What’s a bond fund like this doing in T. Rowe’s stable? (RPIEX)

hank

Re: RPIEX - T. Rowe Price Dynamic Global Bond Fund. Just discovered this one. Price appears to classify it as an it as “alternative” investment. It comprises about 2% of RPGAX - so many of us have some exposure to it.

From Lipper: “The Fund seeks high current income. The Fund invests at least 80% of its net in bonds, and seeks to offer some protection against rising interest rates and provide a low correlation with the equity markets. It invests at least 40% of its net assets in foreign securities including securities of emerging market issuers.” Inception Date: 1/22/15.

M* gives it 1 star. Lipper ranks it 1 (lowest) for total return. Max Funds awards it 19 out of 100.
It appears the fund engages in short selling of bonds to hedge against (anticipated) rising rates. That probably explains a lot, as the Fed and other CBs seem to be doing everything in their power to hold the lid on still very low rates. Many alternative investment funds have struggled and disappointed. But it eludes me how what appears to be a bond fund from such a good house can be off 0.67% over 3 years.

I post only as a possible intellectual exercise for those so inclined. Not seriously considering owning this one.

Sven

I agree that alternative funds have been lagging badly in down cycles, thus I don't see them for drawdown protection. Once you subtract the high fees (typically 2% or more), the results are pretty sad. No wonder those who manage these expensive products are doing very well in their paychecks.

I think in today low yield environment, there is always a demand for better yield products. The recession fear drives these alternative products. I am not surprise of T. Rowe Price is offering this bond fund. Vanguard offers a Market Neutral fund, VMNFX ($50K min and ER 1.80%) , and the 3-years, 5-years returns and 10-years return are -4.71%, -1.32% and 1.08%, respectively.

msf

A couple more factoids:

- M* rates it bronze; though I have my doubts about how much intelligence there is in M*'s artificial "intelligence" ratings (done by machine, not analyst)

- Its 165% turnover rate is not a mere artifact of being a bond fund. 90%+ of the cap gains it has distributed in the past four years are short term. On the other hand, it distributed no cap gains in two of those four years (losing years, perhaps?)

The fund did well out of the gate, for its first two years, but has been essentially flat over the past three. My guess is that the star rating will nevertheless go up in a couple of weeks when the fund hits the five year mark. The way M* calculates stars is to compute a weighted average of a fund's three year rating, its five year rating (if available), and its ten year rating (if available). The two good years of the fund aren't getting counted because the fund is just short of five years. In a couple of weeks that will change, and those good years will be included.

To continue the fund description that Lipper quoted from T. Rowe Price:
The fund also uses interest rate futures, interest rate and credit default swaps, and forward currency exchange contracts, primarily to manage interest rate exposure and limit the fund's overall volatility.

If I'm going to buy a nontraditional fund that uses these techniques to manage interest rate risk and volatility, I'll buy one that does it well: FPNIX. It doesn't seek high current income, just the opposite (though it still sports a very similar SEC yield of 2.59% vs. 2.69% for RPIEX). Slow and steady wins the race.

Here's a chart comparing their performance over the lifetime of RPIEX.

Sven

To continue the fund description that Lipper quoted from T. Rowe Price:
The fund also uses interest rate futures, interest rate and credit default swaps, and forward currency exchange contracts, primarily to manage interest rate exposure and limit the fund's overall volatility.

Thanks for sharing the TRP fund's investment strategy. It resembles what Pimco fund such as PIMIX does, except it is more of a domestic multi-sector fund. RPIEX has additional coverage of oversea debts. Other than a slight underperformance in 2019, PIMIX has done very well over the same time period comparing to RPIEX.

msf

My impression is that PIMCO generally uses derivatives to boost income as opposed to using them to mitigate risk. Likewise, it can be more aggressive with junk bonds.

Foreign exposure? PIMIX is weighted negative 30% in non-USD developed markets. It is also 14% long in emerging markets.

See excerpts below from the funds' prospectuses and fact sheets. They may be meaningful or may signify nothing. Reading these docs is like reading tea leaves. They can mean whatever you want to read into them. For your amusement to compare and contrast.

Objectives:

PIMIX: The Fund’s primary investment objective is to maximize current income.
Long-term capital appreciation is a secondary objective.

RPIEX: The fund seeks high current income.

Investment strategies:

PIMIX: The Fund seeks to achieve its investment objectives by investing under normal circumstances at least 65% of its total assets in a multi-sector portfolio of Fixed Income Instruments of varying maturities, which may be represented by forwards or derivatives...

RPIEX: The fund also uses [derivatives], primarily to manage interest rate exposure and limit the fund's overall volatility.

High yield (junk) bonds:

PIMIX: The Fund may invest up to 50% of its total assets in high yield securities rated below investment grade by [an NRSRO] or if unrated, as determined by PIMCO (except such 50% limitation shall not apply to the Fund’s investments in mortgage- and asset-backed securities). [Note that 77.6% of the fund is presently in securitized debt.]

RPIEX: The fund focuses mainly on holdings that are rated investment grade .... However, the fund may invest up to 30% in high yield bonds, also known as junk bonds, and other holdings (such as bank loans)

Fund home pages (with links to fact sheets, prospectuses, etc.)
PIMIX: https://www.pimco.com/en-us/investments/mutual-funds/income-fund/inst
RPIEX: https://www.troweprice.com/personal-investing/tools/fund-research/RPIEX

Sven

Reading these docs is like reading tea leaves. They can mean whatever you want to read into them.

That is for sure - too much materials to digest easily. Your explanation makes sense for this fund with an one-year duration and yet manages to yield 3.12%.

msf

I wrote: The fund did well out of the gate, for its first two years, but has been essentially flat over the past three. My guess is that the star rating will nevertheless go up in a couple of weeks when the fund hits the five year mark.

The fund now has a five year rating, and its overall rating did go up to 2 stars. Still poor, pulled down by its last three years of performance. The point is that it is a good idea to look beyond summary figures, even ones that summarize the past 3, 5, or 10 years. Look also at how the fund has done over time, year by year, cycle by cycle.

Sven

Thank you for the advice on PIMIX.

Crash

Ya, a loser like that is a rare exception in TRP. Glad I read this thread.