I've been changing the mix of my 20-25% of portfolio bond funds distribution. I thought I'd post the funds I'm moving to going forward. I'd like to get your comments and maybe hear what others are planning to do in this bond-unfriendly environment. A couple of these funds I've held for years. A couple are new.
I sold PIMIX in the fall. This was my biggest bond holding at the time. Sold my MWTRX just yesterday. I sold a small investment I had in MAINX, because I just didn't see a need for it (I already have one of the best global bond funds available. I think I just got caught up in all the hoopla here at MFO when MAINX 1st came out.) I was going to keep a sizable investment in short term bonds, PRWBX, but only because I wanted something safer for interest rate increases - but not stuck in cash. I would have loved to get into the Riverpark fund when it was open, RPHYX, but that choice wasn't available in my 401k.
But then I read about the mis-categorized Wells Fargo short term high yield bond fund, SSTHX, that David uncovered in this months commentary. It has returns as good as or better than RPHYX, but with slightly higher volatility. So, the Wells Fargo fund looks like a good fit for me.
So with the thought of rising interest rates and inflation on the horizon - short duration, high yield, floating rate, corporate bonds and maybe global being the sweet spots, here is where I'm at:
5% LSBRX
5% WDHYX
5% PRFRX
5% FGBRX
I have 40% of my portfolio in balanced and allocation funds, so there is more bond exposure that I'll let those managers deal with.
So, what do others think of this collection and what are others thinking of doing (if anything) with higher interest rates looming?
Comments
Old_Skeet here. Where is the other 20% of your portfolio held? Is it in equities? Or, cash?
Have you Xrayed with your proposed changes to see what your end product will look like?
The Xray analysis might show something to confirm what your thinking might, or not, be.
Something to think on.
In terms of entry, I would wait a bit for LSBRX to improve to about 15.16 or so to establish the inflection from its recent downward trend.
Hop on WDHYX and PRFRX now and avoid FGBRX for now to break out of its sideways move over the last two months as there is some risk of a downward move. The macro international environment still looks a bit iffy. So both fundamentals and technicals suggest avoiding it for now.
The only other asset class to keep an eye on as an alternative to global if that should head down is national high yield munis in a taxable portfolio using a conservative fund in this sector. The sector appears to be recovering.
The bond allocation thumb rules came about at a time when treasuries and investment grade bonds were the primary allocations. Decent interest rates, low volatility was the assumption. The idea was that in a bear market, the bonds would provide a stable part that paid you with dividends while you waited for the bear market to end. The age based allocation was also designed for that environment where getting 4-6% dividends with relative safety was not an unreasonable assumption. This is what led to the use of bonds as a safety net and the lack of correlation with equities as people used them primarily for that purpose.
And then the markets evolved and many of the assumptions blew up. New bond sectors became available easily via funds not all of which satisfied that assumption. Long and significant interest rate movements resulted in investors buying bonds for "total return". They started to move back and forth between bonds and equities depending on economic conditions increasing volatility. Some of these sectors were highly correlated with equities because they were sensitive to economic conditions more than to interest rates.
In this climate 40% bonds in a portfolio says very little. You can construct a 70/30 equities/bond portfolio that is more conservative than a 40/60 portfolio depending on what is in the bond section. @junkster here is living proof that you can just have a 100% bond portfolio and capture gains from all economic cycles just as you can with equities and probably has a much riskier portfolio than a conservative equity portfolio. You can have the bond part of the portfolio be highly correlated with equities without providing that safety net in bear markets.
The low interest rates have distorted the picture as well sending people to sectors in search of yield that don't satisfy the original premise anymore.
And yet we still think in terms of a 60/40 portfolio. 40% containing what? Are convertibles in the equity section or bond section?
The bottom line is that we need better tools for individual investors to create portfolios with bond funds that go beyond the simple duration, volatility X-rays. Portfolios need to be created keeping historical correlations with equities in mind and to diversify across bond sectors based on risk adjusted returns and stress testing tools (not to be confused with Monte Carlo simulations) to test for consequences under multiple conditions.
Until then, I think retail investors are better off outsourcing all of this to allocation funds (I believe this is the site founder's preference), portfolios created by competent RIAs or for the so inclined and adept, tactical allocations that are actively managed with trend/momentum strategies.
I didn't consider muni's because this account is tax deferred. But is that the correct thought here? What would be wrong with holding munis in a 401k if they are the bond sector that is making money? My whole intent here is to make positive gains, hopefully in the 5-6% range, in the bond portion of my portfolio.
Thanks again for the input.
My recall from the past 5 years or so is that many "total" or "multisector" bond funds have held muni's for the very reason you note (make a decent profit); not unlike any other bond type.
'Course, the folks managing these funds don't know whether their fund is being held in a taxable or sheltered accounts. They're just trying to make a gain from the investments, eh?
Take care,
Catch
As you suggest, I do benchmark my returns. I use the TRP 2010 target fund that is about a 60:40 mix with a similar volatility (std dev) to my overall portfolio, TRRAX.
Oh, and I will be a very young 60 years old in 11 days!!!
By the way, I'd be interested to hear how your, at one time, all bond portfolio looks today. Have you gravitated more toward equity?
But for a long term buy and hold portfolio, you include an asset class if it helps diversify (lower correlation with others across market cycles) and risk-adjusted returns justify it. High yield munis don't do much of the former relative to equities over a market cycle while they are priced over the long term to justify the latter only after considering the tax advantages. So if you put 5% in it, all you may have done effectively is to move a 60/40 portfolio to the equivalent of a 62/38 or so portfolio with another asset class and fooling yourself that your bond portfolio is making more than otherwise. You can likely get the same returns with less risk with a small increase of equity allocation.
Our house is 40% equity at this time; with 50% multisector and HY bonds and 10% cash (stable value holdings at 1.5 and 3.5% apr).
VIIIX, VITPX, PRHSX, DODGX, ITOT and VSCPX for the equity sectors.
FTBFX, PONDX, LSBDX, DIHYX, DGCIX, FAGIX, FHIIX and SPHIX for the bond sectors.
FRIFX is about a 50/50 split with equity and bond holdings.
There is overlap for holdings; but this is due to several accounts with various vendors.
Still assessing more moves; and watching the first few weeks of this month as to adding to equity from any of the bond funds monies and the cash; which we generally never hold. It appears some funds have more than enough in some cash form; so we don't need to keep extra for our own account, too.
Stay warm at your town, and keep the snowblower ready, eh? Our area is just about normal again from the 18" of snow for our recent 3 day storm with high winds. Most schools will open tomorrow, Thursday; although many of the roads remain ice covered, as the temps are too low for use of chemical treatments.
Take care,
Catch