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I'm connecting this with my holding in DLFNX (DoubleLine "core") which I've seen referred to here as a core-plus fund. I've owned it for just over 2 years, now. It's a tiny slice of my pie, 2.56% of portfolio. It's taken two years for it to gain 5.7% for me. I'll keep it.
"Like high yield debt, Core Plus products are positively correlated with equities" "Because of the intentionally similar name, Core Plus may have some people convinced that they can add a bit of risk and still get the protection they expect from core bonds, but if you end up adding a lot more risk than you realize for only slightly better yields the change could easily backfire"
I agree with John, that this article paints a broad brush. Would be nice to know in aggregate what % of non-investment grade fixed income the Core Plus funds invest in. The name Core Plus could be deceiving.
Looks like your fund is doing a good job in not abusing its mandate, not abusing the name "Core Plus". I agree, there's going to be a wide interpretation of the term Core Plus. Personally I prefer that the term be used to primarily designate a core fund, with some but not excessive activity around the edges, like your fund is doing.
You know this is the reason I simply don't own bond funds straight. PTTRX is one that I owned, and no more. The only other "bond" funds I own are RPHYX, RSIVX, RNDLX and ARTFX. At least that I know off...
I get very shaken instead of stirred talking about "bond".
If one wants to discuss how people are adding risk by reaching for yield, that's fine - and that's basically the lead sentence in the article. But the writer seems to have an agenda, and has slanted graphs and omitted data to that end.
(Disclaimer: I am a fan of Core Plus bonds - in my view, Core is to Core Plus as S&P 500 is to Total US Equity Market. In each case, the latter provides broader and better exposure to their respective markets - US bond and US equity.)
Everyone "knows" that the US Aggregate Bond Index (tracked by AGG) is much too heavy into government securities. Even Bogle says so, and suggests the index is weighted about 70% in Treasuries and other government bonds.
So when I look at Chart 1 (correlation coefficients), what jumps out at me is not that Core Plus is (slightly) correlated with equities, but rather that a good chunk, if not all, of AGG's (slight) negative correlation with equities could be coming from its heavy slug of government bonds (which the chart shows have a much stronger negative correlation with equities).
What this suggests is that if we were to look at Core Bond funds' correlation with equities (since they rightfully tend to have much lower percentages of Treasury/government holdings than AGG) is that they would have virtually zero, or perhaps even a slight correlation with equities. To me it is telling that the writer provided a core plus bond composite, but not a core bond composite. That likely would have undercut his thesis that there's a lot of difference between core and core plus.
Take the data from that chart, and look at the R-squared values for Core Plus and Aggregate. They're about 10% - close to meaningless.
Look at Table 2. The writer implies, without justification, that because Core Plus bond funds contain some junk bonds, their volatility will be similar to junk bonds. Table 2 shows 14.5 year (curious choice) volatility (std deviation) figures US Agg, junk, and equities. But missing are core bond and core bond plus figures.
This is a suspicious omission, since Chart 1 provides data for core plus, and Chart 3 provides a graph for core bonds (using Wells Fargo Advantage Core Bond as a proxy). I'll remedy that. Using M*'s figures for 15 years (14.5 is not a standard time range), we have
Std Dev Sharpe Core (MBFIX) 3.59 1.12 Core+ (WIPIX) 3.53 0.98 Agg Index 3.50 0.99 S&P 500 Indx 15.38 0.26
The naive idea that adding a modest amount of a volatile asset (junk bonds) to a portfolio will necessarily make it more volatile is wrong. The obvious (albeit contrived) counter example is to add to a portfolio an asset that is volatile and perfectly negatively correlated with the portfolio. Adding a small amount of that asset will reduce the portfolio's volatility.
What one sees here (between Core and Core Plus) is little difference. (I used WIPIX, since the writer selected to use MBFIX, so I simply used the Core Plus representative from the same family.)
I could skewer Chart 3 as misleading also, but you get the point.
If you're really concerned about Core Plus funds that are "too" aggressive, just avoid funds whose portfolios are rated low grade by M*. Lots aren't.
Comments
"Because of the intentionally similar name, Core Plus may have some people convinced that they can add a bit of risk and still get the protection they expect from core bonds, but if you end up adding a lot more risk than you realize for only slightly better yields the change could easily backfire"
I agree with John, that this article paints a broad brush. Would be nice to know in aggregate what % of non-investment grade fixed income the Core Plus funds invest in. The name Core Plus could be deceiving.
AAA. 45.88%
AA. 8.81%
A. 9.65%
BBB. 19.88%
BB. 8.38%
B. 4.10%
CCC. 1.28%
CC. 0.32%
C and below. 1.69%
Per the prospectus; at least 65% in investment grade. Up to 35% in high yield and or emerging market debt. No more than 10% in non-dollar debt.
I'm sure every fund will interpret the Plus differently. Some may be hinging on unconstrained.
I get very shaken instead of stirred talking about "bond".
(Disclaimer: I am a fan of Core Plus bonds - in my view, Core is to Core Plus as S&P 500 is to Total US Equity Market. In each case, the latter provides broader and better exposure to their respective markets - US bond and US equity.)
Everyone "knows" that the US Aggregate Bond Index (tracked by AGG) is much too heavy into government securities. Even Bogle says so, and suggests the index is weighted about 70% in Treasuries and other government bonds.
So when I look at Chart 1 (correlation coefficients), what jumps out at me is not that Core Plus is (slightly) correlated with equities, but rather that a good chunk, if not all, of AGG's (slight) negative correlation with equities could be coming from its heavy slug of government bonds (which the chart shows have a much stronger negative correlation with equities).
What this suggests is that if we were to look at Core Bond funds' correlation with equities (since they rightfully tend to have much lower percentages of Treasury/government holdings than AGG) is that they would have virtually zero, or perhaps even a slight correlation with equities. To me it is telling that the writer provided a core plus bond composite, but not a core bond composite. That likely would have undercut his thesis that there's a lot of difference between core and core plus.
Take the data from that chart, and look at the R-squared values for Core Plus and Aggregate. They're about 10% - close to meaningless.
Look at Table 2. The writer implies, without justification, that because Core Plus bond funds contain some junk bonds, their volatility will be similar to junk bonds. Table 2 shows 14.5 year (curious choice) volatility (std deviation) figures US Agg, junk, and equities. But missing are core bond and core bond plus figures.
This is a suspicious omission, since Chart 1 provides data for core plus, and Chart 3 provides a graph for core bonds (using Wells Fargo Advantage Core Bond as a proxy).
I'll remedy that. Using M*'s figures for 15 years (14.5 is not a standard time range), we have The naive idea that adding a modest amount of a volatile asset (junk bonds) to a portfolio will necessarily make it more volatile is wrong. The obvious (albeit contrived) counter example is to add to a portfolio an asset that is volatile and perfectly negatively correlated with the portfolio. Adding a small amount of that asset will reduce the portfolio's volatility.
What one sees here (between Core and Core Plus) is little difference. (I used WIPIX, since the writer selected to use MBFIX, so I simply used the Core Plus representative from the same family.)
I could skewer Chart 3 as misleading also, but you get the point.
If you're really concerned about Core Plus funds that are "too" aggressive, just avoid funds whose portfolios are rated low grade by M*. Lots aren't.