield fund to my advantage in 96 where it beat not only all its peers but the S&P. I also exploited datelining - probably the closest thing to a free lunch you could ever find on Wall Street. I make no bones about luck being on my side in the 90s. Funny thing about luck as I have also been lucky since 2000 too, especially the luckiest trade of my lifetime - junk bonds on 12/16/2008 when the Fed rang the loudest bell I have ever heard on Wall Street. Probably explains why The Luck Factor by Max Gunther is one of top three favorite books.

    As for IOFIX, I just think they are sitting on a gold mine in the legacy non agency rmbs they have remaining in their portfolio. Can’t think of any time since the Great Recession where there has been any illiquidity in those bonds. Can’t think of where there could be any wave of defaults from those legacy bonds issued between 04 and 07 especially from the equity that has now built up over the years by the homeowners behind such loans. But that is a story for another time. My main concern is IOFIX becomes a groupthink fund. I also worry what the managers do for an encore in the next couple years as the legacy market shrinks even further and they no longer have that to juice their returns. I am not wedded to IOFIX. If you read the archives you will see I went into junk bonds at the end of December but they petered out five months later and went back into other areas of Bondland.
  • edited September 7
    "Just because a fund is performing well doesn’t make it a suitable investment for all people or even most people."

    @LewisBraham- Yes, that's pretty much what I said also: "But Junkster is an old hand, and if he can make money treading where most of us should not more power to him."
  • I have owned IOFIX twice for several months. IOFIX is the only fund in my watch list with much higher volatility than the category every several months with no apparent reason which scars me.

    See YTD chart of IOFIX+JMSIX. Look at 02/2019 where IOFIX was down -0.4...on 04/2019 down -0,8%...08/2019 up more than 2%. A bond fund that can go up more than 2% in just 2 weeks can also go down.

    PV shows that IOFIX has an amazing risk/reward long term (link) for 3 year performance but YTD not so much.


    Portfolio CAGR Stdev Best Year Worst Year Max. Drawdown Sharpe Ratio Sortino Ratio
    PIMIX 5.34% 1.91% 8.60% 0.58% -1.11% 1.95 4.01
    PUCZX 6.89% 2.24% 9.22% 1.75% -1.13% 2.38 6.63
    PDIIX 5.99% 3.45% 11.10% -0.99% -2.23% 1.31 2.8
    IOFIX 10.44% 2.69% 14.04% 3.49% -0.87% 3.16 13.47
  • I also like to buy new hot funds and I don't care about the ER that much. I bought EIXIX earlier this year but sold after a few months when performance was going nowhere. I have talked with the manager and one of their directors and EIXIX invests mostly in RMBS of 2008 and prior + ST floaters interest MBS that do well when rates are going up. The managers are trying to balance out rates going down+up. I noticed the fund is doing well when rates are going up (which is unique for most bond funds) and not well when they are going down and why EIXIX has done very little in the last several months.
    My biggest category YTD used to be HY Munis but I sold a big portion a few weeks ago when momo got weaker and rates started to rebound after a huge rapid decline. I prefer Munis over higher-rated bond funds because they do better in rising rates. Fidelity doesn't let you buy muni funds in IRA but Schwab does. I used to have ORNAX in taxable + IRA but now only in taxable.

    YTD chart(link) of Multi(EIXIX,JMSIX) Higher-rated (USIBX) HY Muni(ORNAX)
  • Just to refresh people's memories: https://kiplinger.com/article/investing/T041-C009-S001-two-morgan-keegan-funds-crash-and-burn.html
    I am aware that the non-agency debt market has changes significantly since this point, but I do think liquidity in the bond market for mutual funds isn't discussed enough.
  • GO, too, and crazy-low UI
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