Mutual Funds That Beat The Market - Part 4 (Fixed Income)

Charles

A review of fixed income funds, which for this post includes funds that invest in government or corporate bonds, loan stock and non-convertible preferred stock. This type of fund has been getting considerable attention lately on MFO with a growing concern that investors could be lulled into false sense of security.

To recap a little from Mutual Funds That Beat The Market - Part 1, there are about 1880 funds of this type, of which 30% have actually delivered higher life-time returns than the SP500, and more importantly and relevant, 98% have beaten cash.

In the tabulation below, purple means the fund was a top performer relative to T-Bill over its life time, blue represents highest Sharpe (if not already a top APR), and yellow represents worst performing APR. I included other notables based on David's profiles, numerous suggestions in the various threads by MFO readers (bee, catch22, claimui, fundalarm, hank, Hiyield007, Investor, johnN, MaxBialystock, MikeM, Mona, msf, Old_Joe, scott, Shostakovich, Skeeter, Ted and others), and some of my own interest.

A reminder that I only used oldest share class, so for popular funds like PONDX, you will find PONAX, similarly MAINX is MINCX, etc.

Here's the break-out, by fund inception date:



























Some observations:

- Every fund listed (5 years or older) with current yields of 6% or more, lost more than 20% of its value in 2008, except three: PIMCO Income A PONAX, which lost only 6.0%; TCW Total Return Bond I TGLMX, which lost only 6.2% (in 1994); and First Eagle High Yield I FEHIX, which lost 15.8%.

- In fact, of all fixed income funds more than five years or older that have current yields of 6% or more, nearly 3 out of 4 had a down-year of 20% or more. Those yielding 5% or more did not do much better. For what it's worth, the break point appears to be between 4 and 5%. Funds with less than 4% current yield did much, much better. Here is summary:



- Just glance over the list...you will see that PIMCO has produced many top performing fixed income funds.

- Fortunately, again, nearly every fixed income fund existing today has beaten cash over its life time, some 98%. The 44 funds with negative Sharpe actually fall into two distinct categories: First, those with negative Sharpe, but positive life-time APR. These are generally funds with short duration and/or tax exempt funds. Second, those with negative Sharpe and negative life-time APR. There are 25 such funds, but it's reassuring to find only 3 older than three years old, which presumably means fixed income funds that actually lose money don't stay around very long. The three enduring poor performers, tabulated below, are: AMF Ultra Short AULTX, SEI Instl Mgd Enhanced Income A SEEAX, and WisdomTree Euro Debt EU.



Both AULTX and EU have less than $10M AUM, but SEEAX is fairly substantial AUM at $170M, which is simply hard to believe...



For those interested, I've posted results of this thread in an Excel file Funds That Beat The Market - Nov 12.

Investor

In bonds funds, high return and yield often come with higher risk. As you observed, the ones that has lower yield lost less in general tends to have higher quality bonds (often less junky)

andrei

There is an interesting exception from the rule formulated by Charles:

"- Every fund listed (5 years or older) with current yields of 6% or more, lost more that 20% of its value in 2008, except three: PIMCO Income A PONAX, which lost only 6.0%; TCW Total Return Bond I TGLMX, which lost only 6.2% (in 1994); and First Eagle High Yield I FEHIX, which lost 15.8%."

Here is what I think is an exception, and it will be clear soon why I consider it VERY interesting:

TCW Total Return Bond I TGLMX yields 5.99% now, so let us say it is 6%.

In 2008 it was amazingly steady, like a flat line. During the year, the fund was actually 1% up. Next year, it was more than 20% up.

At that time, the fund's manager was Gundlach. His fund DBLTX at present yields 6.33%, according to M*. Technically, this fund is not 5 years old, so this observation does not contradict the observation made by Charles. However, it is the same manager of the total return fund, who saved his fund back in 2008, and who leads a very similar fund now, yielding more than 6%.

Many people say that DBLTX recently became to big and too slow. They jump the ship, moving to other, more aggressive bond funds. I am partially guilty in doing the same, but I am still keeping a lot in DBLTX. I wonder what our bond experts think about it, regardless of the often expressed opinion that one should not trust this arrogant manager. It seems that he was among the very few ones who saved a lot of money for those who trusted him back in 2008. Could it be that in the present uncertain situation his skills may become especially useful for us?

MaxBialystock

Quoting Andrei: "Many people say that DBLTX recently became to big and too slow..." Which is why, when I decided to consider Double Line, I went with DLFNX. It's not so crowded with money and is a bit more tame than the other, n'est pas? Anyhow, I was looking for something which would be more deliberately conservative, rather than HY: DBLTX yields 6.33% and DLFNX yields 3.73%. Charles: that is an amazing, fabulous pile of work you've done for all of us. Thank you!

Charles

Reply to @andrei: Outstanding andrei. I was thinking same thing this afternoon. And, it reinforces the point made earlier by BobC about the WHO.

In 2008, TGLMX was managed by Jeffrey Gundlach, M*'s Fixed-Income Manager of the Year in 2006. According to M* archives, he managed TGLMX since inception in 1993, along with co-manager Philip Barach.

"This fund's management team has the experience, talent, and resources required to successfully navigate difficult mortgage markets," M* reported in 2008.

Then, "Manager Jeffrey Gundlach was dismissed by TCW in December 2009, and much of his mortgage team followed him to his new firm shortly thereafter."

TGLMX is now managed by folks from MetWest. It's done pretty well this year...top performer. That said, hard not to follow the Gundlach-Barach dynamic duo to DBLTX given their impressive record.

Hey, as for the other high-yield strong performer in 2008, PONAX, its great manager remains: "Dan Ivascyn has called the shots here since the fund's 2007 inception. Ivascyn joined PIMCO in 1998 and is a managing director at the firm and a portfolio manager on the structured-products team."

Charles

Reply to @MaxBialystock: Thanks man. You all make it fun.

andrei

Reply to @MaxBialystock:

Dear Max, DBLTX has average effective duration about 2 years. This is rather safe with respect to the eventual rise of interest rates. Moreover, if I get it right, high yields will additionally protect the fund from going under. For example, if interest rates rise by 1%, the fund will be hit by 2% loss, but investors will still get 4% per year. Meanwhile for DLFNX average effective duration is about 4 - 5 years. When interest rates rise, it may take a hit; for each 1% rise in interest rates the fund will fall about 5%, and the low yield will not compensate for that loss. I am not a great expert in bonds, perhaps others may correct me here, but I would expect that DBLTX, even though it is less diversified, is safer than DLFNX at least with respect to the rise of interest rates. I guess this is the main reason why most of the people piled their money to DBLTX rather than to DLFNX.

catch22

Hi Charles,
We have been traveling for a few weeks and there is always so much to catch up with, here at MFO, upon being away and without online access.
Thank you for your efforts with this posting. A lot of work, to be sure.
Regards,
Catch