This fund has had incredibly strong performance since opening in Nov of 2018, up 27.8% since inception. I can't figure out how the yield is so high, 18%.
It has about 57% in investment grade bonds, mostly mortgages and corporate credit, no EM, a duration of 2.67, an average bond price of $94.11 and 23% in cash. Non of that indicates anything risky. It only dropped about 5% in March and is up 7% YTD.
Are they doing a "return of capital"? Is it because their asset base of 12 million is so small? They have a small amount in a few derivatives but nothing close to what Pimco uses. Seems to good to be true, what am I missing?
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Checking for 19A notices on the TCW (MetWest/TCW funds) site, one finds no 2020 notices, and the only notices for any MetWest fund for any year are for MetWest's Low Duration and Unconstrained Bond Funds, and then only for 2019. Even those notices show only tiny amounts of ROC for those other funds.
https://www.tcw.com/en/Literature/Tax-Center
Here's an example of what one expect to find from a fund that made frequent ROC payments:
https://www.troweprice.com/personal-investing/planning-and-research/tax-planning/distribution-notices.html
So they aren't making ROC payments. Just very good performance due to low AUM? Seems like a lot of funds have good initial performance due to low AUM. Makes me wonder why a closed end fund like TSI or DBL can't maintain great performance when they're only around 250 million in AUM. 250 is still a lot more than 12 million though.
25% of portfolio is cash/treasuries so that's like 1-2% tops. Maybe some bond gurus on this site can figure out this mystery?
When looking at current yield, i.e. coupon / price rather than YTM, a discount bond will have a smaller yield. It's true that the discount will decrease the denominator. But the coupon (numerator) will also be smaller than with a bond selling at par. This latter effect dominates. So generally current yield goes down, not up, as market discount increases.
(Left as an exercise: compare current yields on two ten year bonds, one with a 2% coupon selling at par, and one with a 1% coupon.) Precisely the point. It's easy enough to look at the full portfolio for this fund because it is so small. Given that the average yield is 15%, 18%, somewhere around there, we need to be able to find lots of bonds with yields well over 20% to counterbalance the cash, let alone other lower yielding bonds.
In our search for these bonds we can ignore all premium bonds paying less then, say, 15% coupon. This is because the YTW of a premium bond is even less than its coupon rate. Pretty much none of the premium bonds have coupons high enough to contribute to the high average yield.
A quick and dirty approximation for yield of discount bonds is:
[discount (as fraction of current price) ÷ years to maturity] + coupon rate
For example, we can approximate the yield of $10K of bonds with a current value of $6K, a coupon of 5%, and a maturity in 10 years as: $4K/$6K ÷ 10 years + 5% ~= 11.6%
Without going into gory detail, I'll just say that few bonds pop out as having high yields (20%+). The ones I could find (this assumes they're performing):
Corporates:
Intelsat Jackson Holdings: $13K @ 22% and $22K @ 21% (using approximation described above)
Antero Resources: $5.7K @ 40% and $3K @50%
Lots of junk yielding 10%-15%, but even those hurt, not help boost the average.
So the help from the corporates comes from $44K in total assets.
Non-agency MBS (assuming not paid off early):
Bombardier: $51K @ 26%
GSAA Trust, Series 2007-3, Class 2A1B: $13K @ 43%
So the help from non-agency MBSs comes from $64K in total assets.
All in all, about $100K of value in a $9M fund. Certainly nowhere near enough to pull the average yield up to where the fund says it is. I have a few more thoughts but they're in the way of pure, uninformed speculation. So I would rather hear from the bond mavens. This is the second post giving a figure of 55% - 57% in investment grade bonds.
Consider that the same managers run another TCW fund that has only 35% in IG bonds. M* rates the average credit quality of that fund as AA. If you'd prefer, SIRRX is another multisector bond fund with 57% of its portfolio in IG bonds, and M* likewise rates its average quality as AA.
OTOH, PUCZX is a multisector bond with half (50%) of its portfolio in IG bonds while its average credit quality is BB. So one can tell virtually nothing about the credit quality of a fund from the figure being given, IG bonds as a percentage of AUM.
I'm reasonably confident that M* would rate MWFEX's portfolio as BB or possibly worse. While a somewhat larger percentage of the bonds in MWFEX are IG than in PUCZX, the junk bonds are of lower quality. The effect on average credit quality, as M* explains in its methodology, is nonlinear. So a few really bad bonds can drag down the whole average.
Moving on to convexity. This is another risk of this fund, where the convexity is almost nonexistent (0.09). While there are various techniques for pushing down duration some of them also drive down convexity. This is undesirable, as it tends to mitigate the benefit of shorter duration.
Finally, when people make statements about volatility, it would be nice to see hard numbers (standard deviations) included.
On the commercial bond side, there looked to be a good amount of junk. But even that junk didn't seem to be yielding that much (maybe 10%-15% if I was doing arithmetic correctly).
I mentioned above that I've got some pure speculation - I'm seeing a lot of derivatives and floaters. I haven't thought through their impact on yield. That goes down a rabbit hole I'd just as soon avoid, unless I want to prep for a job on Wall Street.
You can see SD compared to PIMIX,JMUTX,PUCZX since inception, see PV(link)
Why are you still 'pumping' risky funds with low SD?
SD deviation does not necessarily equate to risk.
Haven't you learned from the other funds you 'pumped' like SEMMX, IOFIX, JMUTX and PUCZX because they have short term 'momentum' with low SD?
Some of these funds were down 17% in one month.
Promoting a fund which has a small AUM, risky assets and low liquidity is irresponsible.
If investors flee from small AUM funds, it will put pressure on the fund to sell illiquid assets. The fund will be selling these illiquid assets at huge discounts resulting in significant losses.
An investor only has to look at what happened to Third Avenue Focus Credit fund to see the result.
https://www.cnbc.com/2015/12/11/third-avenue-to-liquidate-junk-bond-fund-that-bet-big-on-illiquid-assets.html
Just because I like a fund doesn't mean you should own it. Do your own due diligence. I have used it for my own purposes successfully.
Even a fund with 1-3 billion in AUM doesn't guarantee to be liquid. In 2008 money market fund broke the buck(link)
VCIT, about 100% investment-grade fund from Vanguard, lost about 13% from peak to trough. It did recover after the Fed promised to buy bonds but you could not forecast that.
When a black swan shows up bad things happen.
There is a reason for..."Past performance is no guarantee of future results"
Now, if you have any data please post about it. Is this fund resembles SEMMX,IOFIX or Third Avenue Focus Credit fund?
With management owning about 90% of the AUM, I’m not concerned about redemptions yet. It will be an issue at some point though
I understand your concern, but I don’t think any of us are pumping this fund. I’m genuinely interested in what they are doing and how they are doing it.
If you are comfortable with the risks associated with holding illiquid bonds in a MF than go ahead and purchase it. I will say that chasing enticing yields or returns in a bond fund can be detrimental to your portfolio. In certain financial conditions, these funds can drop 20% or more in a couple of weeks. Typically, bonds are used to stabilize a portfolio (less risk) and equity is used to increase risk and returns. It's a personal decision that only you can make if you want to add risk to the bond side of your portfolio.
As for how mwfex/mwfsx fund can have such a high yield, only a portfolio manager can truly tell you how the portfolio is positioned to obtain that high yield.
It's true that you can look at MF portfolio holdings to see where some of that yield may be coming from but those holding are usually a 3+ months old.
Some funds use derivatives, leverage and/or high yielding/illiquid bonds to juice returns.
This thread has been repeatedly flagged. I didn't have time for more than a brief review, but based on what I saw I removed a few posts and edited one other. I left the posts that seemed mostly related to fund discussions and removed those containing personal attacks. Please try to keep it friendly!
In the biggest meltdown in the last 10 years, MWFSX peak to trough was about 6%, VCIF was about 13%, BND (US bond index) all investment grade was about 6.5%. It shows that MWFSX managers did a great job. Is it a guarantee? of course not.
BTW, the Portfolio Composition(Characteristics,Sector Weight,Credit Quality,Duration Maturity) for MWFSX is as of 5/31/2020 based on real data. See (link).
Another observation, the monthly yield keeps getting smaller in the last 5 months.
So, only you can make this decision after gathering all the information.
A current SEC regulation prohibits funds from acquiring illiquid securities if they would put the fund over the 15% threshold. Further, should a fund drift over that limit, it is required to create a plan to get the fund back into compliance within a reasonable amount of time.
A key facet of the regulation is its definition of "illiquid": An illiquid investment is an investment that the fund reasonably expects cannot be sold in current market conditions in seven calendar days without significantly changing the market value of the investment.
https://www.sec.gov/divisions/investment/guidance/secg-liquidity.htm
The Van Wagoner funds predate this regulation by a decade or two. So it's not an example of a disaster in spite of this reg. However, Big Tom gave a different example that is more problematic: In theory, if a fund is 15% illiquid, it could sell off all assets for at least 85% of NAV (recovering 100% of the value of its liquid securities by definition, and 0% or more on the illiquid securities).
What happened with Focus Credit was that in no small part because of withdrawals, the fund shrank about 40% in half a year. Even with this stress, the fund barely exceeded the 15% illiquidity limit. Nevertheless, at that point, the fund halted redemptions, saying that it could not sell off enough assets at "rational" prices.
It is worth noting that shareholders ultimately recovered 85% of the NAV as of the date the fund halted redemptions, Dec 9, 2015.
https://www.nytimes.com/2016/01/12/business/dealbook/a-new-focus-on-liquidity-after-a-funds-collapse.html
https://www.reuters.com/article/us-thirdavenue-settlement-idUSKBN1722N4
Funds like IOFIX must comply with this reg. In fact, the IOFIX summary prospectus says: "The Fund may hold up to 15% of its net assets in illiquid securities."
The poor performance of IOFIX and its close peers suggests there's something inherent in the nature of their portfolios beyond having 15% (or less) in illiquid securities. Such as the remaining securities being liquid most of the time, but not under exceptional conditions (as opposed to the "current market conditions" of the regulation). Which unfortunately is precisely when one demands liquidity. Funds are required to price their securities daily. That this is difficult does not relieve them of this responsibility or allow them to cheat investors by misrepresenting prices. (IMHO the poster child for that sort of cheating is Heartland Funds.) They must mark to market, albeit with fair value pricing as needed.
From the NYTimes article link above: I figure that TCW/MetWest has the necessary expertise.
Regarding volatility, I believe you'll find that this fund is using some of the same techniques that Bob Rodriguez used over at FPNIX to manage a very stable, albeit low-yielding fund. Which brings us full circle back to the question of where those interest payments are coming from. I don't see leverage here, and as I just noted, the other tools can just as easily be used to reduce volatility. Can you point to securities that juiced returns to 18%? I haven't found them yet.
Then you mentioned IOFIX. Do IOFIX bond ratings are close to MWFSX? Was the YTD performance similar? So, why do you think MWFSX is similar to IOFIX?
I don't have a bone in this fight, I know several investors that only use Vanguard funds and I wish them good luck but we can't generalize all funds.