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