Okay I will jump in and start this thread. It seems to be way overdue.
So what about bonds and bond funds? The new Unconstrained funds everyone is jumping into? Gundlach?
Lots of questions here. Considering we are in a rising interest rate environment, which bonds if any will do better that others? Will the impact be short or long term? What if you are close to or in retirement age? What to do.
Dive in and post your opinions and suggestions.
Comments
https://research.stlouisfed.org/fred2/series/DGS10
The same 10-Year Treasury has a yield of 2.4% today.
The unconstrained funds typically have a lower duration, with the express purpose of decreasing interest rate sensitivity. A bond fund with a duration of 6 years will experience a 12% loss of NAV if the corresponding interest rates of those bonds rise 2%.
Add in the yield to that loss of NAV and the total return is calculated.
Full disclosure: I have no interest rate forecast nor will I ever have one.
In exchange for interest rate risk, the unconstrained bond funds, flexible income funds, "tactical income funds", or whatever you wish to call them, take on more credit risk.
Why do they have to take on more credit risk as a result of decreasing their duration/maturity? Because very high quality bonds, such as Treasuries, have such a low yield, that when you shorten the maturity of the bonds and subtract the expense ratio of the active bond fund, you are not left with much yield. Therefore, bank loans and junk bonds and other high credit risk securities enter into the portfolios of these mutual funds.
fuss-trounces-bond-rivals-by-thinking-like-a-stock-picker
@rjb112, Once again thank you for your expertise on this subject. I will defer that I don't know much about this subject and most of my thoughts are just hunches or based on prior experience. This next bear market, if the cards fall right, could be much like the secular bear of the 70's and early 80's. I hope not. That was the last time we had higher rates albeit well above the norm.
Edit; I should add the link for the table. https://ipro.americancentury.com/content/dam/americancentury/ipro/pdfs/flyer/Periodic_Table.pdf
Also I am not a fan of unconstrainded funds - it is another term for bond funds with flexible mandates.
We are lucky we have access to these smart minds like Fuss and Gundlach. Then we can form our own opinions and actions.
I sold my stake in LSBRX and bought SUBFX. So far that has been a poor decision, but my hope is that SUBFX will hold up well if the markets crash, and that's what I want from a bond fund. (I'm 85% equities, so I really need the bond funds in my portfolio to be bulletproof.)
Then again, with its negative duration, I am beginning to fear that SUBFX will not provide much protection if the economy stalls and interest rates drop yet further, though I suppose its 50% cash stake will provide a cushion. Can anyone who understands bonds better than me comment on this?
Here is what I have done to help manage an anticipated rising interest rate environment within the income area of my portfolio. I have two investment sleeves within this area … an income sleeve and a hybrid income sleeve. The income sleeve consist of the more traditional fixed income funds while the hybrid income sleeve consist of funds with a broader spectrum of assets whose focus is to generate income.
In the income sleeve I have selected good fund managers that I believe have the experience to effectively manage changing market conditions along with looking for funds that have short durations and are commonly known as short term bond funds. The funds that I own in this sleeve are EVBAX, LALDX, LBNDX, NEFZX, THIFX & TSIAX. Combined their duration is 3.5 years while their combined yield is about 3.7%. I feel, if these fund manages can not effectively manage interest rate and other risk associated with fixed income investing risk … well it probably just can’t be done.
In my hybrid income sleeve I feel I have selected good fund mangers that I believe again have the experience to use an even broader spectrum of assets to generate income along with using non traditional tools and means that aid them in the management of associated investment risk. Funds that I own in this sleeve are AZNAX, CAPAX, FKINX, ISFAX, PASAX & PGBAX.
My thoughts are that diverfication in of itself provides a certain amount of risk protection. To substantiate this thinking I am linking a recent Morningstar article that addresses this in more detail.
http://news.morningstar.com/articlenet/article.aspx?id=661823
In closing … and in short words … Rather than trying to do this through my own talent window I have chosen to seek out others to manage this for me.
I wish all … “Good Investing.”
Old_Skeet
So I decided on splitting most of my bond allocation to 2 multisector funds, a somewhat aggressive fund/manager, Ivascyn/PONDX and to what I see as a more conservative multisector fund, Sherman/RSIVX.
As a side note, I chose PONDX over LSBRX because returns have been as good with less volatility. I could of held both but my mandate is to hold a minimal number of funds. But I did hold LSBRX for years and was very happy with Fuss.
I still track BGNMX and it seems to hold its own. But if and when rates do rise those funds do very poorly from what I hear and read.
Nothing is sure but at least we can try to minimize damage to our portfolios. If stocks drop 30% and bonds drop 10-15% then that is a success in relative terms.
Regards,
Ted
Regards,
Ted
Regards,
Ted
Below investment grade bonds can add diversification to a portfolio consisting primarily of investment grade bonds, like Treasuries, or the total bond market index. The same below investment grade bonds do NOT add diversification to a stock portfolio.
Take a look at bond market performance during the financial crisis, say 2008. Stocks and below investment grade bonds both did terrible and were highly correlated. Treasury bonds did great. Look at the big recovery year, 2009. Stocks and below investment grade bonds again performed in sync.
For your stated purpose, a reasonable choice would have been a Treasury bond fund. The highest quality bonds are the ones most likely to do what you stated, "to go up when my stocks when down." In a financial crisis there is a "flight to safety", and safety means Treasuries.
However, now we have an extra issue to think about: interest rate risk. If a fund has a 6 year duration, then if the interest rate on those bonds goes up 2%, the fund will lose 12% in NAV, then add back in the yield to get the total return.
But you comment is quite correct, "with its negative duration, I am beginning to fear that SUBFX will not provide much protection if the economy stalls and interest rates drop yet further"
Let's wait to you read this to see if we want to continue....
@rjb112
I don't listen to him any longer and haven't done so for several years now. Do you remember his QQQ buy signal? That was before the tech crash. I was a subscriber and got the bulletin in the mail. It seemed to go against everything he had preached on his show and besides that, the bulletin was on a plain sheet of paper, not even his letterhead. At first I thought it was fake.
I listened to him for a few years after that but he would never talk about that QQQ debacle. During the 90's he had a great show and some excellent advice.
I too was a subscriber and got the bulletin in the mail.
You're right, he would never talk about that QQQ debacle. I still listen to him every Sunday and participate in a Google blog that someone has on Brinker.
Yeah, that QQQ call was awful....