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.
Virtually EVERYONE has been warning of a bond collapse of some kind over the last three years. Admittedly, I, too, thought rates would be higher by now. But then I actually thought the out-of-control federal spending might do more for real employment numbers than it has. That being said, Gross, Gundlach, and all the other bond grinches are telling us that the bubble is ready to burst. They will eventually be right, probably. But it certainly does not appear to be imminent. Most of the downside can be sidestepped by owning bonds with flexible strategies, and those that have reduced durations over the last couple of years. An even more logical step is to stay away from long-term U.S. government bond funds, which would appear to have the most downside risk IF interest rates spike.
Don't know about Abby. I think Ted nailed her pretty well. But I do know something goofy's happening in bond land - virtually all flavors stripes and colors. If this was just Treasuries or high-grade corporates, I'd say it's confirmation of a looming recession or depression. But - Com'on folks! Junk bond's don't soar in response to impending financial collapse. No, something else's going on. If you haven't seen David's "Trees Don't Grow to the Sky" essay, give it a look. He's boiled down to easy-read length a topic on which volumes have been written over recent years. I'm not into doomsday prophesies - which seldom live up to the hype. However, as a novice investor I do care about "relative valuations" among asset classes. When any asset class's valuations have risen year after year, and when flows IN continue to increase despite these high valuations, than you're setting the stage for something most unwelcome to occur. The timing, shape, scope, severity of the eventual outcome are highly speculative. No one knows. That's why the ramblings of Gundlach may seem vague or disjointed.
My high yield bond fund (PRHYX) has been a staple for well over a decade, rarely disappointing - though '08 was tough on this sector. Originally conceived as a low-octane substitute for equities, I'm afraid I've come to gradually view it more as an income component while gradually incorporating additional equity funds into the mix. I know there's something called "scope creep" which occurs when a fund manager invests outside the originally intended area. (perhaps buying small caps for a large cap fund). As individual investors we may be subject to something similar. Perspective creep?
Reluctantly, I'll be shifting my PRHYX assets this week into the newer and smaller PRFRX - Price's new floating rate fund. Floating rate funds have somewhat lower credit risk, since the loans they invest in are issued by banks to borrowing companies or institutions. They still represent loans to lower credit risk borrowers and are still considered speculative. But in bankruptcy proceedings (as I understand it) get repaid in higher order than do junk bonds. Secondly, and more importantly, floating rate bonds hold up better in rising rate environments than do most bonds - as rates are continually shifted upward on the outstanding debt.
Not an easy call. PRFRX has returned only 7.44% over 1-YR as compared to 15.56% for PRHYX. I imagine the disparity will continue awhile longer. Also, am aware that PRHYX has closed to new investors. Exiting will be final. In truth, it has grown to behemoth proportions as dumb money has piled in over the years. I wonder going forward how they will manage such a monster. PRFRX, on the other hand, is quite new and only a fraction the size. Hopefully this will allow managers to be more nimble and take advantage of opportunities that arise. BTW: I still own one domestic bond fund, DODIX, also some internationals - and a few hybrids that hold bonds, namely: RPSIX, TRRIX, and OAKBX. Also hold one balanced fund, DODBX, which has limited bond exposure.
Thanks for reading all this. (You can buy some No-Doze at Amazon:-)
"When any asset class's valuations have risen year after year, and when flows IN continue to increase despite these high valuations, than you're setting the stage for something most unwelcome to occur. The timing, shape, scope, severity of the eventual outcome are highly speculative. No one knows."
Yes, and this could be written for any equity sector, too; foreign or domestic.
You do not plan to keep any of the high yield fund?
I have been worried for some time about bonds. But then I always worry. The risk-on trade for bonds has been working since December 16, 2008, a day I shall never forget. That was the day Bernanke served it up on a silver platter. Does the archives for Fundalarm still exist?
I am also especially concerned about what January may bring. But even more so, I am a big believer in sticking with what is working and leave the predictions and forecasts to the fortune tellers. So for now I am
Reply to @fundalarm: PMZDX is my kind of fund - a brand new fund in a hot category at a hot firm. And has it been outperforming! But it is not available at Scottrade. PMZIX is available for a $1,000,000 minimum but that would mean I would have to roll out of too much of my PONDX, something I am not willing to do. Plus I always buy in increments and a million initial purchase would be too outsized a purchase for that strategy based on my account size.
PRAFX is TRP Real Assets fund. It's not a floating rate fund. I would consider High Yield to Floating Rate as a reasonable change but the fund you have quote, PRAFX is a very different animal.
Reply to @catch22: Hi Catch. In the words of the Master, I was struggling to write "a shorter, (more) inviting essay" so did not elaborate further, having already tried the patience of any rational reader. Yes, your point about many assets apperaring bubble-like is correct. I found it odd that Gundlach is selling bonds only to buy equities, as I'd expect whatever lies ahead to "ding" both at about the same time. If he's as smart as they say, I'd think he'd bail from bonds at just the right moment, than wait for equities to stumble before buying back in. But, what do I know?
Yes, I am selling all shares of PRHYX (my only high yield fund). It's not a large or momentious move in terms of total allocation. As a part of the "buy and hold" segment it's roughly 20%. As a part of the larger total, less than 14%. So, in large measure this is an academic debate (with myself:-) and of little consequence in terms of overall returns. The percentages are low because I'm diversified into a number of hybrid products - most of which will dabble in high yield bonds when valuations warrant. OAKBX is one I like a lot. I've concluded the current underperformance is not so much a reflection on management as a consequence of their having been early in vacating their bond positions in the face of what they consider unacceptable risk-reward metrics.
Getting back to your original observation. All investments involve risk. It's really a matter of where one wishes to place his bets. I tend to view fixed income as the more stable part of a portfolio. This is not the area where I want to "stretch" in search of outsized reward. (I'm sure the point David was establishing with his opening remarks is that many people don't understand the risks they are taking with bonds.) I'm content to stick with equity funds and the assorted hybrids already noted in search of reasonable return. Also, I recently started a very small position (2-3%) in a gold mining fund - in case things unravel in a nastier way than one would hope for or expect. Thanks for asking, Regards
Reply to @Hiyield007: Your knowledgte of this sector is unparallelled. I'm trying to foresee the possibilities on how this will end. Crystal ball quite foggy. Fed is committed to near 0 short term rates for far as the eye can see. That probably won't keep rates farther up the curve from climbing. Even short term bond funds could take a bath over a short period of time.
Another senereo is the economic winds get so turbulent (You name it: inflation, debt ceililng, unemployment, dollar crisis) that there's a shake up at the Fed. In that case the promise to hold rates low into infinity won't amount to a cup of warm spit.
I'm sure your allocation is the right one for you. As indicated in my reply to Catch, my allocation in HY was relatively small. Not a market call. As Bob C noted "the end" has been forcast for many years now. This may continue for another 5, 10, 20 years. I don't follow it as closely as you do, so for me "backing-off" now is the right course. Regards
Comments
robert-kessler--us-treasuries-are-still-the-place-to-be
A previous interview:
investmentnews.com/section/video?playerType=CMWealth&bctid=1369795436001
My high yield bond fund (PRHYX) has been a staple for well over a decade, rarely disappointing - though '08 was tough on this sector. Originally conceived as a low-octane substitute for equities, I'm afraid I've come to gradually view it more as an income component while gradually incorporating additional equity funds into the mix. I know there's something called "scope creep" which occurs when a fund manager invests outside the originally intended area. (perhaps buying small caps for a large cap fund). As individual investors we may be subject to something similar. Perspective creep?
Reluctantly, I'll be shifting my PRHYX assets this week into the newer and smaller PRFRX - Price's new floating rate fund. Floating rate funds have somewhat lower credit risk, since the loans they invest in are issued by banks to borrowing companies or institutions. They still represent loans to lower credit risk borrowers and are still considered speculative. But in bankruptcy proceedings (as I understand it) get repaid in higher order than do junk bonds. Secondly, and more importantly, floating rate bonds hold up better in rising rate environments than do most bonds - as rates are continually shifted upward on the outstanding debt.
Not an easy call. PRFRX has returned only 7.44% over 1-YR as compared to 15.56% for PRHYX. I imagine the disparity will continue awhile longer. Also, am aware that PRHYX has closed to new investors. Exiting will be final. In truth, it has grown to behemoth proportions as dumb money has piled in over the years. I wonder going forward how they will manage such a monster. PRFRX, on the other hand, is quite new and only a fraction the size. Hopefully this will allow managers to be more nimble and take advantage of opportunities that arise. BTW: I still own one domestic bond fund, DODIX, also some internationals - and a few hybrids that hold bonds, namely: RPSIX, TRRIX, and OAKBX. Also hold one balanced fund, DODBX, which has limited bond exposure.
Thanks for reading all this. (You can buy some No-Doze at Amazon:-)
You noted: Yes, and this could be written for any equity sector, too; foreign or domestic.
You do not plan to keep any of the high yield fund?
Take care,
Catch
I am also especially concerned about what January may bring. But even more so, I am a big believer in sticking with what is working and leave the predictions and forecasts to the fortune tellers. So for now I am
PONDX - 71%
WHIYX - 17%
ANGIX - 5%
ABTYX - 4%
SUBFX - 3%
PRAFX is TRP Real Assets fund. It's not a floating rate fund. I would consider High Yield to Floating Rate as a reasonable change but the fund you have quote, PRAFX is a very different animal.
Yes, I am selling all shares of PRHYX (my only high yield fund). It's not a large or momentious move in terms of total allocation. As a part of the "buy and hold" segment it's roughly 20%. As a part of the larger total, less than 14%. So, in large measure this is an academic debate (with myself:-) and of little consequence in terms of overall returns. The percentages are low because I'm diversified into a number of hybrid products - most of which will dabble in high yield bonds when valuations warrant. OAKBX is one I like a lot. I've concluded the current underperformance is not so much a reflection on management as a consequence of their having been early in vacating their bond positions in the face of what they consider unacceptable risk-reward metrics.
Getting back to your original observation. All investments involve risk. It's really a matter of where one wishes to place his bets. I tend to view fixed income as the more stable part of a portfolio. This is not the area where I want to "stretch" in search of outsized reward. (I'm sure the point David was establishing with his opening remarks is that many people don't understand the risks they are taking with bonds.) I'm content to stick with equity funds and the assorted hybrids already noted in search of reasonable return. Also, I recently started a very small position (2-3%) in a gold mining fund - in case things unravel in a nastier way than one would hope for or expect. Thanks for asking, Regards
Another senereo is the economic winds get so turbulent (You name it: inflation, debt ceililng, unemployment, dollar crisis) that there's a shake up at the Fed. In that case the promise to hold rates low into infinity won't amount to a cup of warm spit.
I'm sure your allocation is the right one for you. As indicated in my reply to Catch, my allocation in HY was relatively small. Not a market call. As Bob C noted "the end" has been forcast for many years now. This may continue for another 5, 10, 20 years. I don't follow it as closely as you do, so for me "backing-off" now is the right course. Regards
t