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My 401k provider offers PONAX -Pimco Income A- in the plan, but the expense is 1.45. Thoughts avoid because of the expense is so high or buy it? The only other bond fund is BHYAX BlackRock High Yield. I’m 55 years old and I appreciate your thoughts.
PONAX pays 0.55% in expenses to use leverage. (This figure is the difference between the prospectus stated ER of 1.45% and Morningstar's "adjusted" ER of 0.90% that backs out some leveraging expenses.)
A reason to use leverage is to borrow money for less than you can make with it. Still, it costs something to borrow that money. That cost is included in the 1.45% figure.
According to M*, these leveraging costs are incurred by "6% of all U.S. mutual funds and exchange-traded funds, as of the end of July [2018]. Most of the affected are alternative strategies that use shorting as a regular part of their process, but some bond funds that use certain instruments are also affected, as are a handful of equity funds."
In that column, M* claims that ignoring these leveraging costs provides a more apples-to-apples comparison. If you subscribe to that line of reasoning, you should look at the 0.90% figure. If you feel that the cost of boosting returns (one hopes) by leveraging is nevertheless a real cost of the fund, you should look at the 1.45% figure.
That column analogizes these leveraging costs to trading costs. Trading costs aren't counted in any fund's ER. Personally I view the exclusion of trading costs as deficiency in the reporting of what funds spend, not as a positive feature.
The word M* uses is "philosophically". That pretty much sums it up. It's however you want to view these costs.
Hello Carefree. My opinion is "why have a bond fund when you are 55 years old", unless you are planning to retire in a couple of years. I was 100% equity until 2 years before retiring at 67. Having said that my 401k had PIMIX ("I" shares), which I used for the last 1-1/2 years before retiring. I also owned BHYAX (BHYSX at Schwab, load waived) in my TIRA account as one of my first bond OEFs. Both are good funds IMHO.
Some will not buy PONAX/PIMIX due to the high ER. High ERs don't bother me in bond OEFs (or equity OEFs as well) as long as the returns justify them. One thng about PONAX/PIMIX is that Pimco keeps the income the same each month. Most bond OEFs do not.
If that's your only 2 options I would buy PONAX because it's more of a ballast fund than BHYAX. I would start making adjustments to your asset allocation gradually 5-7 years before retirement.
"Carefree">My 401k provider offers PONAX -Pimco Income A- in the plan, but the expense is 1.45. Thoughts avoid because of the expense is so high or buy it? The only other bond fund is BHYAX BlackRock High Yield. I’m 55 years old and I appreciate your thoughts.
Carefree, you are quoting Gross Expense Ratios. You have to look at the Adjusted Expense Ratios for the actual ER you will be charged. The Adjusted Expense Ratio shows the ER after loads and other expenses are waived. When you do that, you will see the Adjusted Expense Ratio for the 2 funds are about the same, around .90. PONAX and BHYAX are 2 very different kind of bond oefs--BHYAX is a sector HY bond fund in which almost all assets held are below investment grade. PONAX is a multisector bond fund, with a small portion in junk bonds, some in Emerging Market, but the bulk in mortgages. When you chart the 2 funds, you will see the performance pattern for PONAX is much smoother compared to the higher standard deviation of BHYAX. PONAX has become a huge AUM fund, with over 130 billion AUM, but overall it appears to be a much less risky bond oef than BHYAX. BHYAX will correlate much more closely to equities than PONAX, so if you are looking for some level of ballast with a smoother ride, PONAX will probably fill this role a bit better and offer you more diversification than BHYAX. Good luck with your decision.
@dtconroe - please read my post. An investor will be charged more than 1.45%.
From the Semi-annual report, dated Sept 30, 2019: "The Fund's total annual operating expense ratio in effect as of period end were .... 1.45% for Class A shares."
Note that the summary prospectus (July 31, 2019) says that the "Other Expenses" component of the ER "include[s] interest expense of 0.55%. Interest expense is borne by the Fund separately from the management fees paid to ... PIMCO." It goes on to say that if one backs out these interest expenses (which the fund pays), the ERs would be lower. That's how M* gets the adjusted ER.
Fee waivers have nothing to do with the ER adjustment for PONAX. The prospectus says that "PIMCO has contractually agreed, through July 31, 2020, to reduce its supervisory and administrative fee for the Fund's I-3 shares by 0.05% of the average daily net assets attributable to I-3 shares of the Fund." There is no similar fee waiver and/or expense reimbursement for PONAX (class A shares) to subtract.
Finally, the reason why I say that investors are charged more than 1.45% is because in addition to the stated ER expenses borne by the fund, the fund also pays transaction costs on trades.
You’ve got a seriously deficient 401K plan if those are the only two bond funds. Most investors would consider a high quality intermediate bond fund, total bond or bond plus fund to be the starting point for the income allocation in a portfolio. That said, I agree that PONAX is the better choices the two funds you listed. However, I wouldn’t want all of bond money invested in just PONAX.
I should have just copied and pasted this definition from M*: "Adjusted Expense Ratio excludes certain variable investment-related expenses, such as interest from borrowings and dividends on borrowed securities, allowing for more consistent cost comparisons across funds" For "more consistent cost comparisons across funds" (such as PONAX and BHYAX), I prefer to use Adjusted Expense Ratio--Adjusted Expense Ratio for PONAX is .90 and for BHYAX it is .93.
Sebi, in its board meeting on September 18, 2018, anounced changes in the total expense ratio (TER) of mutual funds. It made the changes to bring in transparency in appropriation of expenses, and reducing mis-selling and churning. (link)
The above means that since 2018 Total expense ratio are more accurate, with that in mind, Pimco Income funds had to report their real expense. Basically, if you own PONAX you will pay 1.45% and not 0.9%
FWIW, Schwab lists PONAX with a net exp ratio of 1.45% It also shows it has a 12b-1 expense of .25%. So I have know idea what you would end up paying. But, I haven't owned it for a few years so don't care.
FWIW, Schwab lists PONAX with a net exp ratio of 1.45% It also shows it has a 12b-1 expense of .25%. So I have know idea what you would end up paying. But, I haven't owned it for a few years so don't care.
PONAX exp ratio is 1.45%. This includes 12b-1 fees, management fees, administrative fees, operating costs, and all other asset-based costs incurred by the fund. It doesn't include transaction costs as a result of trading of the fund's assets but this is very small. The most important is the fact that performance is after all costs and risk attributes (SD=volatility, Max Draw, Sharpe, Sortino...) are correct too.
Comments
A reason to use leverage is to borrow money for less than you can make with it. Still, it costs something to borrow that money. That cost is included in the 1.45% figure.
According to M*, these leveraging costs are incurred by "6% of all U.S. mutual funds and exchange-traded funds, as of the end of July [2018]. Most of the affected are alternative strategies that use shorting as a regular part of their process, but some bond funds that use certain instruments are also affected, as are a handful of equity funds."
So this use of leverage is not a common strategy of funds in general and bond funds in particular.
https://www.morningstar.com/articles/876536/a-fee-methodology-update-makes-some-funds-fees-appear-to-swell
In that column, M* claims that ignoring these leveraging costs provides a more apples-to-apples comparison. If you subscribe to that line of reasoning, you should look at the 0.90% figure. If you feel that the cost of boosting returns (one hopes) by leveraging is nevertheless a real cost of the fund, you should look at the 1.45% figure.
That column analogizes these leveraging costs to trading costs. Trading costs aren't counted in any fund's ER. Personally I view the exclusion of trading costs as deficiency in the reporting of what funds spend, not as a positive feature.
The word M* uses is "philosophically". That pretty much sums it up. It's however you want to view these costs.
Some will not buy PONAX/PIMIX due to the high ER. High ERs don't bother me in bond OEFs (or equity OEFs as well) as long as the returns justify them. One thng about PONAX/PIMIX is that Pimco keeps the income the same each month. Most bond OEFs do not.
Carefree, you are quoting Gross Expense Ratios. You have to look at the Adjusted Expense Ratios for the actual ER you will be charged. The Adjusted Expense Ratio shows the ER after loads and other expenses are waived. When you do that, you will see the Adjusted Expense Ratio for the 2 funds are about the same, around .90. PONAX and BHYAX are 2 very different kind of bond oefs--BHYAX is a sector HY bond fund in which almost all assets held are below investment grade. PONAX is a multisector bond fund, with a small portion in junk bonds, some in Emerging Market, but the bulk in mortgages. When you chart the 2 funds, you will see the performance pattern for PONAX is much smoother compared to the higher standard deviation of BHYAX. PONAX has become a huge AUM fund, with over 130 billion AUM, but overall it appears to be a much less risky bond oef than BHYAX. BHYAX will correlate much more closely to equities than PONAX, so if you are looking for some level of ballast with a smoother ride, PONAX will probably fill this role a bit better and offer you more diversification than BHYAX. Good luck with your decision.
From the Semi-annual report, dated Sept 30, 2019: "The Fund's total annual operating expense ratio in effect as of period end were .... 1.45% for Class A shares."
Note that the summary prospectus (July 31, 2019) says that the "Other Expenses" component of the ER "include[s] interest expense of 0.55%. Interest expense is borne by the Fund separately from the management fees paid to ... PIMCO." It goes on to say that if one backs out these interest expenses (which the fund pays), the ERs would be lower. That's how M* gets the adjusted ER.
Fee waivers have nothing to do with the ER adjustment for PONAX. The prospectus says that
"PIMCO has contractually agreed, through July 31, 2020, to reduce its supervisory and administrative fee for the Fund's I-3 shares by 0.05% of the average daily net assets attributable to I-3 shares of the Fund." There is no similar fee waiver and/or expense reimbursement for PONAX (class A shares) to subtract.
Finally, the reason why I say that investors are charged more than 1.45% is because in addition to the stated ER expenses borne by the fund, the fund also pays transaction costs on trades.
Sebi, in its board meeting on September 18, 2018, anounced changes in the total expense ratio (TER) of mutual funds. It made the changes to bring in transparency in appropriation of expenses, and reducing mis-selling and churning. (link)
The above means that since 2018 Total expense ratio are more accurate, with that in mind, Pimco Income funds had to report their real expense.
Basically, if you own PONAX you will pay 1.45% and not 0.9%
It doesn't include transaction costs as a result of trading of the fund's assets but this is very small.
The most important is the fact that performance is after all costs and risk attributes (SD=volatility, Max Draw, Sharpe, Sortino...) are correct too.