Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
You ask a very prudent question. The direct answer is "yes, we are still putting dollars in bond funds." The details are much more obtuse. As you know, we have been avoiding long-term treasuries for more than 2 years (yeah, we were cautious too soon). But the last few weeks tell us our concerns were correct, if not too early. We have also been using managers with pretty flexible mandates. These include OSTIX, GSZIX, EIGMX, BSIIX, LASYX, LSBDX. There is much less flexibility when it comes to international bond funds (TRULY international, non-U.S.). TGBAX has done ok YTD, while GIMDX had a great 4 months, but the last week has been really tough. And despite the losses in many bond funds recently, most fared a whole lot better than stock funds last Friday.
Why would we continue to buy into bonds now? The answer is that bonds, despite the potential fallout over higher interest rates and other concerns, are less volatile than stocks. A recent Vanguard paper made three very good points:
1. Investors trying to time portfolio shifts around expectations of rising interest rates should note that interest rates movements tend to follow a "random walk" and to be driven by "new" economic events, thus making interest rate predictions little more than guesswork.
2. If investors have risk tolerance defined by a maximum tolerable loss, their assets allocations should become more conservative (i.e., increase bond exposure) and their return expectations lower. Reason: At these low rates, offsetting bond price increases won't happen in equity bear markets.
3. If investors place a premium on generating higher returns (versus lowering downside risk), and are reducing their bond exposure in favor of more equities, they must be willing to tolerate more downside risk in their portfolios.
We still think bond managers with flexible mandates offer perhaps the least-volatile path going forward and at this point we have not changed the managers with whom we trust our client fixed-income dollars. We always maintain dollars expected to be used for cash flow over the next 6-12 months in cash, CDs or short-term bonds. We might increase the cash part of the allocation a bit, but no overall change in strategy.
What are your thoughts about the use of leveraged CEF bond funds and unconstrained bond funds (SUBFX, MWCIX, PFIUX, HAUBX) at this time ? Thanks in advance.
Reply to @ron: I am less concerned about this issue if the fund has a flexible mandate and if I know the management viewpoints and how it might change as rates rise, if they have not already done so. I would be REALLY concerned if the fund was not structured this way and I was in a domestic bond fund that currently holds a lot of interest rate sensitive positions. Vanguard Long-Term Treasury would be perhaps one of the worst examples of this now.
PFIUX and HAUBX are run by the same PIMCO manager. There are some differences, but the general philisophy is the same. The folks running MWCIX are actually TCW managers. And the SUBFX team has extensive experience, also. Both of these funds are brand new, so it is hard to evaluate either. We do not use these, but there are a lot of great managers, and we cannot use them all.
I am very cautious about CEFs in this asset group, but there may be some value to searching for underpriced leveraged bonds there. Being flexible could be as important as anything in the first stages of higher rates.
On the theme of unconstrained bond funds and bond CEFs, what do you think of PDI? The NAV is up over the last month but yet the fund has gone from a premium to 7- 8% discount.
Dan Ivascyn, who manages PIMIX and PDI, is the real deal. We have a 5% position in PIMIX, and today I bought a 5% position in PDI. As you noted, the NAV has held up well and I think the market price will head up after this recent interest rate shock has subsided. Obviously, do your own DD, but I like PDI.
Reply to @kevindow: what helps is that PDI is totally hedged and has in fact negative duration.. it's harder to do for PIMIX, so PDI's NAV held up better than that of its OEF sister. it is indeed a great buy at the current discount.
A couple of other positives. Ivascyn has previously stepped in to buy shares in PDI. Also, the 1 month IPO holding period on DSL just expired. It is likely that holders of PDI sold it to buy DSL at the IPO. Some of that money might find its way back to PDI.
I am long PDI. Now, if only we can have a similar discount emerge for GIM...
Reply to @BWG: I was looking at this on Schwab, and if I'm understanding their charts correctly the current discount appears to be about 0.8 or 0.9%. Is there perhaps a decimal point error or am I not understanding this correctly? (Don't know much about this area.)
I "see" what you are viewing; as Fido is similar..."a one month average" number, as viewed here. Fido's number is from April 30.
Hoping you're not as tired as I, with the "project". I must already be ready for apartment living and paying everyone to do all of the other chores. Take care of yourselves, Catch
I thought that I had replied earlier, but I must have pressed the wrong button or something. What this site needs is a decent user guide.
Thanks for your help on the percentage data- appreciate it.
Not only tired on remodel but fast approaching "sick and tired" of the whole thing. And we're just getting into the serious parts. Take care and good luck on your end!
Comments
Why would we continue to buy into bonds now? The answer is that bonds, despite the potential fallout over higher interest rates and other concerns, are less volatile than stocks. A recent Vanguard paper made three very good points:
1. Investors trying to time portfolio shifts around expectations of rising interest rates should note that interest rates movements tend to follow a "random walk" and to be driven by "new" economic events, thus making interest rate predictions little more than guesswork.
2. If investors have risk tolerance defined by a maximum tolerable loss, their assets allocations should become more conservative (i.e., increase bond exposure) and their return expectations lower. Reason: At these low rates, offsetting bond price increases won't happen in equity bear markets.
3. If investors place a premium on generating higher returns (versus lowering downside risk), and are reducing their bond exposure in favor of more equities, they must be willing to tolerate more downside risk in their portfolios.
We still think bond managers with flexible mandates offer perhaps the least-volatile path going forward and at this point we have not changed the managers with whom we trust our client fixed-income dollars. We always maintain dollars expected to be used for cash flow over the next 6-12 months in cash, CDs or short-term bonds. We might increase the cash part of the allocation a bit, but no overall change in strategy.
Kevin
I am very cautious about CEFs in this asset group, but there may be some value to searching for underpriced leveraged bonds there. Being flexible could be as important as anything in the first stages of higher rates.
On the theme of unconstrained bond funds and bond CEFs, what do you think of PDI? The NAV is up over the last month but yet the fund has gone from a premium to 7- 8% discount.
BWG
Hi BWG,
Dan Ivascyn, who manages PIMIX and PDI, is the real deal. We have a 5% position in PIMIX, and today I bought a 5% position in PDI. As you noted, the NAV has held up well and I think the market price will head up after this recent interest rate shock has subsided. Obviously, do your own DD, but I like PDI.
Kevin
Hi fundalarm and Kevin,
A couple of other positives. Ivascyn has previously stepped in to buy shares in PDI. Also, the 1 month IPO holding period on DSL just expired. It is likely that holders of PDI sold it to buy DSL at the IPO. Some of that money might find its way back to PDI.
I am long PDI. Now, if only we can have a similar discount emerge for GIM...
BWG
Thanks-
OJ
http://us.allianzgi.com/Products/pages/631.aspx
As always, please do your own DD.
BWG
Here's the M* view page
I "see" what you are viewing; as Fido is similar..."a one month average" number, as viewed here. Fido's number is from April 30.
Hoping you're not as tired as I, with the "project". I must already be ready for apartment living and paying everyone to do all of the other chores.
Take care of yourselves,
Catch
I thought that I had replied earlier, but I must have pressed the wrong button or something. What this site needs is a decent user guide.
Thanks for your help on the percentage data- appreciate it.
Not only tired on remodel but fast approaching "sick and tired" of the whole thing. And we're just getting into the serious parts. Take care and good luck on your end!
OJ