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Is 2023 the time to wade back into bond funds? Thoughts?

edited January 2023 in Fund Discussions
What are your thoughts here. I know we have some really knowledgeable bond people here at MFO and I' like to hear everyone's opinion on the subject and if you are buying.

I've been out of specific bond funds for about a year and a half (except for RPHYX). I'm considering getting back in now with the hope the worst is over or close. What are other's thoughts? I'm specifically looking at floating rate at this point, piggybacking onto statements I've seen from David Giroux and others in Barrons. If I'm looking for an early trend, the last quarter of 2022 was steadily increasing for this sector. I'm considering using SAMBX.

I know the safer route is CD's and treasuries at 4-5%, but I'm hoping with a little added risk, high single digit returns may be obtainable.

What are the thoughts? Pros and cons?
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Comments

  • edited January 2023
    Good question @MikeM … Mine is not a direct (or likely helpful) answer…

    Since mid-year I’ve preferred intermediate term investment grade bonds over cash. In particular I’ve used the etf GNMA as a cash replacement. Not because I hope to make any money on it (though I might), but because I consider good quality bonds a better hedge against sharply falling equity valuations than cash. Good quality bonds should increase in value during turbulent times as investors seek safety. No guarantee of course! The fact that investment grade intermediate and longer dated bonds are now yielding 5% or higher certainly makes them more attractive as a hedge than they were a year or two ago.

    So my preference for bonds has to do with overall portfolio construction and trying to reduce volatility (there’s that word:)) and counter potentially greater equity losses. I’d only suggest bonds if that is your main goal. Currently, less than 20% of portfolio is allocated to fixed income. Mostly that’s in GNMA, DODLX, PRIHX and JPIB. But there’s roughly another 20% in CVSIX (convertible bond) or other funds which, for portfolio construction purposes, are part of the alternative sleeve.

    Your question really goes to the heart of where the economy is going to go over the next year or more and how the Federal reserve responds. I’m afraid no one can predict that with any certainty. However, I think an actively managed bond fund (having low fees) a better choice than an ETF if overall return is the main goal. My predilection for bond ETFs is because I want to be able to move in and out without any trading restrictions.
    -

    * MikeM may have been referencing an article by @LewisBraham in this week’s Barron’s in which he quotes David Giroux on the subject. “Funds: Taking a Risk to Earn Fatter Yields”

  • I can tell you that I'm 31% in bonds, all in funds--- including some that sit in PRWCX. The other two are junk: TUHYX and PRCPX. I am, likewise, looking for better dividends than the safer CDs and Treasuries offer. And at this point, the damage has been done, I think. TUHYX, by the way, has a brand-new twin: an ETF version. It's THYF. How they came up with that share-price, I dunno. It's over $50 at the moment. Dividends are higher than in the standard OEF, too. FR/BL funds turn me off after my experience with the TRP particular flavor. Supposed to stay level, eh? But the thing fell, even if not by much. Seems to me even junk bonds have just about reached their nadir in terms of share price. I'm not in it, but AGEPX is a Frontier EM fund I like to track. The yield on that puppy is astronomical.
  • My January MFO article, out soon, focused on Bonds, especially long dated TIPS. I hope you find it useful.
  • @MikeM I'll be watching pricing in the below list to discover when and where the money is traveling. The FED can control the short duration end for yields, but the markets may control the other durations.

    Last weeks pricing performance.

    --- AGG = -1% / -13.02% (I-Shares Core bond etf) widely used bond benchmark, (AAA-BBB holdings)
    --- MINT = -.01% / -1% (PIMCO Enhanced short maturity, AAA-BBB rated)
    --- SHY = -.18% / -3.88% (UST 1-3 yr bills)
    --- IEI = -.58% / -9.5% (UST 3-7 yr notes/bonds)
    --- IEF = -1% / -15.2% (UST 7-10 yr bonds)
    --- TIP = -.46% / -12.2% (UST Tips, 3-10 yrs duration, some 20+ yr duration)
    --- STPZ = -.22% / -4.47% (UST, short duration TIPs bonds, PIMCO)
    --- LTPZ = -1.1% / -31.7% (UST, long duration TIPs bonds, PIMCO)
    --- TLT = -2.55% / -31.2% (I shares 20+ Yr UST Bond
    --- EDV = -3.3% / -39.2% (UST Vanguard extended duration bonds)
    --- ZROZ = -3.67 / -41.3% (UST., AAA, long duration zero coupon bonds, PIMCO
    --- TBT = +5.4% / +93.3% (ProShares UltraShort 20+ Year Treasury (about 23 holdings)
    --- TMF = -7.9/ -72.6% (Direxion Daily 20+ Yr Trsy Bull 3X ETF (about a 3x version of EDV etf)
    --- BAGIX = -.58% / -13.35% (active managed, plain vanilla, high quality bond fund)
    *** Other, for reference:
    --- HYG = -1% / -11% (high yield bonds, proxy ETF)
    --- LQD = -1.52% / -17.9% (corp. bonds, various quality)
    --- FZDXX = 4.26% yield (7 day), Fidelity Premium MMKT fund



  • edited January 2023
    Thanks for the data update @catch. I know in your post you were looking for a trend. I think we are starting to see it forming.

    @devo, looking forward to your article.

    @hank, I saw LB's article. All I read is saying it may be or may be pretty close to thinking it may be time to consider bond funds again.
  • edited January 2023
    I have very small positions in two IG bond OEFs, hoping from there to spot good entry points toward a more normal allocation this year.

    Everything I'm hearing from bondland now (e.g., fixed income leads from various companies on Bloomberg Real Yield) is pretty negative on bank loans, with them and C-rated junk as the assets most likely to suffer the worst (as in a rising default rate) if risk conditions really go south. (Those opinions are coming from a place of expecting an economic slowdown.)
  • edited January 2023
    @MikeM, are we reading the same Barron article by LewisBraham. One I read is “
    Floating-Rate Loan Funds Have Promise—and Hidden Risks” and David Giruox was part of the interview. If that is the case, I came away with a different interpretation from yours on bonds in which risk is higher today with bank loan funds than previous years.
  • LB's article in Barron's looks at pros and cons of FR/BL.

    Keep in mind that FR/BL are a subclass of HY and their rate resetting mechanism works fine when rates are rising or stable. If rates start declining, or economy finds itself in recession, then they will be hit hard like other HY. Davis Giroux runs a capital appreciation fund PRWCX with some exposure to credit spreads and he won't be doing B&H for FR/BL.

    Fido FFRHX, 1-yr (default). Switch to 3+ years to see volatility. https://stockcharts.com/h-sc/ui?s=FFRHX&p=D&yr=1&mn=0&dy=0&id=p80706396341
  • Volatility in 3 years… particularly during the beginning of pandemic in March 2020. It rebounded strongly after Powell cut the rate. Nevertheless it showed the magnitude of drawdown.

    I am watching carefully and have pared back some BL/FR funds. Question is what can Giruox do with a such large asset fund. Right now, he is holding some treasuries, perhaps as a hedge in case things get back. He stated I several interviews that US market is strong fundamentally and we will not in a recession.
  • edited January 2023
    MikeM said:

    @hank, I saw LB's article. All I read is saying it may be or may be pretty close to thinking it may be time to consider bond funds again.

    @MikeM - Yes, LB’s article seems to make the case for bonds - particularly floating rate types of lower credit quality. David Giroux is one proponent noted in the article. What I find interesting is that Giroux isn’t very far off from what he said a year ago. I posted a thread in January of last year on the Barron’s Roundtable and in it I quoted Giroux’s words:

    Giroux: “The asset class today with the most attractive risk/reward profile is leveraged loans. I’ve taken leveraged loans to 12% of my portfolio …”

    https://www.mutualfundobserver.com/discuss/discussion/59086/a-glimpse-into-barron-s-roundtable-part-1-january-17-print-edition

    Somewhat paradoxically, his fund lost 12% during 2022. And, as if to further cement his bond credentials, in the same interview Giroux avowed ….

    “I would make a bet that the 10-year doesn’t get above 2.5% in the next year.”

  • Exited EABLX Dec. 30 . Decided it was time to let it float away !
  • edited January 2023
    At the of the article it also highlighted the default risk of BL has increased.
    Yet there’s a dark cloud to that silver lining. Some 90% of the record $615 billion in loans issued in 2021 were what is known as “covenant-lite” loans with weaker default protections.
    Yes, PRWCX has outperformed Vanguard balanced index (60/40), 11.9% vs 16.9%, even though the balanced index is not exactly the right benchmark. The bank loan allocation has a small loss (TRP floating rate fund, -0.69%) while the total bond index used in VG banned fund lost -13.3%. Even though the growth stocks in PRWCX have not done well, the overall portfolio still outperformed by 4%.

    At the time of the Roundtable discussion, the treasury yield curve has not been inverted until August this year. As of December 28, 2022, 10 year treasury yield is at 3.88% and the spreads between 2 mo, 3 mo and 10 mo to 10 year treasury are all negative. https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_yield_curve&field_tdr_date_value_month=202212

    Recent WealthTrack interview Giruox thought we may have a chance of not getting into a recession in 2023. I hope he is right and that is why I invest with him for a long time.

    I will get back to bond finds again but it will be gradual over the entire year. Until the Fed lower the rate , I will stay with Tbill ladders even at 4-5% yield.
  • @Hank. +2. And I might point out the esteemed Mr Giroux’s interests and motivations don’t necessarily align with individual investors.
  • edited January 2023
    I can't assume the risk of being invested entirely in stocks.
    I therefore utilize bonds (and "cash") to hedge equity losses.
    Both equities and fixed income experienced losses in 2022 - this is a rare occurrence.
    In late 2021, I sold my core bond holding (DODIX) which was ~16% of my portfolio.
    Overall bond yields have risen significantly since 2021.
    Although the Federal Funds rate will probably be increased a few more times,
    the bulk of rate increases in this cycle may have already transpired.
    I purchased DOXIX (replaced DODIX in 401k) on 12/30/22.
    This is my core fixed income holding currently comprising ~19% of my portfolio.
    The remainder of the portfolio's bond/cash position is in T-Bills and money markets now.
    I'll likely purchase additional bonds/bond funds (possibly TIPS/Treasuries/munis) later in the year.
  • edited January 2023
    larryB said:

    “I might point out the esteemed Mr Giroux’s interests and motivations don’t necessarily align with individual investors.”

    I think that’s a bit too darkly suggestive. But it does raise an interesting question of what the primary motivational factors are for managers who rise to the esteemed position of Barron’s Roundtable Member as well as whether historically their funds have performed better or worse after said ascension. In Giroux’s case, the motivation can hardly be to pull more money into his swollen (closed) fund. If the goal is to bring more assets into TROW it hasn’t gone very well to date, as money has been fleeing and their stock price has fallen sharply over the past year. I’d imagine members are well compensated for their work. Then again … why would someone running a 46 billion dollar fund be in need of additional compensation?

    If the manager(s) of DODBX - one of my larger holdings - ever take a seat at that rountable and begin broadcasting their brightest new ideas to an adoring public … I think I’d sell the fund.

    @Observant1 +1 / You succinctly and clearly stated in 120 words what it took me half a page to convey. Nicely done.
  • @hank,

    Thanks!
    Now if I could only write succinctly on a consistent basis... :D
  • edited January 2023
    @hank ; I see DODBX had a rather large CG !
    Added : Have you held this fund as a long term hold, say over ten years ?
  • Derf said:

    @hank ; I see DODBX had a rather large CG !
    Added : Have you held this fund as a long term hold, say over ten years ?

    Umm CG? Is that something good?

    I’ve owned DODBX for about 20 years - the same amount of time I’ve been with D&C. It’s just one of several of their different funds I’ve used from time to time over those years. So the amount in DODBX has waxed and waned over time. Presently it serves as the major part of the “growth” portion of my portfolio. Yes - it contains bonds too, but those have rarely accounted for as much as 30% of the fund.

    Hope I’ve addressed the thirst of your question adequately @Derf
  • Thanks for the reply @hank . I had an investment with Dodge a number of years ago, but left when they carried a heavy load of financial & got toasted in 07-08 .
  • DODBX in top 10% among peers in '22.
  • edited January 2023
    Derf said:

    I had an investment with Dodge a number of years ago, but left when they carried a heavy load of financial & got toasted in 07-08 .

    Yes @Derf. I remember it well.

    The last thing I would ever do is try to steer anyone into any particular fund. But I like to note that DODBX’s track record extends clear back to the 1930s. Longevity - if not consistent performance!

    Thanks for the comments.

  • Recall that DODBX has changed investment policy recently to include some shorting. Its idea was to tame its high volatility. This is quite unusual for allocation/balanced funds, and DODBX may have had beginner's luck just as this bear was arriving.

    Among the oldest allocation funds are VWELX (1929), LOMMX (1929-2022; liquidated), DODBX (1931). Not so old FPURX (1947) is also old enough.
  • edited January 2023
    The bond sleeve of my portfolio was reorganized as the ballast sleeve in early 2022 as the bond world ran into serious trouble. SVARX survived the transition and CBLDX and HMEZX were added (a small residual holding of RCTIX also remains). Those holdings held up relatively well through 2022. The goal of the sleeve for 2023 remains ballast (with upside potential). SVARX has the potential to do well once conditions in the bond market improve. CBLDX is more defensive but has upside potential in a more favorable bond market. HMEZX continues to chug along. Maintaining the ballast and cash sleeves at 20% of the portfolio makes sense to this 70 something investor as 2023 begins (cash = RPHIX and FZFXX). No changes are currently on the horizon.
  • @davfor, good reminder about SVARX. Haven't owned it for a while, and hadn't checked on it lately; it's interesting to see what they've been doing the past few months. It's back on the short list for now.
  • Thanks everyone for your input. A lot to contemplate and maybe FR funds might be more risk than needed. I did see both the pros and cons for FR in the Barron's article. And gradually investing, as @Sven mentioned, may be prudent.

    @larryB, I hope you are wrong with this comment:
    @Hank. +2. And I might point out the esteemed Mr Giroux’s interests and motivations don’t necessarily align with individual investors.
    . Why else would anyone invest with him if that were the case? I trust his interests and motivation does line up with his investors.
  • Recall that DODBX has changed investment policy recently to include some shorting. Its idea was to tame its high volatility.

    Thanks for that info, Yogi. DODBX now goes on my BUY list.
  • @MikeM and Hank. To clarify I did not mean to imply any nefarious intentions on the part of Mr Giroux. Running a multi billion dollar pile of money is entirely different than managing a million or two. All that money has to go someplace. He can hardly place his non equity funds into CD’s T bills and money markets to avoid losses during a period of rapidly rising rates. And he might have a longer horizon than a 75 year old too. Just one guys opinion.
  • edited January 2023
    Here are some snippets from the DODBX Morningstar Analyst Report dated 06/16/2022.

    "In May 2022, a newly formed balanced fund
    committee, which features a well-rounded mix of the
    firm’s equity, fixed-income, and quantitative veterans,
    officially took over management of the fund. The
    committee started as a working group following the
    fund’s sharp losses during the 2020 coronavirus-driven
    bear market."


    "In 2021, it no longer forced the underlying
    stock and bond sleeves to fully mimic Gold-rated Dodge
    & Cox Stock DODGX and Gold-rated Dodge & Cox
    Income DODIX."


    "Other changes the new committee enacted since 2020
    include allowing a small short position in the S&P 500 to
    counter potential market selloffs. They can also sell
    covered-calls on some stocks the analysts believe are
    at or near full value."


    "The increased focus on managing risk is a welcome
    improvement, but a longer track record of execution
    would increase our confidence that the changes will
    lead to a smoother ride going forward."
  • edited January 2023
    @LarryB - I took no offense at your “couched” suggestion. As I said earlier I think it’s “a bit too darkly suggestive.” Sometimes it feels like walking on eggs around here.:)

    I sold PRWCX mid-year after owning it since the 90s. Not because I don’t like the fund. Just because as I’ve aged I’ve grown more conservative. Rather than holding on to both DODBX and PRWCX in my growth sleeve in relatively small amounts I opted just to hang with DODBX. I think the ride with DODBX will be smoother (in part due to the short position @Yogibearbull outlined.) But I’d guess longer term PRWCX will perform better - as it has in the past. Their short position (on the S&P 500) started at 5% and over the past year or so has fallen to just 2% of portfolio. What they have said (paraphrasing here) is that overall they view(ed) the S&P as overvalued, but that they have found bargains in other areas of the market. Makes perfect sense to me.

    I can’t help wondering whether increased “limelight” (public attention) on a manager might lead them to make more mistakes than they would otherwise, whether because they feel somehow compelled to produce outsized returns to go along with that increased attention - or whether they said something in an interview (ie “the 10-year doesn’t get above 2.5% in the next year.”) and are therefore more reluctant to admit their miscalculation and alter the approach that statement supports?

    Giroux is a proven winner. Rough year last year ( -12%), but PRWCX will do fine longer term. And, absolutely, I feel both he and TRP have the highest integrity.

    I’ve never provided my return stats (not that they’re that great) for various reasons, but in part because I don’t want to feel like I’m competing with other posters when making buy-sell decisions. I suspect that it would cause me to take on more risk than prudent and also be more reluctant to admit error and alter course. Thanks to all those who do provide such information, including @MikeM. It adds to the discussions immeasurably.
  • edited January 2023
    I will invest hugely in bond OEFs in 2023, as I have done in the last several years.
    But, I must see an uptrend to be invested. I think 2023 will be a good year.
    You can make several % more in managed bond fund, this is where they shine. Think DODIX for higher rated bonds, HY Munis and good Multi (where I find my best ideas).
    I made 9.7% in 2022, mostly in 3 HY munis trades. See ORNAX (chart). The 3 trades were several days in May + July and several weeks in Nov. All are based on T/A.
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