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Repost - 5 Star Bond Fund HOBIX loses over 2.70% in four trading days this week

edited August 16 in Fund Discussions
It is always an eye brow raising event when you see a five star rated short term bond fund lose over 2.70% in four trading days. Morningstar shows a one week loss of 2.58% as daily accumulated dividends are included. Apparently this loss is due to their holding of the preferred shares of Riley Financial. Riley Financial is in a world of hurt as their common shares have lost 75% this month. Noted short seller Marc Cohodes for the past many months on X (Twitter) has been on a rampage against Holbrook Holdings and their management warning of dire consequences for holding Riley Financial. Chalk one up for Marc.

While I don’t hold HOBIX my concern is with HOSIX. HOSIX is a newer bond fund at Holbrook, also five star rated, and has been the “It” fund since its inception of the bond crowd due to its amazing persistency of trend. It is primarily a CLO fund and CLOs have been the latest rage in Bondland. While HOBIX and HOSIX are not similar they do share the same management team. HOSIX has seen a huge surge in AUM this year. My fear is the management team in their haste to employ new money will make a similar mistake as they did with Riley Financial in HOBIX.

Comments

  • Just checked X/Twitter comments - awful. Not taking them at face value, there may be something to those.

    Much of the M* report on HOBIX is computer-generated gobbledygook. Overall, it looks like run of the mill ST bond funds. But one M* comment in passing was an alert - its 5-yr SD was much higher than its 3-yr SD. Then I noted in M* Portfolio details that while total junk % is small, lot of it is in securitized credit with underlying shaky firms.

    So, I looked at TestFol that is based in daily data - not monthly data used by M*, PV, MFO Premium, etc. I ran with both 36-mo and 60-mo (default) rolling-periods and one can see that it was a disaster in 2020 pandemic and post-pandemic, but suddenly started doing better in early-2023.

    IMO, ST bonds aren't for speculation, but the category is so wide that almost anything goes. There isn't even a distinction between ST-inv-gr and ST-HY. And the fact that generic overviews (M*, etc) may look OK (as for HOBIX) points to dangers lurking in ST bonds. I suppose that the lessons learned during the GFC were forgotten.

    Rolling 36-mo HOBIX-36

    Rolling 60-mo HOBIX-60
  • edited August 16
    My post delete and your response crossed. Sorry. Your input though is appreciated, They made a bad bet with the preferred of Riley Financial and were called out on it months ago by noted short seller Marc Cohodes, This week the chickens came home to roost, Hopefully the same management team doesn’t someday make a similar bad bet in their other five star rated bond fund HOSIX.
  • I should write up my discussion with Holbrook in March. It was revealing and I am glad I didn’t go with the fund.
  • HOSIX is only 2+ year old. So, it has none of the baggage of HOBIX and much of M* data is NA. It's also mostly structured credit and its average credit quality of BB is lower than that for HOBIX (BBB).

    TestFol data with 12-mo rolling periods looks OK. HOSIX-12

    The boutique firm Holbrook has only 2 funds - HOBIX (8+ years old) and HOSIX (2+ years old).
    https://www.morningstar.com/asset-management-companies/holbrook-holdings-BN00000J2X/funds
  • I drafted this also while you were deleting and as Yogi was posting. Largely duplicative of Yogi's post, but hey, I had already put the words to paper.

    The fund is reasonably diversified on the bond side. But it has significant issue risk on the "other" (preferreds) side. At the end of July, 4.22% of its portfolio was in Riley, which means that the manager should have been paying close attention to the company. Also 3.42% of its portfolio is in Babcock & Wilcox Enterprises. It's not just the size of these holdings but the total holdings outside of bonds and cash (about 13%).

    Those are numbers that one might see in multisector bond funds (which is how M* originally classified the fund in 2017). Despite M* rating the fund as currently (3 year) risk as below average, this looks like a fund built for risk. Its five year M*risk rating is high, so "things" may also have happened in the past.

    I agree that when a short term fund loses half a year's typical gains in a year it begs attention. Though with these other holdings (especially concentrated) it shouldn't be viewed as a short term fund.
  • edited August 16
    M* shows HOBIX 70% in bonds, over half of which are classified not rated. I’m curious what the 24% “other” might represent? Derivatives come to mind. But could be convertibles.

    Suspect this has been written about / posted because it might be a “canary in the coal mine” - an early warning sign of economic malaise to follow. Certainly a possibility. On the other hand, it might be a positive sign because the Fed might be more inclined to cut rates.
  • Scroll down to the holdings section near the bottom of the M* page. There you'll see 82.5% in bonds. I don't know why it doesn't match the 70% fixed income at the top of the page. Clearly this difference is coming from the 24% "other" allocation at the top of the page.

    Perhaps not all the bonds are "fixed" income? You might be right about convertibles. Have to check M*'s definitions.

    The 17% "other" in the holdings is a MMF (3.63%) and preferred (13% or so).
  • edited August 16
    Anyone remember the Schwab short term bond fund “Schwab Yield Plus”? That was a serious debacle. SWYSX. Fell about 35% in 2011.
  • Those were ultra-SY bond funds around GFC and the category then had lots of ST-HY. Schwab, Fido and others had them. This Category was killed by the GFC.

    A new category reemerged a few years later as ultra-ST with inv-grade bonds only. So, the ultra-ST bond funds of today aren't comparable to those around the GFC.
  • But the HOSIX performance chart is sooooo beautiful. Straight across from bottom left to upper right. Please don't make me consider selling this yet.

    Just....just look at that chart again. Positive returns in all 26 months. It's like some wonderful alternate (reality) fund.
  • JD_co said:

    But the HOSIX performance chart is sooooo beautiful. Straight across from bottom left to upper right. Please don't make me consider selling this yet.

    Just....just look at that chart again. Positive returns in all 26 months. It's like some wonderful alternate (reality) fund.

    I got shaken out by the action in the CLO ETFs on Friday August 2. But back in, just not as heavy. Those monthly dividends credited to your account end of month are something to look forward to.
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