MFO Newbie--Help with PONAX/Core holdings

Starchild

Hello! I just signed up and need some input. I'm 43 and started investing about 12 years ago, but left a taxable account dormant until last year when I was left two IRAs from my folk's passing and added to the taxable account as well. One of the accounts is managed at JP Morgan where the adviser suggested PONAX/PIMIX respectively. On his suggestion, I set up all 3 accounts with PONAX as my core fixed income holding. My questions are:

1. Ever since I set them up, they've been losing a little each day (Ugh!, although the monthly dividends are good). I understand about the rising interest rates, but should I be concerned? This money won't be touched for a good 20 years and of course I want performance, but mostly peace of mind for the long haul.

2. Should I consider diversifying my fixed income with something other than PIMCO, such as a total bond fund like Vanguard, or anything else? I like simplicity, but concerned about all my egg's in one basket.

As an amateur, I'm here for education, so will mostly be in lurker mode. Many thanks! Starchild.

LewisBraham

@Starchild PONAX has been a strong performer, but it normally carries a 3.75% load/commission to make purchases and has a higher expense ratio 0.90% than other share classes of the same mutual fund. So at the least I would recommend buying a different share class if you can get it--PIMIX if the transaction cost is low. At TD Ameritrade you can also buy PIINX--the administrative share class--without paying a transaction fee and with a $0 minimum investment-- and a lower expense ratio of 0.75% as opposed to 0.90% for PONAX. PIMIX has the lowest expense ratio of 0.50% of the three but the transaction fee as it usually isn't on NTF platforms can be high, so if you buy that it is better to buy one big chunk all at once and not to be buying small amounts over time so you only pay one transaction fee.

Regarding diversification, PONAX/PIMIX/PIINX is pretty well diversified so I'm not sure you need much else if you like this fund. But some diversification that might be worthwhile are a small amount in a floating rate fund such as SAMBX or a small amount of an international bond fund with some emerging market exposure. Bear in mind that interest rates are rising so some argue that bonds in general are unattractive right now as bonds tend to move inversely with rates. That's why a higher quality floating rate fund might be worthwhile as its yields rise with rates. That said, there is increased credit risk with such funds that could be punishing if we enter a recession. Another alternative that could be safer than PONAX or floating rate funds is a high credit quality short-term corporate bond fund as short-term funds are less sensitive to rising rates than long. Hope this helps.

Starchild

LewisBraham said:

@Starchild PONAX has been a strong performer, but it normally carries a 3.75% load/commission to make purchases and has a higher expense ratio 0.90% than other share classes of the same mutual fund. So at the least I would recommend buying a different share class if you can get it--PIMIX if the transaction cost is low. At TD Ameritrade you can also buy PIINX--the administrative share class--without paying a transaction fee and with a $0 minimum investment-- and a lower expense ratio of 0.75% as opposed to 0.90% for PONAX. PIMIX has the lowest expense ratio of 0.50% of the three but the transaction fee as it usually isn't on NTF platforms can be high, so if you buy that it is better to buy one big chunk all at once and not to be buying small amounts over time so you only pay one transaction fee.

Regarding diversification, PONAX/PIMIX/PIINX is pretty well diversified so I'm not sure you need much else if you like this fund. But some diversification that might be worthwhile are a small amount in a floating rate fund such as SAMBX or a small amount of an international bond fund with some emerging market exposure. Bear in mind that interest rates are rising so some argue that bonds in general are unattractive right now as bonds tend to move inversely with rates. That's why a higher quality floating rate fund might be worthwhile as its yields rise with rates. That said, there is increased credit risk with such funds that could be punishing if we enter a recession. Another alternative that could be safer than PONAX or floating rate funds is a short-term corporate bond fund as short-term funds are less sensitive to rising rates than long. Hope this helps.

Thanks Lewis! Unfortunately, those classes are unavailable at either bank (SAMBX as well), although PIMIX is used under the managed account. I could ask the manager if it can be changed, but then he would haunt be to make it a managed account, which he's been doing. In fact, that's another topic I'm curious about, and might search here, using the financial advisor. He's managing the smaller account, but charges 1%. That can add up.

LewisBraham

@Starchild I don't really think it's worth paying any adviser 1% today unless they are giving you a whole lot of advice such as complex estate planning or business succession planning. Otherwise, you could get an adviser with less hand holding at places like Vanguard Personal Advisors:
https://nerdwallet.com/blog/investing/vanguard-personal-advisor-services-review/ for as little as 0.3%. For more handle holding, you still probably shouldn't be paying 1.0% in 2018. You could also buy a few investing books, read investing periodicals and MFO and do it yourself for free.

Crash

@Starchild: what LewisBraham said! No need to pay 1%. That advisor will not like it if you pull out, but you are correct: that 1% adds up! Steel yourself toward his reaction, and get out from under that 1% arrangement. Do your own homework. You can do this yourself, as long as you don't do anything radical and "screw the pooch."
https://www.urbandictionary.com/define.php?term=screw the pooch

You've told us that you can let this money work for you for a long time. So a long-term view of things will be appropriate. Don't let day-to-day ups and downs concern you. Most of your stuff ought to be in well-performing stock funds, and if you want to do it, a smaller portion in bonds. Be aware that bonds are facing headwinds, but it's not the end of the world. All this stuff is cyclical. If you want to "set it and forget it," buy into a "balanced" fund which holds both stocks AND bonds. But they all hold a different AMOUNT of each. No two are the same. I'm most familiar with T Rowe Price, so I'd have you look at RPBAX. But there are dozens and dozens of others, too. RPBAX includes some offshore holdings, too. That's another piece worth thinking about. But don't go "whole hog" into foreign stuff.... I found that it's very helpful simply to get familiar with a lot of the professional financial jargon. ("What do you MEAN, 5 basis points???" Why don't you just say, 5 percent?!) A link: Investopedia. https://www.investopedia.com/
A basic book for you:
https://en.wikipedia.org/wiki/The_Intelligent_Investor

Graham taught Warren Buffett and Charlie Munger, by the way.

LewisBraham

Regarding floating-rate loan funds, here are others:
news.morningstar.com/fund-category-returns/bank-loan/$FOCA$BL.aspx
There are also ETF versions and closed-end fund versions of floating-rate loan strategies that could prove the best options, but it may be a little complex for a newbie to understand the risks and rewards of these.

Sven

@Starchild,

The institutional share, PIMIX, (ER 0.50%) is available at Vanguard brokerage with a $20 transaction fee. The investment minimum is $25K, not $1M as in other brokerages. You can buy more for $2 transaction fee with two consecutive transactions. Vanguard is old school so that you need to speak with a representative. The D class has lower minimum, $3K for example but the ER is higher, and it is widely available as NTF.

Depending which state you live in and your tax bracket, you may want to consider municipal bond funds instead. If you live in a high income tax states and having a high tax bracket, muni bond funds are worthwhile consideration. The dividend from PONIX/PIMIX is taxed as original dividend, i.e. at your tax bracket rate. Dividend from a diversified muni bond funds is not taxable on the federal income, but taxable at the state income. A single state muni bond fund are tax free on both federal and state income. Yields in diversified muni bond funds are lower but it is the after-tax yield is what is important.

Starchild

Thank you all so much! I will look into these funds and ignore the FA. I began by reading the John Bogle book and the Random Walk Down Wall Street one, among other research and devised portfolios app. 80/20 s/b using etf's (SPY, SLY, VO, VEA, etc), some individual stocks, and two mutual funds--PONAX and VTSMX, where I can contribute on a regular basis, finances permitted (I might add VGTSX). I live in NJ, so don't know the tax bracket situation.

Mark

I wonder and would also calculate how much of your total portfolio is held in this fund along with whatever other bond funds that you might be holding. As a 31-yr old when you started you should have had 5-10% at most unless you are extremely risk adverse. Even now at 43, 10-15% seems like a lot but again I have no idea about your tolerance for risk, what else you hold and what your overall portfolio plan looks like. I will say this - when Warren Buffett leaves his fortune to his 80-something year old wife his instructions are to have 90% in an S&P 500 index hund and 10% in a total bond fund. YMMV.

Sven

@Starchild,

I live in NJ, so don't know the tax bracket situation

When you file your tax return this year, your adjusted gross income tells you which tax bracket you are in. NJ is one of high tax state of the northwest region of the county that include state income tax, property tax and sale tax. We have friends who live in that region. Investing in tax efficient index funds and ETFs are the key in taxable accounts. I think you are moving in the right direction. Remember, the 1% FA fee compounds itself and it really eats into your $$. Question is why - when you are young enough to manage your own portfolio? If you have the motivation, the internet provides the necessary tool for you to learn to be an effective investor.

Starchild

Sven said:

@Starchild,

I live in NJ, so don't know the tax bracket situation

When you file your tax return this year, your adjusted gross income tells you which tax bracket you are in. NJ is one of high tax state of the northwest region of the county that include state income tax, property tax and sale tax. We have friends who live in that region. Investing in tax efficient index funds and ETFs are the key in taxable accounts. I think you are moving in the right direction. Remember, the 1% FA fee compounds itself and it really eats into your $$. Question is why - when you are young enough to manage your own portfolio? If you have the motivation, the internet provides the necessary tool for you to learn to be an effective investor.

Thanks Sven!

Starchild

Mark said:

I wonder and would also calculate how much of your total portfolio is held in this fund along with whatever other bond funds that you might be holding. As a 31-yr old when you started you should have had 5-10% at most unless you are extremely risk adverse. Even now at 43, 10-15% seems like a lot but again I have no idea about your tolerance for risk, what else you hold and what your overall portfolio plan looks like. I will say this - when Warren Buffett leaves his fortune to his 80-something year old wife his instructions are to have 90% in an S&P 500 index hund and 10% in a total bond fund. YMMV.

I was a renegade at 31 Mark, all individual stocks lol! In all honesty, there wasn't a whole lot in it. Luckily, they worked out. Now, I'm with you, index funds all the way.

catch22

Hi @Crash
You noted previous: "I found that it's very helpful simply to get familiar with a lot of the professional financial jargon. ("What do you MEAN, 5 basis points???" Why don't you just say, 5 percent?!"


---A basis point is the smallest measure used in quoting yields on fixed income products. Basis points also pertain to interest rates. One basis point is equal to one one-hundredth of one percentage point (0.01%). Therefore, 100 basis points would be equivalent to 1%.

Regards,
Catch

Crash

But .05 is still 5%. Ork?

Starchild

Crash said:

@Starchild: what LewisBraham said! No need to pay 1%. That advisor will not like it if you pull out, but you are correct: that 1% adds up! Steel yourself toward his reaction, and get out from under that 1% arrangement. Do your own homework. You can do this yourself, as long as you don't do anything radical and "screw the pooch."
https://www.urbandictionary.com/define.php?term=screw the pooch

You've told us that you can let this money work for you for a long time. So a long-term view of things will be appropriate. Don't let day-to-day ups and downs concern you. Most of your stuff ought to be in well-performing stock funds, and if you want to do it, a smaller portion in bonds. Be aware that bonds are facing headwinds, but it's not the end of the world. All this stuff is cyclical. If you want to "set it and forget it," buy into a "balanced" fund which holds both stocks AND bonds. But they all hold a different AMOUNT of each. No two are the same. I'm most familiar with T Rowe Price, so I'd have you look at RPBAX. But there are dozens and dozens of others, too. RPBAX includes some offshore holdings, too. That's another piece worth thinking about. But don't go "whole hog" into foreign stuff.... I found that it's very helpful simply to get familiar with a lot of the professional financial jargon. ("What do you MEAN, 5 basis points???" Why don't you just say, 5 percent?!) A link: Investopedia. https://www.investopedia.com/
A basic book for you:
https://en.wikipedia.org/wiki/The_Intelligent_Investor

Graham taught Warren Buffett and Charlie Munger, by the way.

Thanks @crash! You guys are awesome!

msf

I know a few people who are paying 1% - some are getting a good amount of help with their financial situations (i.e. are getting reasonable value for their money), some are getting investment help and some long term planning (IMHO not in itself worth the 1%, but these people also seem to derive value from the personal handholding).

If, as it sounds here, all you're looking for is investment selection and management, I agree with Lewis that something like Vanguard Personal Advisors (a hybrid robo/human offering) or a pure robo advisor would fit the bill.

Regarding PONAX and other bond funds: PONAX is NTF (no fee, no load) at many brokerages now. If you're investing at least $25K, it's worth paying a transaction fee to buy the cheaper PINIX shares, especially if you're looking to buy-and-hold. Vanguard has a $25K min, most other places require at least $100K.

Most people here seem to be enthusiastic about the fund. I'll be the wet blanket. The manager is excellent and I doubt over any long period of time the fund would be a poor choice. But it's focused on asset backed securities(ABS) - a few years ago on mortgages (a form of ABS), more recently on non-mortgage ABS. These have their own risks and rewards; the fact that they have done well does not mean they will continue to do so. See these columns:

http://www.morningstar.com/articles/834221/is-pimco-income-the-new-total-return.html (how PONAX did well with mortgages, but that market's risk/reward has worsened), and

https://www.housingwire.com/articles/39045-morningstar-heres-the-impact-of-rising-interest-rates-on-mortgage-backed-securities (unique risks in mortgage backed securities that may manifest with rising interest rates)

Non-mortgage ABS are yet again different from vanilla bonds. (See investment characteristics in this page.) So again, the behavior may not be what one expects.

Thus I agree again (at least partially) with Lewis that you might benefit from adding a more vanilla bond fund, something like a short to intermediate term corporate. (IMHO index funds are too heavily weighted toward lower yielding, though higher quality, Treasuries.)

davidrmoran

With so much in PONAX I do fret rate hikes. But except for the 12/15 one, when its time to recovery was three months (if I am reading things right), all of the others (12/16, three last year, one a month ago) have had trivial effect.

Performance since mid-Jan has not been great, for whatever reasons, but still better than a variety of other bond funds, vanilla and not (FSICX, AGG, FAGIX, FTBFX, DODIX, MWTIX, PYACX). So I have not yet diversified out of it.

Starchild

msf said:

I know a few people who are paying 1% - some are getting a good amount of help with their financial situations (i.e. are getting reasonable value for their money), some are getting investment help and some long term planning (IMHO not in itself worth the 1%, but these people also seem to derive value from the personal handholding).

If, as it sounds here, all you're looking for is investment selection and management, I agree with Lewis that something like Vanguard Personal Advisors (a hybrid robo/human offering) or a pure robo advisor would fit the bill.

Regarding PONAX and other bond funds: PONAX is NTF (no fee, no load) at many brokerages now. If you're investing at least $25K, it's worth paying a transaction fee to buy the cheaper PINIX shares, especially if you're looking to buy-and-hold. Vanguard has a $25K min, most other places require at least $100K.

Most people here seem to be enthusiastic about the fund. I'll be the wet blanket. The manager is excellent and I doubt over any long period of time the fund would be a poor choice. But it's focused on asset backed securities(ABS) - a few years ago on mortgages (a form of ABS), more recently on non-mortgage ABS. These have their own risks and rewards; the fact that they have done well does not mean they will continue to do so. See these columns:

http://www.morningstar.com/articles/834221/is-pimco-income-the-new-total-return.html (how PONAX did well with mortgages, but that market's risk/reward has worsened), and

https://www.housingwire.com/articles/39045-morningstar-heres-the-impact-of-rising-interest-rates-on-mortgage-backed-securities (unique risks in mortgage backed securities that may manifest with rising interest rates)

Non-mortgage ABS are yet again different from vanilla bonds. (See investment characteristics in this page.) So again, the behavior may not be what one expects.

Thus I agree again (at least partially) with Lewis that you might benefit from adding a more vanilla bond fund, something like a short to intermediate term corporate. (IMHO index funds are too heavily weighted toward lower yielding, though higher quality, Treasuries.)

This is very helpful and much appreciated. Bonds are new to me, and really want something I don't want to worry too much about. PONAX seems diverse, and has a positive track record for a good 10 years, and as the other poster mentioned, has not gotten as bad a hit as of late compared to other bond funds.

I think adding something more vanilla, like VBMFX, or one of Vanguard's corp/int'l funds could be a good idea as you suggested, but it might be wise to let rates settle first.

I also feel that you guys are right about the FA. Aside from my bond uncertainty, I'm generally happy with my AA so far, and don't think it's really necessary to give this guy a quarterly cut for making slight adjustments here and there.

Thanks again!

davidrmoran

VBMFX exactly tracks AGG except for being slightly lesser due to expenses, so my comparative comments above apply to it as well. A fine and completely tame choice with steady performance '08-'09 too.