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Maximal Drawdowns

Maybe I am missing something, but when I calculate the change in either value or NAV of most of the bond funds listed in Charles Bolin's Seeking Alpha article I get far higher drops then the MFO statistics show.

Example VCOBX, MFO lists a DD over last year or during Covid crash of minus 0.8, but the NAV dropped from $21.48 (3/6/2020) to $20.20 ( 3/19), a drop of 6%

There were no dividends paid during this time, and even adding back in a proportion of the dividend of $0.04430 paid 3/31, you still get a drop of 5.8%.

Even the drop on a monthly basis for March is 0.8%.

Morningstar listed the Maximum Drawdown over all time periods as 2.7% from 2017 to 2018.

The definition of Maximal Drawdown MFO uses is " The percentage of greatest reduction in fund value below its previous maximum over period evaluated".

Comments

  • @sma3,

    Following the definition of maximum drawdown for this year, I come up with similar MAXDD value as you did for VCOBX: -6.8% versus -0.8% (MFO).

    NAV = $21.48 on 3/6/20 - peak date
    NAV = $20.02 on 3/19/20 - bottom date

    The other difference I found was that the recovery to reach the same NAV was 29 days and MFO reported 2 months.

    I understand that MFO uses Lipper database to derive their data. It is possible there is a systematic error on how Lipper is calculating the MAXDD.

    @charles, can you help with this question? Thanks
  • edited October 19
    MAXDD is a monthly number and why VCOBX is only at -0.8%. Use 03/01-04/1. See this (link).
  • edited October 19
    Have not checked this fund history yet, but ...

    MFO uses month ending total return. Not daily returns. So, intra-month, like 3/18 illiquidity hell, does not get picked-up.

    Besides, if you have to watch your investments daily, is it really an investment?

    (Just kidding ... the world reacted that week as if an asteroid was inbound!)

    c
  • Also, MAXDD is for specific evaluation period specified. So, 1-, 3-, 5-year MAXDD for same March 2009 drawdown can all be different.
  • @charles, @FD1k, thank you for the explanation. Think the strict definition was the source of confusion.
  • Well that explains why VCOBX lost over 6.8% at the bottom and even 4% from first of March to the bottom, but can claim it's "maximal drawdown" is only 0.8% for the two months.

    It seems somewhat disingenuous to limit the calculations to a month to month only statistic. A loss of 7% in a bond fund would unnerve a lot of people and it is only through the grace of the Fed that things snapped back so quickly.

    With wide swings and Fed intervention it seems like time to change the definition of MaxDD to more accurately reflect losses like this.
  • VCOBX YTD 8.82 % As / Schwab
    I guess I would have to ask how it compared to like funds?
    Stay Safe, Derf
  • +1 sma That's why I look at the worst 3 month period(not limited to calendar quarters) listed at Schwab for any funds I invest in. The period covered seems to go back to the 2007-2008 timeframe.
  • Maybe one should incorporate recovery time when looking at MDD ? I believe (NAV) came back in a couple of months for VOCBX. I'm still waiting on a couple of funds to recover to their last high !
    Stay Safe, Derf
  • Concur. Recovery duration is the other half of criterion when consider MAXDD. I prefer those with shorter duration and VCORX is one example versus PIMIX, one month versus 6 months. Remember during 2008's MAXDD it took over 24 months to recover. That is a deep hole that took a long time to climb out.
  • @Derf Portfolio Visualizer offers this information. After entering your mutual fund or ETF in the MaxDD column, the Max DD data has an "i" next to it. Hover over this symbol and it will open a dialog box that provides both the month DD and the recovery time (months and year).

    https://portfoliovisualizer.com/backtest-portfolio
  • Port Viz is also month to month data not daily data.
  • edited October 25
    We do include recovery time (months underwater), actually both decline and ascent periods as well.

    I absolutely agree that condensed volatility made the monthly returns seem inadequate. But maybe not, at least for investment grade bonds and US equities. I'll cite DODIX and SPY as examples.

    I've honestly still not completely reconciled March events.

    I know it's a reminder that no investment is immune from drawdown, 'cept perhaps CDs.

    I think it makes you genuinely ask that if you have to watch your investments daily, then perhaps they are not investments at all but trades ... or, they are not investment quality.

    Sure, when the world is ending, no investment is safe. But short of that, if it just feels like it's ending, like it did in mid-March (and certain times in 2008-2009), while good investments (SPY) may draw down, we can expect recovery ... just based on stress tests of historical events.

    March was a kind of litmus test.

    It compressed GFC into 2-3 weeks!
  • Sven said:

    Concur. Recovery duration is the other half of criterion when consider MAXDD. I prefer those with shorter duration and VCORX is one example versus PIMIX, one month versus 6 months. Remember during 2008's MAXDD it took over 24 months to recover. That is a deep hole that took a long time to climb out.

    by long you mean short, I think
  • Great discussions and sorry that I am late responding, but I see Charles has responded with the correct answer - drawdowns are based on monthly data. I agree with the comments about performance being relative to other funds for the time period.

    I think we are headed into unchartered (In recent history) investment waters with high valuations and extremely low interest rates. For future articles, I am looking at fund performance during the 1960's and 70's when interest rates rose so much. Over longer time periods, bonds still offer downside protection and moderate returns even given rising rates. I have moved to shorter durations and am contemplating paying of my mortgage. I still own some intermediate bond funds.

    I prefer funds that actively manage risk and have the flexibility to shift investments instead of me changing funds.

    Best Regards,
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