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.
Support MFO
Donate through PayPal
Is 2023 the time to wade back into bond funds? Thoughts?
I would think of floating-rate loans as a potential equity substitute at this point. I think Giroux sees them similarly--that their risk adjusted return profile offering similar upside but less downside than stocks makes them appealing currently. That said, they will not function defensively as well as conventional high quality bonds. If we enter a severe recession, the risks are significant.
That leads us to the exciting part: we believe this is the most attractive bond market we have seen in at least a decade! For reference, the charts below show the yield and spread on the Bloomberg U.S. Aggregate Bond Index and Bloomberg 1-3 year U.S. Aggregate Bond Index. Yields on investment grade bonds are now at levels we haven’t seen since 2007. Most of the increase in yield through September 2022 has been due to higher risk-free rates, with a smaller component due to higher spreads.
Click on the link to see the charts. One significant event that occurred in 2022 by the way was it was the first calendar year since 1984 that FPNIX lost money. That is some record, and shows you just how difficult 2022 was for bond investors. It is admittedly a very conservative fund.
In my circumstances, munis don't make sense. For a few different reasons, I'll be adding bonds to my taxable account. I've already got a slug of bonds in the IRA. I want to track the new TUHYX twin, the new ETF: it's THYF, before throwing money at it. Lots of options available. There's a strange contradiction about TUHYX, when I look at what Morningstar offers. Granted, Morningstar is not gospel, and there are many other sources to turn to. Anyhow, Morningstar rates it with 2 stars and with a SILVER decoration. On the surface, it looks not bad.... HIGH marks for the "Process/People/Parent" wonky categories, too. But then they show it at the bottom for '22 among peers. 2018 was some sort of watershed for the fund, probably a change in style or mandate. Since then, there have been three pretty good years, bookended by two awful years. Still, the dividends remain juicy. Can the share price still be falling much? Are we at the nadir? Different opinions about that sort of thing are what makes a Market........ At the moment, I'm looking at Schwab's TIPS ETF. (SCHP.)
In a current Schwab market outlook article, they see 2023 as a great year for bonds. They are recommending increasing duration of bond holdings and focusing on higher quality bonds. I am in the wait and see category, as projections are largely based on a prediction of what the Feds will do with rates. Schwab is predicting a couple of small rate increases in 2023, and then rate cuts in the latter part of 2023.
With respect to PRWCX’s time horizon, Giroux stated several times that he invest with the goal to match the return of S&P500 within a full market cycle but with less volatility. He has done that more than once. Question is his fund is much bigger now, can he still meet his goals going forward?
With respect to PRWCX’s time horizon, Giroux stated several times that he invest with the goal to match the return of S&P500 within a full market cycle but with less volatility. He has done that more than once. Question is his fund is much bigger now, can he still meet his goals going forward? -
Here’s PRWCX’s expected time-horizon as stated by Giroux in PRWCX’s Semi-Annual Report - June 31, 2022:
“Before we discuss fund performance, I would like to review the three goals of the Capital Appreciation Fund:
(2) Preserve shareholder capital over the intermediate term (i.e., three years)
(3) Generate equity-like returns with less risk than that of the overall market over a full market cycle (i.e., normally five years)” -
As I understand Giroux’s words, they mean that if you had money in his fund on January 3, 2022 when the markets / fund topped-out, you can expect to get back to “break-even” no later than January 3, 2025. That would appear to be in nominal dollars - not inflation adjusted. Hypothetically, should inflation run at a 5% annual rate over that 3-year period, you’d be “poorer” in purchasing power by about 15%. (Of course, Giroux seems to view this as a worst case scenario.)
Thanks @hank, good information. Learned from past drawdowns that losing to a lesser degree provides a shorter time to fully recover and respond appropriately without triggering panic selling. Some funds may take 4-5 years just to reach breakeven point. Kind of like the hare and tortoise race.
Learned from past drawdowns that losing to a lesser degree provides a shorter time to fully recover and respond appropriately without triggering panic selling. Some funds may take 4-5 years just to reach breakeven point. Kind of like the hare and tortoise race.
Yes, always good to limit losses. The math works against you on the way back up as has been pointed out here many times.
Example - a 25% loss requires roughly a 33% gain to get back to break-even.
>> You can make several % more in managed bond fund, this is where they shine.
go on, please (as always)
DODIX was down just under 10% for the year, a few percent better (yes) than FTBFX, FBND, AGG, BOND, and the others, not as good as PONAX (a bit better than -8%). STIP down a bit over 2%.
You don't understand... most posters are here to try and give others the benefit of their knowledge and experience. A few others are here to let us know how great they are.
@hank, you made a good point. The opportunity cost was left out to make the recovery point easier to understand. MFO Premium makes the recovery duration calculation without taking into account of up or down markets during the recovery period. Additionally the behavioral aspect comes into place where panic selling near the bottom is common. Ideally, investors want to avoid buy low and sell high and not the other way around.
I have owned FPNIX for years but lightened up last year as they lost money.
Does the large exposure to asset backed securities based on automobile loans bother you? If we hit a serious recession a lot of these are going down. Obviously, the managers are aware of this and must think they will not loose much
The quality of the asset backed securities in auto loans can vary dramatically, being tiered like mortgage-backed securities, but my impression is that FPA invests in the senior ones that are from the highest credit quality borrowers and that get first claim to the assets in the event of default. If you're the top tier of an asset-backed security and borrowers default the proceeds from the sales of the repossessed autos, etc. go to you first. The other interesting factor is that from what I've read/heard, consumer borrowers are in much better shape today than they were prior to the 2008 recession/crash. It's corporate borrowers that seem more extended to me currently.
>> You can make several % more in managed bond fund, this is where they shine.
go on, please (as always)
DODIX was down just under 10% for the year, a few percent better (yes) than FTBFX, FBND, AGG, BOND, and the others, not as good as PONAX (a bit better than -8%). STIP down a bit over 2%.
Apples and oranges. PONAX is a multi sector fund. TIPS is a tip fund. DODIX is a diversified higher rated bond funds. PMORX made more than all the above. TBX made even more, and I posted about it months ago on another site.
But all you can come up with now is a mortgage fund and a one-day inverse gov ETF? Weren’t you whingeing on about BSV months ago? Do you have any nonwacky thoughts?
I posted already "You can make several % more in managed bond fund, this is where they shine. Think DODIX for higher rated bonds, HY Munis and good Multi (where I find my best ideas)." In HY Muni there are funds such as ORNAX. Both DODIX+ORNAX are not wacky. I'm a trader and based my decisions on big picture + T/A. I think 2023 would be a good year for bonds. If you want to make more, you got to know the funds you own. Good trading can add even more. Hint: none of these funds are Vanguard (or other) vanilla funds.
BTW, I made a lot of money in "wacky" funds. In the early years of PIMIX, many claimed it's wacky and can't be done. FAIRX was a great "wacky" fund in 2002-2008. I love to find these funds.
Some thoughts on bonds from David Giroux, manager of PRWCX, in this week’s Barron’s:
* “My last recommendation is a bond. I echo the view expressed here that fixed income hasn't been this attractive in a long time. We invest in high-quality high-yield bonds and high-quality leveraged loans—issuers whose Ebitda isn't volatile and that have a large EV [enterprise value] cushion, relative to their debt. You can get yields of 7% to 8% today in the high-yield and leveraged-loan market without taking on bankruptcy risk.
“My pick is the Hub International 7% coupon unsecured bond that matures on May 1, 2026, trading for $99. This is a bond that tends to be reasonably liquid, given its large size, and should be able to be purchased through most, if not all, brokerage accounts. Hub is one of the largest private midmarket insurance brokerages. It is an attractive business with low capital intensity, long-term organic growth in the mid-single digits, and low cyclicality … “
The above is Giroux’s final (fifth) recommendation. For what interest it may hold, following are the 4 equity investments he recommends:
- GE HealthCare Technologies GEHC $58.95
- Avantor AVTR $20.07
- Fortive FTV $65.54
- NXP Semiconductors NXPI $159.63
*Excerpt & additional information from: Barron’s “Roundtable III” - January 30, 2023 print edition.
Extra-topical - But makes you wonder why he was high on AMZN a year ago when it was 30% more expensive but fails to mention it this year? But I digress ….
@hank. thank you. Yes, interesting. PRWCX is still 36% of portfolio, here. "I echo the view expressed here that fixed income hasn't been this attractive in a long time. We invest in high-quality high-yield bonds and high-quality leveraged loans—issuers whose Ebitda isn't volatile and that have a large EV [enterprise value] cushion, relative to their debt."
I wrote on a different thread about bonds just yesterday. Things run in cycles, yes. So today's King of the Road will be next year's Loser, often. For now, I'm loving the ride on these particular ponies:
SCHP (TIPS, not junk.) HYDB TUHYX PRCPX Bonds are up to 32% of my portfolio today. And a soft rain is falling here in Honolulu. Of course, with over $50M at his disposal, uncle David is able to play with INDIVIDUAL bonds, with their much bigger thresholds. Morningstar shows PRWCX holding 31.46% of its portfolio in bonds. That might be stale, by now.
Sonal Desai from Franklin Templeton focused on income and bond funds. LINK1LINK2 "5-yr TIPS; FRIAX (hybrid); CPREX (private real estate); EADOX, FHYVX, IGSB, SIDCX (Part 3); gradually increasing duration."
Extra-topical - But makes you wonder why he was high on AMZN a year ago when it was 30% more expensive but fails to mention it this year?
Thanks @hank. I was reading this segment of the round table this morning. A quick look at PWRCX's top 10 equity holdings shows about a 2% stake in Amazon. It also shows he's owned it since 2016. It' gone up a ton since then. I actually hope he bought more at the start of this year. I bought a little myself.
I don't believe these people are giving secrets as to what they are buying or selling at the moment in most cases. They are likely stating what anyone can already find in their portfolio in hindsight. Maybe they are using this platform to drive up price on their picks.
Yes, I always pay attention when she's on-air. Of course, most of what she's pushing are Franklin products. For comparison:
FHYVX. $100k threshold. Yield: 4.35% E.R. 0.55% Performance YTD: +3.78%, in 51st percentile among peers. (Franklin typically requires a front-load. Dunno, in this case.) **************** HYMU threshold = the cost of one share. (ETF. $22.02 today.) Yield: 4.02% E.R 0.35% YTD: +4.36%, in top 22% among peers. But are junk bond ETFs in a different category altogether, re: FHYVX? https://www.franklintempleton.com/articles/blogs/meet-the-manager-sonal-desai
”All Barron's Roundtable interviews were done in NYC on January 9. Info is released piecemeal in 2-3 weekly installments (3 this year).”
Thanks Yogi - Should have checked date of interview. A bit surprised it’s that old. So much has happened in both the equity & bond markets since then. The 10-year is quite a bit lower in yield (higher in price) than earlier in the year. A lot of other investment grade bonds keys off of it. So I wouldn’t be backing up the truck on AAA / AA stuff at the moment, but what do I know? Giroux’s bond recommendation is for lower rated stuff - the reason I thought it worth posting. And some here understand the lower rated tier much better than I do. Perhaps they’ll chime in.
Yes - Sonal Desai from Franklin Templeton is a pleasure to read / listen to. -
@MIkeM said, “Maybe they are using this platform to drive up price on their picks.”
Let us hope not! If it were me I’d probably offer up 4 good picks and one that I was hoping to dump. But ISTM that would be illegal as hell - if it could be proven. Honestly, David Giroux is the last person on earth I’d expect such shenanigans from.
@hank Yes, I'm using TIPS as a safe location, saving $$$ with a particular purpose in mind, and receiving more than the credit union wants to give me. I looked at the posted rates on CDs and told the teller: "Those rates are simply telling me that you don't want my money."
Comments
One bond fund I think that isn't discussed enough here is FPNIX. Here is what they had to say about bonds recently:
https://fpa.com/docs/default-source/funds/fpa-new-income/literature/fpa-new-income-inc-2022-q3-commentary.pdf?sfvrsn=d1cf909d_6 Click on the link to see the charts. One significant event that occurred in 2022 by the way was it was the first calendar year since 1984 that FPNIX lost money. That is some record, and shows you just how difficult 2022 was for bond investors. It is admittedly a very conservative fund.
https://fidelity.com/insights/markets-economy/whats-next-stocks?print=true
One needs to consider the possibilities as one reposition his/ her portfolio.
With respect to PRWCX’s time horizon, Giroux stated several times that he invest with the goal to match the return of S&P500 within a full market cycle but with less volatility. He has done that more than once. Question is his fund is much bigger now, can he still meet his goals going forward?
-
Here’s PRWCX’s expected time-horizon as stated by Giroux in PRWCX’s Semi-Annual Report - June 31, 2022:
“Before we discuss fund performance, I would like to review the three goals of the Capital Appreciation Fund:
(1) Generate strong risk-adjusted returns annually
(2) Preserve shareholder capital over the intermediate term (i.e., three years)
(3) Generate equity-like returns with less risk than that of the overall market over a full market cycle (i.e., normally five years)”
-
As I understand Giroux’s words, they mean that if you had money in his fund on January 3, 2022 when the markets / fund topped-out, you can expect to get back to “break-even” no later than January 3, 2025. That would appear to be in nominal dollars - not inflation adjusted. Hypothetically, should inflation run at a 5% annual rate over that 3-year period, you’d be “poorer” in purchasing power by about 15%. (Of course, Giroux seems to view this as a worst case scenario.)
Example - a 25% loss requires roughly a 33% gain to get back to break-even.
>> You can make several % more in managed bond fund, this is where they shine.
go on, please (as always)
DODIX was down just under 10% for the year, a few percent better (yes) than FTBFX, FBND, AGG, BOND, and the others, not as good as PONAX (a bit better than -8%). STIP down a bit over 2%.
I have owned FPNIX for years but lightened up last year as they lost money.
Does the large exposure to asset backed securities based on automobile loans bother you? If we hit a serious recession a lot of these are going down. Obviously, the managers are aware of this and must think they will not loose much
PMORX made more than all the above.
TBX made even more, and I posted about it months ago on another site.
Weren’t you whingeing on about BSV months ago?
Do you have any nonwacky thoughts?
In HY Muni there are funds such as ORNAX.
Both DODIX+ORNAX are not wacky. I'm a trader and based my decisions on big picture + T/A. I think 2023 would be a good year for bonds. If you want to make more, you got to know the funds you own. Good trading can add even more.
Hint: none of these funds are Vanguard (or other) vanilla funds.
BTW, I made a lot of money in "wacky" funds. In the early years of PIMIX, many claimed it's wacky and can't be done.
FAIRX was a great "wacky" fund in 2002-2008.
I love to find these funds.
Otherwise nonresponsive
* “My last recommendation is a bond. I echo the view expressed here that fixed income hasn't been this attractive in a long time. We invest in high-quality high-yield bonds and high-quality leveraged loans—issuers whose Ebitda isn't volatile and that have a large EV [enterprise value] cushion, relative to their debt. You can get yields of 7% to 8% today in the high-yield and leveraged-loan market without taking on bankruptcy risk.
“My pick is the Hub International 7% coupon unsecured bond that matures on May 1, 2026, trading for $99. This is a bond that tends to be reasonably liquid, given its large size, and should be able to be purchased through most, if not all, brokerage accounts. Hub is one of the largest private midmarket insurance brokerages. It is an attractive business with low capital intensity, long-term organic growth in the mid-single digits, and low cyclicality … “
The above is Giroux’s final (fifth) recommendation. For what interest it may hold, following are the 4 equity investments he recommends:
- GE HealthCare Technologies GEHC $58.95
- Avantor AVTR $20.07
- Fortive FTV $65.54
- NXP Semiconductors NXPI $159.63
* Excerpt & additional information from: Barron’s “Roundtable III” - January 30, 2023 print edition.
Extra-topical - But makes you wonder why he was high on AMZN a year ago when it was 30% more expensive but fails to mention it this year? But I digress ….
"I echo the view expressed here that fixed income hasn't been this attractive in a long time. We invest in high-quality high-yield bonds and high-quality leveraged loans—issuers whose Ebitda isn't volatile and that have a large EV [enterprise value] cushion, relative to their debt."
I wrote on a different thread about bonds just yesterday. Things run in cycles, yes. So today's King of the Road will be next year's Loser, often. For now, I'm loving the ride on these particular ponies:
SCHP (TIPS, not junk.)
HYDB
TUHYX
PRCPX
Bonds are up to 32% of my portfolio today. And a soft rain is falling here in Honolulu.
Of course, with over $50M at his disposal, uncle David is able to play with INDIVIDUAL bonds, with their much bigger thresholds. Morningstar shows PRWCX holding 31.46% of its portfolio in bonds. That might be stale, by now.
"5-yr TIPS; FRIAX (hybrid); CPREX (private real estate); EADOX, FHYVX, IGSB, SIDCX (Part 3); gradually increasing duration."
I don't believe these people are giving secrets as to what they are buying or selling at the moment in most cases. They are likely stating what anyone can already find in their portfolio in hindsight. Maybe they are using this platform to drive up price on their picks.
FHYVX. $100k threshold.
Yield: 4.35%
E.R. 0.55%
Performance YTD: +3.78%, in 51st percentile among peers.
(Franklin typically requires a front-load. Dunno, in this case.)
****************
HYMU threshold = the cost of one share. (ETF. $22.02 today.)
Yield: 4.02%
E.R 0.35%
YTD: +4.36%, in top 22% among peers. But are junk bond ETFs in a different category altogether, re: FHYVX?
https://www.franklintempleton.com/articles/blogs/meet-the-manager-sonal-desai
Yes - Sonal Desai from Franklin Templeton is a pleasure to read / listen to.
-
@MIkeM said, “Maybe they are using this platform to drive up price on their picks.”
Let us hope not! If it were me I’d probably offer up 4 good picks and one that I was hoping to dump. But ISTM that would be illegal as hell - if it could be proven. Honestly, David Giroux is the last person on earth I’d expect such shenanigans from.