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This fund's bond portfolio is potentially hitched to a runaway train.
Is this a positive or negative comment? Are they saying this bond portfolio will potentially outperform others? Or is it saying it is reckless and will crash and burn?
Reply to @Ted: Not about past performance, right Ted? Besides can you clarify which of my interpretations of phrase "runaway train" is true? Is M* making a positive or negative comment? Just FYI, M* have the fund rated GOLD.
Reply to @VintageFreak: I took the M* comment to be negative. If anyone has an M* membership and can read the full-membership-only commentary, I'd be very grateful. Vanguard has gone to some effort on its website to educate investors about bonds (I haven't read any of the articles, but I know they have been forthcoming). I *think* M* is taking a short-term view of things. VWELX and a frosty La Fin du Monde will be pried out of my cold, dead hands. Thanks also for your comment on my ARTSX question. It gave me a different angle to think about.
Here is the justification for the headline. Duration has increased over the last year or two:
"This fund's lengthening duration owes instead to its link with its benchmark's duration, the Barclays U.S. Credit A or Better Index. Comanager John Keogh keeps the fund roughly duration neutral by staying within a year or less of the benchmark. But these days being duration neutral means substantially more interest-rate risk. During the past six years, benchmark duration has lengthened by 1.2 years to 6.7 as companies have rushed to issue long-term, low-coupon debt. The fund's duration has risen by two full years during that time, giving it one of the category's longest durations. If interest rates suddenly spiked, the fund could get walloped worse than most peers."
Reply to @tigerman3: Thanks oh striped one! Bonds are supposed to keep one diversified. Sounds to me if we are in an environment where bonds may no longer ying when stocks yang. Besides, learning I am in leveraged bond fund (AQRNX) without knowing it, has left me very ashamed. Being clueless about bonds is one thing, but I think I dropped the ball on AQRNX. I do spend time researching before I buy, but was simply not smart enough to see it.
So now I'm looking to see if "Conservative" and "Moderate" allocation funds are ACTUALLY going to behave like I expect them too. Or better be in cash and equities instead of bonds and equities for diversification. If duration has increased, then I have to think any balanced fund in which that happens has now become more risk and giving wrong sense of security to the investor. In fact Conservative Funds with more bonds could be riskier than Moderate Funds with less bonds while the perception is exactly the opposite.
I say this because I'm assuming Conservative/Moderate/Aggressive allocation designations are simply derived based on higher/moderate/lower allocation to bond holdings and has little if anything to do with the duration of the bond portfolio,
Reply to @VintageFreak: I interpret that as "be careful going forward". Rates will likely be higher several years from now. The 35% bond sleeve will be a drag on the fund's total return. Several weeks ago we witnessed the bond decline due to Fed's tapering fear. There are few safe haven when the rates go back up.
Vanguard's theory (and this appears in many other places as well) is that rising rates are not necessarily bad for long term bond fund investors, because investors ultimately benefit from the higher rates and come out ahead. (Besides, you can't time the rate increases - people have been predicting the end of the world in bonds for years and lost out on significant gains.)
I'm not saying that Vanguard's comment regarding Wellington is a variation on this theme - it's not - but rather trying to respond to your comment that there are few safe havens.
A problem with bond funds, including many actively managed ones notably by Vanguard and T. Rowe Price is that they tend to keep average duration close to the benchmark, which is in itself flawed. Not only for the reason that M* gives (see, e.g. Apple floating loads of long term bonds rather than repatriating money because rates are so low), but for the related reason John Bogle gives (that the index has much too much in Treasuries).
So, for safe(r) havens, one can seek out more "creative" funds - ones which don't come close to their benchmarks. Not surprisingly, FPA New Income FPNIX did not lose much in May-July (about 0.38% was the worst monthly loss, vs a percent worse for most bond funds in June). Its problem is that it yields little, so it is more difficult for its yield to make up for even these small losses. Nevertheless, I still think of it as a "relatively" safe haven (and it is positive YTD).
Bank loan funds and high yield funds are also still largely positive YTD. But I don't have faith in either. The former because lots of bank loans won't float (the current market yield is below the bonds' floors, so as the market rate rises, the bonds' won't, and so the bonds will depreciate). The latter because everyone has piled into junk, so they're likely more overpriced than other bonds. That's why I'm poking around more flexible bond funds. Strictly on numbers, IFUNX has held up well ("modest" loss of 1.38% in June, no other significant monthly losses since May 2012), but I don't know anything about the fund.
In short - safe havens are indeed few. That doesn't mean one gives up looking.
Reply to @msf: >> Strictly on numbers, IFUNX has held up well ("modest" loss of 1.38% in June, no other significant monthly losses since May 2012), but I don't know anything about the fund.<<<<
It appears its entire bond portfolio as of June 30 is all open end junk bond funds. You would be much better off just investing in their largest junk holding which is the Ivy High yield fund. I use WHIYX for that. Still, even I am getting a bit leery about junk.
You wrote: "So now I'm looking to see if "Conservative" and "Moderate" allocation funds are ACTUALLY going to behave like I expect them too. ... In fact Conservative Funds with more bonds could be riskier than Moderate Funds with less bonds while the perception is exactly the opposite."
- As humans we have a tendency to project the present into the future, believing the status-quo will endure indefinitely. Bonds have slumped. Stocks have rocketed. However, I think it's dangerous to project that trend out very far into the future. The folks running these allocation funds aren't dumb. So, I wouldn't expect those risk metrics to reverse long term, although this year that appears tthe case. Not to dispute that we have entered a long term rising rate environment. We have. But the repercussions will take decades to play out. Equities do appear to be the better long term bet. But it's far from a "done-deal". I'm not drastically altering allocations to the various asset classes and don't think anyone else should either. Just my couple cents worth. BTW: Aren't equities looking a bit overextended at present?
Reply to @hank: This has nothing to do with with being dumb or being smart. More bonds on higher duration are risky in current environment, no?
Besides, it is not I who is questioning the dumbness of Wellington Managers. After all I own the damn fund. I'm asking because I don't want to be under any false sense of security in case stocks tank and this fund ends up loosing way more than a standard equity fund. That is all.
Reply to @VintageFreak: VWELX looks like a fine fund. Held 65% equities as of last reporting with 35% in a blend of diversified fixed income. The bond duration was 6.23 years on June 30. That's considered "intermediate" at most.
Talking about "risk" is always difficult, the term being open to varying interpretations. As I think most of us would define it, risk involves volatility and also the likelihood of experiencing significant near term loss of principal. Wellington's blend of assets appears to be a pretty conservative one. Yes - I'd worry if the bond duration was substantially longer. But, this is pretty tame. And, as msf noted earlier, rising rates do have some benefits, especially at the shorter end of the curve in the form of a higher yielding income stream.
Back to my original point: I don't expect rising interest rates to result in a long lasting (multi-year) reversal of risk metrics as we commonly understand and define them. So, in my humble opinion, VWELX should continue to give you a less volatile ride and offer greater protection of your principal against significant near term loss than would a fund holding a higher percentage of equites. Whether it's an appropriate investment for you, only you can decide.
Comments
Regards,
Ted
https://personal.vanguard.com/us/FundsAllHoldings?FundId=0021&FundIntExt=INT&tableName=Bond&tableIndex=0&sort=marketValue&sortOrder=desc
So I'm totally confused now.
Vanguard has gone to some effort on its website to educate investors about bonds (I haven't read any of the articles, but I know they have been forthcoming). I *think* M* is taking a short-term view of things. VWELX and a frosty La Fin du Monde will be pried out of my cold, dead hands.
Thanks also for your comment on my ARTSX question. It gave me a different angle to think about.
"This fund's lengthening duration owes instead to its link with its benchmark's duration, the Barclays U.S. Credit A or Better Index. Comanager John Keogh keeps the fund roughly duration neutral by staying within a year or less of the benchmark. But these days being duration neutral means substantially more interest-rate risk. During the past six years, benchmark duration has lengthened by 1.2 years to 6.7 as companies have rushed to issue long-term, low-coupon debt. The fund's duration has risen by two full years during that time, giving it one of the category's longest durations. If interest rates suddenly spiked, the fund could get walloped worse than most peers."
So now I'm looking to see if "Conservative" and "Moderate" allocation funds are ACTUALLY going to behave like I expect them too. Or better be in cash and equities instead of bonds and equities for diversification. If duration has increased, then I have to think any balanced fund in which that happens has now become more risk and giving wrong sense of security to the investor. In fact Conservative Funds with more bonds could be riskier than Moderate Funds with less bonds while the perception is exactly the opposite.
I say this because I'm assuming Conservative/Moderate/Aggressive allocation designations are simply derived based on higher/moderate/lower allocation to bond holdings and has little if anything to do with the duration of the bond portfolio,
Thanks again.
Vanguard's theory (and this appears in many other places as well) is that rising rates are not necessarily bad for long term bond fund investors, because investors ultimately benefit from the higher rates and come out ahead. (Besides, you can't time the rate increases - people have been predicting the end of the world in bonds for years and lost out on significant gains.)
I'm not saying that Vanguard's comment regarding Wellington is a variation on this theme - it's not - but rather trying to respond to your comment that there are few safe havens.
A problem with bond funds, including many actively managed ones notably by Vanguard and T. Rowe Price is that they tend to keep average duration close to the benchmark, which is in itself flawed. Not only for the reason that M* gives (see, e.g. Apple floating loads of long term bonds rather than repatriating money because rates are so low), but for the related reason John Bogle gives (that the index has much too much in Treasuries).
So, for safe(r) havens, one can seek out more "creative" funds - ones which don't come close to their benchmarks. Not surprisingly, FPA New Income FPNIX did not lose much in May-July (about 0.38% was the worst monthly loss, vs a percent worse for most bond funds in June). Its problem is that it yields little, so it is more difficult for its yield to make up for even these small losses. Nevertheless, I still think of it as a "relatively" safe haven (and it is positive YTD).
Bank loan funds and high yield funds are also still largely positive YTD. But I don't have faith in either. The former because lots of bank loans won't float (the current market yield is below the bonds' floors, so as the market rate rises, the bonds' won't, and so the bonds will depreciate). The latter because everyone has piled into junk, so they're likely more overpriced than other bonds. That's why I'm poking around more flexible bond funds. Strictly on numbers, IFUNX has held up well ("modest" loss of 1.38% in June, no other significant monthly losses since May 2012), but I don't know anything about the fund.
In short - safe havens are indeed few. That doesn't mean one gives up looking.
It appears its entire bond portfolio as of June 30 is all open end junk bond funds. You would be much better off just investing in their largest junk holding which is the Ivy High yield fund. I use WHIYX for that. Still, even I am getting a bit leery about junk.
- As humans we have a tendency to project the present into the future, believing the status-quo will endure indefinitely. Bonds have slumped. Stocks have rocketed. However, I think it's dangerous to project that trend out very far into the future. The folks running these allocation funds aren't dumb. So, I wouldn't expect those risk metrics to reverse long term, although this year that appears tthe case. Not to dispute that we have entered a long term rising rate environment. We have. But the repercussions will take decades to play out. Equities do appear to be the better long term bet. But it's far from a "done-deal". I'm not drastically altering allocations to the various asset classes and don't think anyone else should either. Just my couple cents worth. BTW: Aren't equities looking a bit overextended at present?
Besides, it is not I who is questioning the dumbness of Wellington Managers. After all I own the damn fund. I'm asking because I don't want to be under any false sense of security in case stocks tank and this fund ends up loosing way more than a standard equity fund. That is all.
Talking about "risk" is always difficult, the term being open to varying interpretations. As I think most of us would define it, risk involves volatility and also the likelihood of experiencing significant near term loss of principal. Wellington's blend of assets appears to be a pretty conservative one. Yes - I'd worry if the bond duration was substantially longer. But, this is pretty tame. And, as msf noted earlier, rising rates do have some benefits, especially at the shorter end of the curve in the form of a higher yielding income stream.
Back to my original point: I don't expect rising interest rates to result in a long lasting (multi-year) reversal of risk metrics as we commonly understand and define them. So, in my humble opinion, VWELX should continue to give you a less volatile ride and offer greater protection of your principal against significant near term loss than would a fund holding a higher percentage of equites. Whether it's an appropriate investment for you, only you can decide.