DODIX - Up 9% YTD / 9.3% one year / 6+% annually over the past three years
DODFX - Up 1.74% YTD / 2.37% one year / 1.68% annnually the past three years
The question isn’t purely academic. I opened a small spec position in DODFX about two and a half months ago. Just a little play money - pennies. The fund has caught fire of late. Normally, I’d now shift the spec money from DODFX back into DODIX, locking in a 20-30% gain. DODIX is, after all, clearly the more “conservative” fund. It serves as a cash substitute for investors at Dodge Cox which doesn’t have a money market fund.
However, at this juncture everything looks “upside-down”. It’s the “safe” conservative fund that’s been screaming hot for several years while the “riskier” international fund has hardly moved. Regression to the mean - maybe?
Comments
While I don't gauge risk primarily by SD, many do. So here's two little data points that should answer your question (if the first statement didn't);
Prior 3-yr SD:
DODFX: 23.55
DODIX: 3.71
BTW, DODIX is NOT a cash substitute despite the fact/notion that some D&C investors might use it as such.
I agree with @stillers that beyond the 3-year threshold DODFX has outperformed DODIX. Yet, according to Lipper, at the 10-year point their annualized returns are nearly identical: DODIX: +4.67% / DODFX: +4.85%
And I agree that an international stock fund is inherently riskier than a predominately investment grade domestic bond fund. That’s a mathematically provable thesis as well as conventional wisdom. But an individual investor might view risk differently, asking “Which of these choices is more likely to generate gain and less likely to produce a loss over a relatively short near-term period (1-3 years) based on the macro outlook?” I’m suggesting that on the second note the “playing field” is much less uneven now than it has conventionally been. Others are concerned about fixed income as well. David Giroux in his last semi annual report called the investment grade bond market “extremely unattractive and in fact the most unattractive it has been in my whole career.” Capital Appreciation Semi-Annual Report 2020
Not seeking to answer my own question, but rather to explain why I felt it deserved to be asked. If the question didn’t have at least two sides to it, it wouldn’t be worth asking. And thanks @sillers for your input.
Hank, FWIW, I did NOT say that. I only presented SD data for the 3-yr period, not performance data.
On cash substitutes, good that you can take the volatility of DODIX as a cash sub. That said, there is a wasteland of 2020 M* forums participants who previously thought that several multi-sector bond funds with high concentrations of securitized holdings were good cash subs. They learned some very hard lessons in Feb-Mar this year.
It doesn't surprise me that DODFX and DODIX had similar TRs over 10 years. No offense, but DODFX is not a very good FLV fund, while DODIX is a worthy domestic IC+ bond fund.
Bottom Line: Don't overthink this. You're asking if a mediocre international stock fund is riskier than a domestic IC+ fund. Risk, in its simplest form, is uncertainty concerning loss. SD, while not exactly a measure of that, is a still a worthy measure of it and DODFX's SD is about 5x-6x greater than DODIX's for all prior time frames.
Granted, the macro outlook sure is pointing to outperformance of international stocks in the coming year(s). Now if I only had a nickel for the multiple times that's been the macro thinking over my 40 years of investing, I'd, well, probably have enough money for something.
"I agree with stillers that beyond the 3-year threashhold DODFX has outperformed DODIX. Yet, according to Lipper, at the 10-year point their annualized returns are nearly identical: DODIX: +4.67% / DODFX: +4.85%"
However, since the timeframe you are interested in is 3 years, we can compare performance data over the past three years. M* reports that the foreign large cap value category lost an annualized average of 0.70%, through Nov 30th. See its trailing total returns here (click on Monthly tab). DODFX did bit better, losing just 0.10% annually. Fidelity reports that the average prime MMF made 1.31% annually through Nov 30th (see its graph here).
Using the theory that one should take money from winners and place it on losers, we should take money out of cash and bet it on foreign large cap value funds? Surely that doesn't sound right; MMFs are safer investments, even now, than DODFX. One can stretch rules of thumb too far, especially over short time frames.
I do agree with Giroux that IG bonds do not look attractive. However, if one accepts the Fed statement that it will keep short term rates near zero for the next three years, then one might eek out a bit better return with IG bonds than with a "high" yield savings account. That's at least until the economy heats up, which could push longer term rates higher. IMHO this small potential improvement in return isn't worth the risk but it's a thought.
But DODIX isn't a vanilla IG bond fund. It can invest a significant amount in junk - it is a "core plus" fund. While IG bonds and the stock market have essentially no correlation (BND and VTSMX have a correlation coefficient of -0.04), DODIX and VTSMX have a correlation coefficient of 0.58 over the past three years.
Edit: Over the past decade, DODFX has outperformed its category by just north of 1% annually. Not great, but enough for M* to characterize its 10 year performance as "above average" (vs. its 3 year "average" performance). It earns a lower star rating than its performance suggests because its risk is rated "high" over all time frames, and star ratings are risk adjusted.
Yes, per @msf, DODIX may by prospectus invest large amounts in non investment grade paper. But it hasn’t done so, currently holding just slightly above 10% in junk bonds - nearly all of it in the highest rated tier (BB).
- “Using the theory that one should take money from winners and place it on losers, we should take money out of cash and bet it on foreign large cap value funds?”
It’s an intriguing conjecture. But, No, I wouldn’t recommend that. On the other hand, if one is using “play money” (defined as 1-5% of a larger well diversified portfolio) I think it might be a good idea to do just that.
I'm not so sure about that. Over the past few years, it had been positioned as a short term fund (see M* historical style boxes here), but in 2020 it extended its duration into intermediate term territory.
Also, as I suggested above, rising interest rates could be a result of an improving economy. In that case, one would expect the spread between junk and IG to decline, making junk more attractive. In addition, junk bonds are less sensitive to interest rate changes, tending to a fair degree to track equities. See, e.g. this Balance piece.
Yet as you noted, DODIX is not taking advantage of its ability to hold lower grade bonds. It is one of the few core plus funds with a M* average credit rating of A. (Just 17 hold A rated portfolios vs. 25 with BB portfolios; over half the core plus funds have portfolios rated BBB.)
ISTM the fund is positioned for a slow slog; low and steady rates, where it is betting on rates not going up (and prices dropping), while not willing to bet on avoiding short term problems in the economy (where junk bond prices would fall).
In the equity market, rising interest rates are good for the financial sector, because people expect higher rates to lead to higher spreads and greater profits. I don't know how that connects with financial sector bond prices though. I really have no idea unless one expects lower profits to substantially increase the risk of financial institutions being unable to service their IG debt.
Bottom line: DODIX and many others playing that space (intermediate duration / mid and lower investment grade bonds) have had an outsized year that’s not likely to repeat. That’s largely due to the Fed’s efforts on interest rates and in providing at least tacit backing for BBB corporates (generally considered borderline investment grade). I’m assuming that you can only pull the same rabbit out of the same hat once. So for 2020, the bond cart was up-ended.
I’m also biased towards D&C, having been with them some 20 years, which also affects my outlook somewhat. I know that international markets have wave-like patterns, with different global economies rising and falling, not always in sync. So, I tend to view an international fund that has lagged peers for a number of years as having greater potential than those that have ridden the crest of the wave. Another consideration is the potential for large gain that should be part of the risk equation ISTM. By that measure it’s clear international stocks have much greater potential for gain today than short or moderate term credit instruments do.
DODFX appears to be team managed with 5 of the 8 managers being there since 2001-2007. It's been a mediocre, M* 3-star fund in all report periods, 3 years, 5 years and 10 years.
What makes you think that somehow that same mgmt team that has only produced 3-star ratings for their entire tenure are all of a sudden gonna turn this fund into something they've been unable to do during their entire 10-20 year tenures?
DODFX has had negative returns in 4 of the past 10 years, with double-digit losses in 3 of them, 2011, 2015 and 2018, ranging between -11% to -18%. It's actually in the RED in 2020, in a year when worthy FLV funds like CIVVX are UP 5%.
You've already posted that DODIX has virtually matched DODFX's 10-yr performance with DODIX only having ONE small loss in ONE year. (Actually, it lost -0.59% in 2015 and -0.31% in 2018.)
All that said, DODFX and DODIX are an apples and oranges comparison, or more accurately, 90/10 Foreign/US stocks vs 90/10 US/Foreign bonds.
DODFX's SD is 5x-6x that of DODIX and that's not going to change much at all, overnight, or over a 3-10 year period.
I kindly suggest that you spend a little time examining exactly what these funds respectively own, and what SD and other risk measurements mean (see Investopedia link), and how those two items make this decision pretty easy.
https://www.investopedia.com/investing/measure-mutual-fund-risk/
The conclusions that should be drawn are:
DODFX is a mediocre FLV stock fund that has only kept pace with IC+ bond fund DODIX for the past ten years.
DODFX is inherently a much higher risk fund than DODIX and the chance of it not meeting investors return expectations is significantly higher.
What about BND vs RBIN??
ISTM that you're rolling up multiple factors into a single number. Over the past ten years, DODFX has turned in four star performance. It is rated three stars for risk adjusted performance.
While it's more than fair to consider risk since that's @hank's main concern here, it's not quite fair to mix raw performance and risk adjusted performance in the same sentence: "mediocre" (risk-adjusted) and "kept pace" (raw performance).
We can take a closer look at those ten year performances. DODFX has outperformed its category by an average of 1.03% over the past decade (through Sept. 18, per M*). DODIX has outperformed its category by 0.40% over the past decade. Based on these figures, which is the mediocre fund?
Sure, DODIX has kept pace with DODFX. But that's because a mediocre core plus fund has outpaced a mediocre FLV fund over a decade, 4.26% to 3.95%.
"What about BND vs RBIN??"
Okay, what about it? Seriously.
Is it your thesis that a portfolio consisting of these two funds and others shouldn't be periodically rebalanced? Because current rebalancing would effectively take some money from BND and add it to RBIN. Of course that would be within the larger scope of an entire portfolio.
There are certainly many people who think rebalancing is overrated. I had asked the same question: "should [we] take money out of cash and bet it on foreign large cap value funds [that have lost value]?"
To put it another way: should rebalancing be a one-way street? Should we move money out of (long term) riskier categories into (long term) less risky categories when the former have done well, but we shouldn't rebalance the other way? That would mean we don't move money from bonds to stocks even though core plus bond have had a better ten year run (even the mediocre ones) than foreign large value funds.
As of Dec. 1st DODFX results:
YTD -{3.0%}, 3 years -{0.1%}, 5 years +4.5%. Negative returns for 3 years is "Gold?"!
Compare that blow out performance to the Category (Foreign Stock Funds):
YTD +7.1%, 3years +3.7%, 5 years +7.3%
Translated: avoid, its a bum fund, you lost money for years. Of course, your mileage may differ should you choose to fork over hard earned cash today. Much better options elsewhere...Vanguard Intl Growth or Fidelity Intl Discovery perhaps?
YTD -{3.0%}, 3 years -{0.1%}, 5 years +4.5%. Negative returns for 3 years is "Gold?"!
"Compare that blow out performance to the Category (Foreign Stock Funds):
YTD +7.1%, 3years +3.7%, 5 years +7.3%"
Compare that to the Category (Foreign Large Value Funds):
YTD -{4.1%}, 3 years -{0.7%}, 5 years +3.8%
(My data are from M*'s performance page for the fund, as of month end Nov. 30th. The category performance was calculated by taking the fund's performance and subtracting its category outperformance as given on that page.)
Morningstar stars are given for (risk adjusted) past performance. Gold (and other medal) ratings concern prospective performance. While past performance informs, "past performance does not guarantee future results."
If you want to say that FLV has done lousy over the three years, all well and good. However, medal ratings are relative to peers, and the fund does perform well relative to its peers. At least on an absolute (not risk adjusted) basis.
YTD + 49.8%, 3 YRS +20.2%, 5 YRS +19.4%
Yowza! Dramatically different returns for both "Gold" funds in the same M* category.
"Gold" rated apples are not all "gold."
Yowza! Dramatically different returns for both "Gold" funds in the same M* category. Therein lies the problem. While a variety of foreign stock categories are grouped together under the rubric "Foreign Stock" on page 38 (pdf p. 40), M* does not call that a category.
Read a little more closely. The DODFX line (it's the 11th fund in this grouping) has the notation FV. Likewise, the VWIGX line (39th in the grouping) has the notation FG.
There's a key at the bottom of the page. On the right hand side is something called Categories (bold font in original). Two of the categories given are:
FG Foreign–Large Growth
FV Foreign–Large Value
If all the funds under "Foreign Stock" were in the same "category", then how could Phaeacian Accent International Value Ins PPIVX have a lower three year return than VWIGX ( 8.1% vs. 20.2%) yet have a higher three year return category rating: top 1% vs. 4th percentile? That's all from the same page 38. The answer is simply that they're in different categories.
Perhaps this web page will help: http://awgmain.morningstar.com/webhelp/glossary_definitions/mutual_fund/glossary_mf_ce_Morningstar_Category.html
"Gold" rated apples are not all "gold."
"Gold" rated apples are "gold". "Gold" rated oranges are "gold". Don't confuse apples with oranges.