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In the first six months of 2020, we established new positions in over a dozen corporate issuers at what we believe were exceptionally attractive valuations. These purchases, along with many additions to existing corporate issuers, increased the Fund’s Corporate sector weighting by 11 percentage points to 45%.To fund these purchases, we sold certain Agency MBS and U.S. Treasuries, which now make up 31% and 8% of the Fund, respectively. We lengthened the Fund’s duration modestly through the aforementioned corporate bond purchases, though we remain defensively positioned with respect to interest rate risk.
Historically, when stock prices are rising and more people are buying to capitalize on that growth, bond prices have typically fallen on lower demand. Conversely, when stock prices are falling and investors want to turn to traditionally lower-risk, lower-return investments like bonds, their demand increases, and in turn, their prices.
dtconroe said: I think "Best" is only relevant to each individual investors portfolio criteria for what purpose/role an individual investor is attempting to fill in their portfolio. Portfolio criteria can vary widely, based on age, risk metrics, total return metrics, etc.
I think "Best" is only relevant to each individual investors portfolio criteria for what purpose/role an individual investor is attempting to fill in their portfolio. Portfolio criteria can vary widely, based on age, risk metrics, total return metrics, etc.
Out of tax considerations I also decided to take a modest 2020 distribution from the Traditional side, even though that was not required in 2020. Didn’t need the money. So it went into Price’s PRIHX - a “limited term“ HY muni fund that I think is probably a better fund than M* and the others currently rate it. ... As to the tax considerations, I’d rather write the IRS a check next April 15 than have to wait in line for a tax refund. Building up the non-IRA assets may prevent having to take an unwanted withdrawal from the Roth someday
davidrmoran said:Some slightly contrarian contextual takes here, of high-level interest perhaps:https://humbledollar.com/2020/10/follow-the-fed/
Some slightly contrarian contextual takes here, of high-level interest perhaps:https://humbledollar.com/2020/10/follow-the-fed/
davidrmoran said:consumer spending affects even your investments, no?
consumer spending affects even your investments, no?
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If I'm going to hold bonds at all I want them to be boring.
M* calculates the weighted average credit rating of the fund's holdings (based on Sept. 30th portfolio) to be "A". M*'s methodology is not a simple average, but a weighting based on default probabilities. This gives more weight to lower graded bonds. So if anything, M*'s calculation tends to give funds lower credit ratings than the funds would appear to merit.
Of 126 distinct core plus funds for which M* reports credit ratings, it rates only 3 at AA and 19 at A, including DODIX. The remaining 104 are rated BBB or BB (mostly BBB). There are 28 unrated funds.
M* reports average duration for 122 distinct core plus funds. While DODIX's 4.8 years is not near the bottom numerically (there are a few very short duration funds), it is 21st lowest (3 way tie), i.e. in the quintile of shortest durations.
These figures raise the broader question: do you want to own any core plus fund? The comment, "I want them to be boring" suggests the answer is no. Not because DODIX is making changes that you currently disagree with, but because this is what actively managed funds generally, and core plus bonds specifically, tend to do.
My approach with actively managed bond funds is that I don't want them to be boring. That's what index funds are for. If I'm paying for active management, I want to see the managers take advantage of a variety of opportunities - in sectors, in quality, in yield curves, in economic cycles, etc. Different strokes for different folks.
Regarding the last (semi) annual report, the fund did open a new position in Exxon Mobile (sic). However, that was presented as one of sixteen new positions that represented a variety of sectors. The securities were selected individually and not based on sector. Likewise, the 2019 annual statement "highlighted ... the additions of AbbVie, Occidental Petroleum, UniCredit, and Vodafone Group over the course of the year."
That said, a closer look at the June 2020 and Dec 2019 statements does show a significant increase in energy debt, e.g. Petroleo Brasileiro SA and Petroleos Mexicanos among others.
If duration on DODIX is 5 years (as stated by @WABC), I would find that concerning as well as “odd”, since it’s no secret D&C has for many years now been erring on the side of caution - expecting interest rates to rise. That’s one thing that has dinged their equity performance. So a 5 year duration is hard to explain. One guess: They have been known to short a few longer Treasury bonds as a hedge on rising rates. That might be what allows for the longer duration on their long bond positions. Yep - I wouldn’t use a fund with a 5 year duration as a cash substitute.
I bailed on DODIX back in March after the Fed drove interest rates to near 0. I had been using it as a cash substitute for many years and felt the risk / reward had shifted. Turns out I was wrong (or perhaps just early). It’s had a great run this year. I guess it was the (yet unannounced ) Fed dalliance with the corporate bond sector that provided the added impetus.
I’ve long wondered how DODIX can turn out such splendid returns with so little volatility. I’d say that puzzles me about as much as the enduring success of PRWCX. Some things are simply beyond my comprehension.
I'll try explaining this by analogizing to a vehicle in motion. Duration can be thought of as a measure of speed. A duration of five years means that you're "driving" at 5% per 1% rate change. That is, for every 1% increase in interest rates, you lose 5% in value. That's your "speed".
If you were "driving" at a constant speed, you'd lose 5% for each 1% increase in interest rates, like driving a steady 5MPH down a road. The way vanilla bonds work, it's as though you were tapping the brakes. (A gentle tapping, nothing more, with apologies to Edgar Allen Poe.) So at the first instant, you're losing money at 5% per 1% rate change. But as soon as you start losing principal, you slow down. That's good, you don't lose money so quickly. You lose less than 5% as rates drop 1%.
With negative convexity, instead of decelerating (positive convexity), you're accelerating. You're not gradually dropping from 5MPH to 4MPH, but you're stepping on the gas, and speeding up, say to 6MPH. Instead of losing 5% as rates drop 1%, you're losing more than 5% as your losses accelerate.
One way of looking at this is that an MBS with a 5 year duration will lose more value than a vanilla bond with a 5 year duration. (So duration understates MBS interest rate risk.) Another way of looking at this is that an MBS with a shorter duration will lose just as much as a vanilla bond with that 5 year duration.
What DODIX did was shift from somewhat shorter duration MBSs to somewhat longer duration vanilla (corporate) bonds. So even though the duration looks longer than before, the expected loss if rates increase should still be comparable. https://dodgeandcox.com/pdf/shareholder_reports/dc_income_semi_annual_report.pdf
1) "A duration of five years means that you're "driving" at 5% per 1% rate change." that formula only works for treasuries but you can find it in so many articles. It does not even work for a common index such as BND which also have Corp+MBS bonds.
2) I'm mainly a bond investor and most of the money I made was in MBS/securitized where skilled managers can find nuggets in different categories within securitized, especially after a meltdown. I also made more money in Muni HY which act differently.
3) Most investors use high-rated bonds as ballast and dampen volatility but even these go down in a black swan and why I sell to cash. This year from peak to trough the following investment grade bond lost the following: VSIGX(Treasuries) 2.5%... VBTLX(US tot bond index) over 6%...VCIT(Corp IG)=over 13%.
So only "pure" treasury fund is a real ballast but even that was down. These high-rated funds recovered within weeks but in the last 3 months the above 3 indexes are down while the lower-rated funds are still making money.
Most of us don't have the time or desire to do the research and then jump in and out of lower-rated and often newer bonds fund.
This is not a criticism of your investment style, so don't get defensive. Just my opinion.
1) Ballast - This is what most investors think
That's the first site(link) I found at Google: 2) "Most of us don't have the time or desire to do the research and then jump in and out of lower-rated and often newer bonds fund." How about admitting it's not about time at all. Investing was always may passion, I do research regardless if I trade or not. When I do it specifically for trading it takes me maybe an hour per month. In the period of 2000-2010 when I traded less often it took me about an hour every several months. The bigger and more important question is...do you see better results?
If I remember correctly you do change your asset allocation and funds according to market conditions which means you are not a buy and hold investor and it worked pretty well for you. I came to conclusion FOR ME that the only way to achieve my strict goals and rules and use mainly bond fund is what I do.
BTW, sometimes I don't change for months-years. I held a huge % in PIMIX for several years but in the last 2-3 years it's getting harder and from this point a lot harder for high-rated bonds.
I think that's a formula that everyone can agree is correct whether it is applied to a 0.01% checking account, a variable rate savings account, a fixed rate CD, an inflation-adjusted Series I savings bond, or any other interest bearing vehicle.
It says that if R increases by 1%, then the interest you get in a year will increase by 1%. No exceptions.
It doesn't matter what the Fed does. If the Fed raises interest rates by 25 basis points but your bank doesn't increase 'R', then you won't be getting any more interest. If you think otherwise, well, you're just looking at the wrong 'R'.
Same with bond prices. Sure, the formula for bond prices is a little more complicated, but it's just as arithmetically sound as I = PRT.
Same with the formula for duration, which is essentially just the first derivative (rate of change, or "speed") of price as market interest rates (YTM) change.
As with I = PRT, if you believe the formula doesn't always "work" because the price of your corporate bond may not change when the Fed changes its overnight rates or when the 10 year Treasury rate drops, well you're just looking at the wrong 'R' (YTM).
Case in point. Between mid 2007 and September 2008, the market rate on 10 year Treasuries dropped from 5+% to around 3¾% while the rate on Aaa 10 year corporates barely moved. The formula worked fine; corporate bond prices didn't move because corporate interest rates didn't move. It's an oversimplification to talk about "rates" as though there's only one set of interest rates.
Stay Safe, Derf
The chart is cool and gets specific. I’ll confess to generally being fog-bound with regards to bond funds anyhow. RPISX is probably listed as a bond fund, but I beg to disagree owing to its 5-25% allowable weighting in an equity fund. Also, its “bond” holdings, ranging from EM to Treasuries are so diverse as to demand a more specific moniker than simply “bond fund.”
Another consideration in the overall equation here: Some investors find value in sticking with only one or a few houses. In that case, they may be “comfy“ in settling for only “third best” or “fifth best” fund in any particular category of fund. And, as has no doubt already been mentioned, various economic forces at work at any one time can greatly lend favor to or create havoc for virtually any bond fund, regardless of name, management or style.
FWIW - I closed out long held RPSIX today. Not only has it stunk up the joint in recent years, but its diverse holdings no longer fill my perceived portfolio needs. I’d rather today hold generally short term and / or high quality bond holdings as a stabilizing influence in the portfolio rather than seeking growth or high income with such a broadly diverse “income“ fund. The small remaining amount was moved into their .25% ER index bond fund PBDIX, which I’ve held for about a year. Why bonds over cash? IMHO they would act more like a hedge against rapidly falling equity prices - if only temporarily.
Out of tax considerations I also decided to take a modest 2020 distribution from the Traditional side, even though that was not required in 2020. Didn’t need the money. So it went into Price’s PRIHX - a “limited term“ HY muni fund that I think is probably a better fund than M* and the others currently rate it. It appears almost stable enough to use as a cash alternative (not recommended however).
Part of my thinking on munis - No matter which side wins the election, municipalities and states will eventually get some federal help. (But still waiting for my official “Oracle“ license to arrive in the mail.) As to the tax considerations, I’d rather write the IRS a check next April 15 than have to wait in line for a tax refund. Building up the non-IRA assets may prevent having to take an unwanted withdrawal from the Roth someday (which is now near 70% of invested assets).
It's a different question when comparing T-IRAs and Roths. There are several reasons for keeping at least some money in a T-IRA (QCDs, lower tax bracket for heirs, leave to charity, etc.) But given a choice between adding eligible money to a Roth or leaving it in a taxable account, I'm not aware of a reason to keep it in a taxable account. So I'm not clear on your thinking here.
The muni bond fund does let you escape federal taxes (it's still substantially subject to state taxes). However that comes at a cost - muni bond yields are less than taxable bond yields (which would be tax free in a Roth).
For example (this is just the first one I picked, not necessarily the best comp), RPIHX is a taxable junk bond fund with a duration of 3.58 years and an unsubsidized SEC yield of 4.94% (subsidized is 5.08%). PRIHX is a muni junk bond fund with a duration of 4.44 years and an unsubsidized SEC yield of 1.40% (subsidized is 1.84%)
Though most multi-sector funds don't hold equity worth mentioning (5%+), about 1/8 of the nearly 100 funds do. They can get a fair amount in dividends plus a small growth kicker, but at the expense of higher volatility.
When Kathleen Gaffney left Loomis Sayles, it seemed she tried to outdo her mentor Dan Fuss at LSBDX by upping the equity to 20% in Eaton Vance Bond (EVBAX). That resulted in a fund even more volatile than LSBDX.
PRIHX appears to merit a 2* rating because of its below average returns. This in turn is likely because it has one of the shortest durations of any high yield muni fund. A problem with M*'s ranking of junk bond funds is that it groups funds together regardless of duration - no short term, intermediate term, long term breakdown. There are only five muni high junk bond funds with durations under five years. Four have 2 stars; only ISHYX which has done slightly better, has a 3* rating.
Stay Safe, Derf
Hi Derf, I am not doing much posting these days, but do enjoy reading others posting. I expect to post a little more often after the election is over, and toward the end of the calendar year, when I typically start making investment decisions for the next year.
“ ... its below average returns. This in turn is likely because it has one of the shortest durations of any high yield muni fund.” -
Yes - (using Yahoo) PRIHX has a duration of 4.34 years vs 7.07 years for the category average. What I want. Of course, it’s being measured against more aggressive competitors. I suspect this is a major problem in most bond rating efforts.
I don’t follow M*, but watching the Lipper scorecard, bond funds’ fortunes tend to wax and wane depending on the climate. ER - ISTM is the greatest predictor of success, all other factors being roughly equal.
“I don't see anything unwanted about Roth distributions.” -
Ahh ... Mine were all converted during retirement. There was a price paid in paying the tax as well as the hassle. To me the Roth is “the gift that keeps on giving”. All your gains remain tax free. Convert at the right time (ie: early ‘09) or goose the returns with a few good speculative plays and those untaxed gains can be considerable. Meanwhile, with a traditional IRA, not just your original (untaxed) contributions, but also all your gains - even those you’re compiling today - stand to be taxed as ordinary income at withdrawal.
Not against pulling from the Roth. But considering the trouble expended in doing the conversions and the nice tax treatment, would rather save for a rainy day.
However ... On second look, the shorter-term one isn’t high-yield. In this case, I’d like to reach a bit for yield. And rather like that 4.34 year duration. Of course, both of those stated preferences might prove to be completely wrong.
At the time I wrote about DODIX I could swear it was BBB, and that the duration had crept up to five years. That's why I read their report, and discovered that they were buying some energy bonds. Today, all is back to normal. Duration under 5, credit rating A.
Don't know what I saw. Maybe it was primer fumes. All the regular paint is low VOC. But not the primer.
It may seem contrary to some, but I do not view bond index funds as boring.
The main reason I would sell bond funds in the near future is to realize some profit, and have some cash for the next opportunity.
I especially like #6 - “Stay Flexible”.
BTW - David Giroux referred to bonds at today’s rates in the unkindest of terms in the PRWCX fund report somebody posted here a month back. Can’t recall his exact words - but he’s very negative on them as investments today.
1)Employment: has nothing to do with stocks. Disregard.
2+5)Inflation + Plan for higher inflation.: I don't see any inflation coming soon. Still high unemployment, Covid, big tech improve processes, globalization. Disregard
3)Expect low yields. Of course, the Fed told us that
4)Favor the middle. intermediate term bonds are where you should be long term. Disregard
6)Rethink asset location: Same old narrative. Not all bonds are treasuries. Example: PTIAX,PIMIX pay about 4% annually.
6)Stay flexible. Keep your style and why disregard. If you are buy and hold investor and it worked for you changing isn't your strength. I'm a trader for about 20 years and why flexibility works for me.
7)Avoid gold. Sure. Most should avoid other stuff such as CEFs, risk parity and other exotic funds. KISS. Use only several funds, Core funds: wide indexes, explore funds: a few managed.