Gross Trails Index Fund as Top Managers Miss Treasuries Rally

Investor

http://www.bloomberg.com/news/2011-10-06/gross-trails-index-fund-as-top-managers-miss-treasuries-rally.html

He is not alone:

"The bond market is also less efficient than the stock market, said Morningstar analyst Eric Jacobson, because of the number of bonds outstanding and the complexity of the instruments. In theory, that should give active managers an advantage over index funds, he said.

That hasn’t happened over the past five years, when just 25 percent of bond funds beat their benchmarks. That compares with 52 percent of equity-fund managers who outperformed, according to Lipper, a Denver-based research firm. A majority of actively managed bond funds failed to match their benchmarks in 10 of the last 11 years, according to Lipper. Active funds with 10 years of performance lagged behind the benchmarks by an average of 0.45 percent per year, Lipper data show."

GregFromBoston

So your conclusion is...?

In recent years, I have been splitting my bond investing bets between managed funds and indexed strategies. I am not sure these observations will lead me to just abandon ship with the managed funds altogether just yet. One of the risks unique to the index strategies is sampling error. I recall that Vanguard's Total Bond Market Index fund had a big miss due to sampling error early in the 2000s. Presumably even with improved processes, such a problem could happen again in a year in which the bond market misbehaves (relative to the revised model that now drives sampling).

Where do other people stand with respect to the choice between bond index funds, managed bond funds and individual bond holdings (perhaps in a ladder).

AndyJ

Looks to me like the big win for indexes recently is about as much of an artifact of index construction - the winners have happened to be the sector that is the largest by percentage in the index - as it is about the difficulty of running a successful active bond fund. Gross's big blunder had a lot to do with the fact that he went all the way to zero with negative duration, rather than just underweighting T's.

I really agree, though, with M*'s usual point - they bring it up in practically every bond-fund analyst report - that E.R. matters a lot with bond funds, especially when yields are low. Also, let us investor-types not forget how very much recent performance affects even the 3y and 5y relative return numbers.

Just looked at the portfolio spreadsheet, and this house has ~ 30% of core bonds in index funds and 70% in managed funds - although one of the larger "managed" fund positions sticks really close to the index.

There's just a lot of gray in this whole subject - yes, there are index funds, which in the case of bonds, aren't really index funds in the same way stock funds are because you can't own a slice of every bond in the market. But there are also active funds that stick really close to an index, followed by funds that vary somewhat from the index, but keep, say, duration within a certain range around the index's, or limit non-index exposure to 10% or something like that, all the way out the spectrum to the wild and crazy multis and the new-ish 'unconstrained' variety - the latter proving to be pretty much a bust at this point.

Just imho, AJ