My question is probably naïve.
I am wondering what prevents the best core bond funds of the past years (like PTTDX, DLTNX and others) to adjust their portfolio to the new interest rate environment. We are talking about the best bond fund managers who suppose to understand the bond market very well. If the fund policy allow them to change portfolio allocation accordingly why investors need to leave these funds and look for other opportunity.
I expected the managers of funds with flexible mandates can do the best in any environment if they are really good.
Comments
If the fund is flexible, then the manager is the one who should be adjusting to market conditions. If the fund is boxed in (to a style box), then you're paying the manager to find good securities within the box, but it is your responsibility to adjust your portfolio from box to box.
This is why I prefer total return ("core" or preferably "core plus") funds to intermediate bond funds, why I don't make much use of short term funds (except as relatively high risk alternatives to MMFs), etc. And like Ron, why I am not enamored of bond index funds. (I'm not an index enthusiast, but am more amenable to total stock funds than total bond funds - the latter being stuck buying too many Treasuries - see Bogle - and too much in short term investment grade now.)
Bill Gross uses derivatives to such a great extent (in part because his funds are so large), that it's difficult to figure out what's really in the fund. M* says that the fund is 150% long in bonds and 50% short in cash, and it seems unable to give a breakdown of the portfolio. That leveraging can give you the same exposure as if the fund were more heavily invested in different markets, regardless of the literal restrictions.
As noted in the annual report: The fund is still beating the majority of its peers YTD.
If anything, the fund has not done as well as it might precisely because of its flexibility. Gross has been calling Treasuries wrong for quite some time now - selling when they were going up, buying at the top. I'm not talking just about his 2011 fiasco, where he made a rare admission that he was wrong. But also of 2013, where he did the same thing:Take a look at a fund like Baird Core Plus (BCOIX). Its prospectus places no limits on foreign (or EM) debt, though it looks like the securities must be dollar denominated (limiting currency risk). In contrast to PIMCO which is restricted to 10% in junk, Baird can go up to 20%. (But as I already noted, Gross uses derivatives so extensively it's hard to figure out what his real exposure to any sector is.)
Or Met West Total Return (MWTIX). M* says its average quality rating is junk, which it manages to do even with a 20% limitation on junk bonds in the portfolio. Once managers are given a modicum of leeway, it's impressive how much exposure they can achieve in various sectors, if they are so inclined.
I prefer the same approach in bond funds as you leaving to a fund manager a difficult task navigating the bond market and protecting a portfolio from loses.
But I am not happy with Pimco Total Return and would like to replace it with another fund.
Can you recommend alternative core bond fund?
What do you think about DoubleLine Total Return?
I'll discuss each of these below, but my personal opinion on each question is "no".
Despite being called a "total return" fund, Grundlach (along with his flagship fund) is essentially an MBS bond manager. That's the way he ran TCW Total Return, and the way he continues running his new charge. As good as he is within this sector, a fund like this seems to be what you are asking to escape - a fund that is locked into one sector of the market (albeit able to move along the yield curve within the sector). Also one that makes heavy use of derivatives (like Bill Gross at PIMCO).
Don't get me wrong - I like intelligent use of derivatives. The fact that Bob Rodriguez makes use of interest only bonds (a form of inverse floater) is one of the things that attracted me to FPA New Income (FPNIX). But unlike that fund, which uses derivatives in moderation to reduce risk, Grundlach and Gross seem to make their use a core part of their strategy. These tend to be less liquid and as M* notes (in its analysis of DoubleLine Total Return), puts the funds at more risk in times of stress.
As a sector, MBS bonds command a somewhat higher yield, because of their lower (or even negative) convexity. This works to one's advantage in a stable, or even gradually and smoothly rising interest rate environment, but these bonds can take a pounding when interest rates are unstable or rapidly rising. Not a risk I would personally take now, at least not one where I would place 100% of my money as DoubleLine does.
For the past few years, there's been an anomaly in the market that has mitigated some of the normal MBS risk. With many homes under water, people were less able to refinance, so mortgages behaved more like "normal" bonds. Housing prices have recovered in many (albeit not all) parts of the country, so MBS securities may be approaching their traditional risk levels.
Assuming one does want a MBS fund, why Grundlach? One has to ask whether his old charge TCW Total Return, would be a better choice. With the latter, you get MetWest, which you seem to like as a management company. While Grundlach did better out of the gate (2H2010-11), that was with heavy use of derivatives - see above - and with a much smaller fund. He's now got a fund that's 4.5x as large as TCW, and has underperformed the MetWest team in 2012 and 2013. (Except for 2Q 2013, he's underperformed each quarter.)
It's not as though he's using a different strategy - various attributes of the two funds' portfolios - sectors, duration, credit ratings, are extremely similar (though TCW seems to have a small but not insignificant amount of short maturity bonds that are lacking in the DoubleLine portfolio).
Fundamentally though, I don't see any MBS fund meeting your interest in a fund that makes use of the full bond market. And I think their risk is rising as the possibility of "tapering" increases (simply because that roils the market).