I parked some money in RPHYX a few months ago, and now I am trying to understand how I should use this fund in the long term: as an alternative to cash, or as part of my bond allocation, or in some other way. If U have a 70/30 split between stocks and bonds, is RPHYX a suitable replacement for the "bond" portion of the portfolio? Or should I stick to a typical "core" bond fund such as VBMFX, PTTDX, DLFNX, etc.
In the other thread about the role of fixed income in a portfolio, BobC noted that he advises clients to expect 2-4% from bonds over the next 10 years. According to Morningstar, RPHYX's 1 yr trailing performance is 3.61%, and its SEC yield is 3.65%. In this context, RPHYX's performance as a bond fund seems very respectable. It has returned (and is currently yielding) at the upper end of BobC's target range with very little change in NAV.
On the other hand, Vanguard's Total Bond Market VBMFX has returned 6.49% over the same period but with much more volatility. In isolation, I would think that if my bond target is 2-4%, and RPHYX is already returning 3.61%, then VBMFX is not worth the risk. However, I don't know how this plays out in the context of a portfolio. Maybe VBMFX is a better diversifier and thus a better choice a hedge against equity risks.
I noted in David's June commentary that he was planning to update his profile of RPHYX, so maybe this is one of the things that he could comment on. The original profile highlighted RPHYX as an alternative to money market funds but did not really discuss whether it could be a "core" bond fund in the context of a portfolio.
Comments
You noted: "I parked some money in RPHYX a few months ago, and now I am trying to understand how I should use this fund in the long term: as an alternative to cash, or as part of my bond allocation, or in some other way. If U have a 70/30 split between stocks and bonds, is RPHYX a suitable replacement for the "bond" portion of the portfolio? Or should I stick to a typical "core" bond fund such as VBMFX, PTTDX, DLFNX, etc."
>>>>> We don't hold this fund; but it is indeed a speciality bond fund, and would be a complementary bond fund holding for us; among our other bond funds. VBMFX and PTTDX are more broad based, while DLFNX does and will probably continue to tilt towards mortgage bonds, unless Mr. Gundlach finds problems with this area going forward.
"In the other thread about the role of fixed income in a portfolio, BobC noted that he advises clients to expect 2-4% from bonds over the next 10 years. According to Morningstar, RPHYX's 1 yr trailing performance is 3.61%, and its SEC yield is 3.65%. In this context, RPHYX's performance as a bond fund seems very respectable. It has returned (and is currently yielding) at the upper end of BobC's target range with very little change in NAV."
>>>>> I have to presume BobC's reference is an annualized, total return from a broad based bond fund holding(s). I don't know what to expect that far out into the bond/financial world and will attempt to adjust going forward, as needed.
"On the other hand, Vanguard's Total Bond Market VBMFX has returned 6.49% over the same period but with much more volatility. In isolation, I would think that if my bond target is 2-4%, and RPHYX is already returning 3.61%, then VBMFX is not worth the risk. However, I don't know how this plays out in the context of a portfolio. Maybe VBMFX is a better diversifier and thus a better choice a hedge against equity risks."
>>>>> As to risk of RPHYX versus VBMFX; one would have to consider risk in the HY bond sector in general and what affect this might have upon RPHYX and how it deals with a special area of the HY bond area. VBMFX is definitely more diverse. Another consideration is that although RPHYX has a current yield of about 3.75%, it also has an ER of 1.25% (temporary, and could be adjusted to 2.2% range); while VBMFX has a yield of about 2.75%, but an ER of .25%. Not as much yield obviously, but one is saving 1% in ER, too. Additionally, at least for me; I would continue to measure RPHYX against SPHIX. Not the same critters in function; but they are cousins. I note SPHIX, as it has a very long record of returns, is well managed and ranks 47 of 563 HY funds over the past 5 years, which of course, includes the market melt period. Since its inception, has shown RPHYX to have a slow and steady upward path when measured against swings in the traditional HY bond funds, but with about 1/2 of the total return.
"I noted in David's June commentary that he was planning to update his profile of RPHYX, so maybe this is one of the things that he could comment on. The original profile highlighted RPHYX as an alternative to money market funds but did not really discuss whether it could be a "core" bond fund in the context of a portfolio."
>>>>> For our house, for most aspects; we currently use TIPs funds for our "cash" holdings, while any of our other bond funds serve a similar purpose and could be sold for equity positions. The TIPs funds are very liquid; thus part of their usage desire. The ultimate test for RPHYX would be enough of a market scare (lasting at least 3-6 months) that also would affect the traditional HY bond sectors to find the fund's reaction to buyers and/or sellers in this area. For our purposes, we would maintain a total type bond fund for a core holding in this area.
My 2 cents worth............
Take care,
Catch
The biggest risk of this fund is tail risk: it should earn consistently attractive rates above cash but could be susceptible to a large negative drop in the event of a default. An additional risk is liquidity; my understanding of called high yield bonds is apparently, they aren't very liquid and the aim is to hold them to maturity.
If all of the shareholders want to cash out at the same time, say during a banking crisis, and the manager was forced to liquidate a substantial portion of the portfolio, this would create a problem. The funds holds a good deal of cash and should generate it quite quickly, so this may not be a huge risk.
Its not really a money market fund and its not really a bond fund. Its risks are different. Its probably not a good replacement for something really volitile like LSBRX or PONDX, which should out-perform it over long periods of time, nor is it a great replacement for ultra-safe SIPC/FDIC insured cash or t-bills, but it is an awesome fund. It could earn ~3-4% vs ~2-2.5% in vanilla bonds over the next few years. Personally, the cash I have for investment purposes is split between this and a high yield-savings account, for what it's worth.
"In general, bond fund managers won’t buy such short-lived remnants and money market managers can’t buy them: these are still nominally “junk” and forbidden to them. According to RiverPark’s president, Morty Schaja, these are “orphaned credit opportunities with no logical or active buyers.” The buyers are a handful of hedge funds and this fund. If Cohanzick’s research convinces them that the entity making the call will be able to survive for another 30 days, they can afford to negotiate purchase of the bond, hold it for a month, redeem it, and buy another. The effect is that the fund has junk bond like yields (better than 4% currently) with negligible share price volatility."
"This strikes me as a fascinating fund. It is, in the mutual fund world, utterly unique. It has competitive advantages (including “first mover” status) that later entrants won’t easily match. And it makes sense. That’s a rare and wonderful combination. Conservative investors – folks saving up for a house or girding for upcoming tuition payments – need to put this on their short list of best cash management options."
⇒ David's Review, July 2011
Regarding the fund's performance in a 2008-like scenario, here is a quote from David's commentary of August 2011, which contained an update on RPHYX:
"Unfortunately, the pure separate accounts using this strategy only began in 2009, so we have to look at investments in this strategy that were part of larger accounts (investing the excess cash). While we can’t predict how the fund may perform in the hypothetical next crisis, we take comfort that in 2008 the securities performed exceedingly well. As best as we can tell there were some short term negative marks as liquidity dried up, but no defaults. Therefore, for those investors that were not forced to sell, within weeks and months the securities matured at par. Therefore, under this hypothetical scenario, even if the Fund’s NAV fell substantially over a few days because markets became illiquid and pricing difficult, we would expect the Fund’s NAV would rebound quickly (over a few months) as securities matured. If we were lucky enough to receive positive flows into the Fund in such an environment, the Fund could take advantage of short term volatility to realize unusually and unsustainable significantly higher returns."
catch22: You mentioned the relative expense ratios of VBMFX vs. RPHYX. Just to clarify, the reported SEC yield is net of expenses. I think you know this but I am not sure how the ER factors into your discussion. The fee waiver is a concern but it looks like their actual expenses have been decreasing, and in any case we can cross that bridge when we get to it.
More soon!
David
At the risk of repetitive redundancy, I'll note that RPHYX has essentially nothing in common with the portfolios or profiles of short-term high-yield bond funds. The manager's strategy is to invest a large fraction of the portfolio in called or soon-to-be called high yield bonds. That means that he might own an intermediate-term junk bond, but he owns it only for the 30-60 days between being formally called (or between being convinced that a call is imminent) and its final redemption by the bond issuers. While the strategy is not risk-free, he argues that the risks are different from what investors in either high-yield or short-term high-yield funds face. You get a sense of those differences if you chart RPHYX's NAV as STHBX or a high-yield index.
At the risk of putting words in his mouth (words which I'll try to confirm before incorporating them in an updated fund profile), the manager sees this as more nearly cash-like than bond-like in its profile.
For what it's worth,
David
Junkster, ya think???
I have wondered about Junkster on more than one occassion; and would most welcome a return here.
Take care of you and yours,
Catch
David
Let's say say you have a 60/40 or 70/30 split between stocks/bonds. In this scenario, I believe the bond portion should serve the following purposes:
1. Preserve capital: The bond fund should be relatively low risk (relative to the equity portion) in case of an emergency where you need more cash. Also in case of a crash in stocks, you can rebalance and buy on the lows.
2. Low or negative correlation to stocks: You don't get any benefits of diversification if the bonds and stocks go up and down at the same times.
3. Decent amount of return: You should expect the bonds (over time) to return more than cash (savings, CDs, etc).
My questions are: Do you agree with the above goals for the bond portion of a stock/bond portfolio? And if so, does RPHYX meet all of these criteria?
Ultimately what I'm getting at is, let's say you have a stock-tilted portfolio and you could only have one bond fund. Would RPHYX qualify or would you still choose one of the more typical core bond funds such as the offerings from Doubleline, Pimco, Vanguard, etc.
MarkM
MarkM
I hold LSBDX/LSBRX, but I remember in 2008 it dropped over 20%. It eventually recovered (and maybe Fuss learned some lessons from it) but at least during that period, it was not very good for protecting against equity risk.
Hi claimu-
LSBRX does carry some risk! It is volatile as you saw during 2008-09.
Personally, I have put my money with Gundlach and Gross. I believe they can navigate what may be a difficult bond market ahead and obtain decent returns.
That being said, if you want to lock in the 3-4% that Riverpark looks to get you, have weighed the alternatives and are making an informed choice, I see no reason that under some scenarios that that can't be a viable strategy. You take the "certain" return, wait until the bond market normalizes, then reassess.
If I had to answer your question, the other funds have more tools in their toolkits than Riverpark. It's a one or two trick pony, but a good one at that.
Best,
MarkM
MarkM
I plan on using RPHYX in my (soon) retirement as a repository for my annual cash, with a fixed monthly transfer to my checking account for budgeted living expenses. [The monthly transfer out is a feature if you have an account directly with RiverPark.]
The pseudo 'steady income stream' will keep the better half happy