What are your thoughts here. I know we have some really knowledgeable bond people here at MFO and I' like to hear everyone's opinion on the subject and if you are buying.
I've been out of specific bond funds for about a year and a half (except for RPHYX). I'm considering getting back in now with the hope the worst is over or close. What are other's thoughts? I'm specifically looking at floating rate at this point, piggybacking onto statements I've seen from David Giroux and others in Barrons. If I'm looking for an early trend, the last quarter of 2022 was steadily increasing for this sector. I'm considering using SAMBX.
I know the safer route is CD's and treasuries at 4-5%, but I'm hoping with a little added risk, high single digit returns may be obtainable.
What are the thoughts? Pros and cons?
Since mid-year I’ve preferred intermediate term investment grade bonds over cash. In particular I’ve used the etf GNMA as a cash replacement. Not because I hope to make any money on it (though I might), but because I consider good quality bonds a better hedge against sharply falling equity valuations than cash. Good quality bonds should increase in value during turbulent times as investors seek safety. No guarantee of course! The fact that investment grade intermediate and longer dated bonds are now yielding 5% or higher certainly makes them more attractive as a hedge than they were a year or two ago.
So my preference for bonds has to do with overall portfolio construction and trying to reduce volatility (there’s that word) and counter potentially greater equity losses. I’d only suggest bonds if that is your main goal. Currently, less than 20% of portfolio is allocated to fixed income. Mostly that’s in GNMA, DODLX, PRIHX and JPIB. But there’s roughly another 20% in CVSIX (convertible bond) or other funds which, for portfolio construction purposes, are part of the alternative sleeve.
Your question really goes to the heart of where the economy is going to go over the next year or more and how the Federal reserve responds. I’m afraid no one can predict that with any certainty. However, I think an actively managed bond fund (having low fees) a better choice than an ETF if overall return is the main goal. My predilection for bond ETFs is because I want to be able to move in and out without any trading restrictions.
* MikeM may have been referencing an article by @LewisBraham in this week’s Barron’s in which he quotes David Giroux on the subject. “Funds: Taking a Risk to Earn Fatter Yields”
Last weeks pricing performance.
--- AGG = -1% / -13.02% (I-Shares Core bond etf) widely used bond benchmark, (AAA-BBB holdings)
--- MINT = -.01% / -1% (PIMCO Enhanced short maturity, AAA-BBB rated)
--- SHY = -.18% / -3.88% (UST 1-3 yr bills)
--- IEI = -.58% / -9.5% (UST 3-7 yr notes/bonds)
--- IEF = -1% / -15.2% (UST 7-10 yr bonds)
--- TIP = -.46% / -12.2% (UST Tips, 3-10 yrs duration, some 20+ yr duration)
--- STPZ = -.22% / -4.47% (UST, short duration TIPs bonds, PIMCO)
--- LTPZ = -1.1% / -31.7% (UST, long duration TIPs bonds, PIMCO)
--- TLT = -2.55% / -31.2% (I shares 20+ Yr UST Bond
--- EDV = -3.3% / -39.2% (UST Vanguard extended duration bonds)
--- ZROZ = -3.67 / -41.3% (UST., AAA, long duration zero coupon bonds, PIMCO
--- TBT = +5.4% / +93.3% (ProShares UltraShort 20+ Year Treasury (about 23 holdings)
--- TMF = -7.9/ -72.6% (Direxion Daily 20+ Yr Trsy Bull 3X ETF (about a 3x version of EDV etf)
--- BAGIX = -.58% / -13.35% (active managed, plain vanilla, high quality bond fund)
*** Other, for reference:
--- HYG = -1% / -11% (high yield bonds, proxy ETF)
--- LQD = -1.52% / -17.9% (corp. bonds, various quality)
--- FZDXX = 4.26% yield (7 day), Fidelity Premium MMKT fund
@devo, looking forward to your article.
@hank, I saw LB's article. All I read is saying it may be or may be pretty close to thinking it may be time to consider bond funds again.
Everything I'm hearing from bondland now (e.g., fixed income leads from various companies on Bloomberg Real Yield) is pretty negative on bank loans, with them and C-rated junk as the assets most likely to suffer the worst (as in a rising default rate) if risk conditions really go south. (Those opinions are coming from a place of expecting an economic slowdown.)
Floating-Rate Loan Funds Have Promise—and Hidden Risks” and David Giruox was part of the interview. If that is the case, I came away with a different interpretation from yours on bonds in which risk is higher today with bank loan funds than previous years.
Keep in mind that FR/BL are a subclass of HY and their rate resetting mechanism works fine when rates are rising or stable. If rates start declining, or economy finds itself in recession, then they will be hit hard like other HY. Davis Giroux runs a capital appreciation fund PRWCX with some exposure to credit spreads and he won't be doing B&H for FR/BL.
Fido FFRHX, 1-yr (default). Switch to 3+ years to see volatility. https://stockcharts.com/h-sc/ui?s=FFRHX&p=D&yr=1&mn=0&dy=0&id=p80706396341
I am watching carefully and have pared back some BL/FR funds. Question is what can Giruox do with a such large asset fund. Right now, he is holding some treasuries, perhaps as a hedge in case things get back. He stated I several interviews that US market is strong fundamentally and we will not in a recession.
Giroux: “The asset class today with the most attractive risk/reward profile is leveraged loans. I’ve taken leveraged loans to 12% of my portfolio …”
Somewhat paradoxically, his fund lost 12% during 2022. And, as if to further cement his bond credentials, in the same interview Giroux avowed ….
“I would make a bet that the 10-year doesn’t get above 2.5% in the next year.”
At the time of the Roundtable discussion, the treasury yield curve has not been inverted until August this year. As of December 28, 2022, 10 year treasury yield is at 3.88% and the spreads between 2 mo, 3 mo and 10 mo to 10 year treasury are all negative. https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_yield_curve&field_tdr_date_value_month=202212
Recent WealthTrack interview Giruox thought we may have a chance of not getting into a recession in 2023. I hope he is right and that is why I invest with him for a long time.
I will get back to bond finds again but it will be gradual over the entire year. Until the Fed lower the rate , I will stay with Tbill ladders even at 4-5% yield.
I therefore utilize bonds (and "cash") to hedge equity losses.
Both equities and fixed income experienced losses in 2022 - this is a rare occurrence.
In late 2021, I sold my core bond holding (DODIX) which was ~16% of my portfolio.
Overall bond yields have risen significantly since 2021.
Although the Federal Funds rate will probably be increased a few more times,
the bulk of rate increases in this cycle may have already transpired.
I purchased DOXIX (replaced DODIX in 401k) on 12/30/22.
This is my core fixed income holding currently comprising ~19% of my portfolio.
The remainder of the portfolio's bond/cash position is in T-Bills and money markets now.
I'll likely purchase additional bonds/bond funds (possibly TIPS/Treasuries/munis) later in the year.
If the manager(s) of DODBX - one of my larger holdings - ever take a seat at that rountable and begin broadcasting their brightest new ideas to an adoring public … I think I’d sell the fund.
@Observant1 +1 / You succinctly and clearly stated in 120 words what it took me half a page to convey. Nicely done.
Now if I could only write succinctly on a consistent basis...
Added : Have you held this fund as a long term hold, say over ten years ?
I’ve owned DODBX for about 20 years - the same amount of time I’ve been with D&C. It’s just one of several of their different funds I’ve used from time to time over those years. So the amount in DODBX has waxed and waned over time. Presently it serves as the major part of the “growth” portion of my portfolio. Yes - it contains bonds too, but those have rarely accounted for as much as 30% of the fund.
Hope I’ve addressed the thirst of your question adequately @Derf
The last thing I would ever do is try to steer anyone into any particular fund. But I like to note that DODBX’s track record extends clear back to the 1930s. Longevity - if not consistent performance!
Thanks for the comments.
Among the oldest allocation funds are VWELX (1929), LOMMX (1929-2022; liquidated), DODBX (1931). Not so old FPURX (1947) is also old enough.
@larryB, I hope you are wrong with this comment: . Why else would anyone invest with him if that were the case? I trust his interests and motivation does line up with his investors.
"In May 2022, a newly formed balanced fund
committee, which features a well-rounded mix of the
firm’s equity, fixed-income, and quantitative veterans,
officially took over management of the fund. The
committee started as a working group following the
fund’s sharp losses during the 2020 coronavirus-driven
"In 2021, it no longer forced the underlying
stock and bond sleeves to fully mimic Gold-rated Dodge
& Cox Stock DODGX and Gold-rated Dodge & Cox
"Other changes the new committee enacted since 2020
include allowing a small short position in the S&P 500 to
counter potential market selloffs. They can also sell
covered-calls on some stocks the analysts believe are
at or near full value."
"The increased focus on managing risk is a welcome
improvement, but a longer track record of execution
would increase our confidence that the changes will
lead to a smoother ride going forward."
I sold PRWCX mid-year after owning it since the 90s. Not because I don’t like the fund. Just because as I’ve aged I’ve grown more conservative. Rather than holding on to both DODBX and PRWCX in my growth sleeve in relatively small amounts I opted just to hang with DODBX. I think the ride with DODBX will be smoother (in part due to the short position @Yogibearbull outlined.) But I’d guess longer term PRWCX will perform better - as it has in the past. Their short position (on the S&P 500) started at 5% and over the past year or so has fallen to just 2% of portfolio. What they have said (paraphrasing here) is that overall they view(ed) the S&P as overvalued, but that they have found bargains in other areas of the market. Makes perfect sense to me.
I can’t help wondering whether increased “limelight” (public attention) on a manager might lead them to make more mistakes than they would otherwise, whether because they feel somehow compelled to produce outsized returns to go along with that increased attention - or whether they said something in an interview (ie “the 10-year doesn’t get above 2.5% in the next year.”) and are therefore more reluctant to admit their miscalculation and alter the approach that statement supports?
Giroux is a proven winner. Rough year last year ( -12%), but PRWCX will do fine longer term. And, absolutely, I feel both he and TRP have the highest integrity.
I’ve never provided my return stats (not that they’re that great) for various reasons, but in part because I don’t want to feel like I’m competing with other posters when making buy-sell decisions. I suspect that it would cause me to take on more risk than prudent and also be more reluctant to admit error and alter course. Thanks to all those who do provide such information, including @MikeM. It adds to the discussions immeasurably.
But, I must see an uptrend to be invested. I think 2023 will be a good year.
You can make several % more in managed bond fund, this is where they shine. Think DODIX for higher rated bonds, HY Munis and good Multi (where I find my best ideas).
I made 9.7% in 2022, mostly in 3 HY munis trades. See ORNAX (chart). The 3 trades were several days in May + July and several weeks in Nov. All are based on T/A.