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Part of the issue is mark-to-market pricing. If you have a thinly-traded bond from a high-yield issuer, you're forced each day to answer the question "how much could I get from this bond if I had to sell it in today's (panicked) market?" The answer's scary but not terribly important if the manager intends to hold the bond until redemption, then receive full face value for it from the issuer, regardless of what he could have gotten for it on the secondary market.
I've always said RPHYX is not a good cash substitute primarily because it has never been tested during a bear market in junk bonds. I don't care what the fund manger may say, this fund will get hurt in a junk bear market and we have seen how it has over the past month where it has lost almost 1%. Much better than the average junk bond fund but not exactly what many investors have been lead to believe. Still, YTD it is outperforming cash and has done well as a cash substitute since its inception. However, a continued decline in junk bonds will turn this fund negative for the year. So goes energy, so goes junk bonds the rest of the year.
Bonds should return principal if held till maturity. Is there any risk that will not be the case for short term HY funds held for 3-5 years? I am thinking about rising interest rate environment with falling bond prices. Can, for example RSIVX, be considered as good and safe investment, if held for 5 years, for investors who care about total return?
I tend to prefer unconstrained funds in this sector to give more flexibility to the managers. My holding in ASDVX has held up very well in this turmoil of late.
Bonds should return principal if held till maturity. Is there any risk that will not be the case for short term HY funds held for 3-5 years? I am thinking about rising interest rate environment with falling bond prices. Can, for example RSIVX, be considered as good and safe investment, if held for 5 years, for investors who care about total return?
I never could figure out why so many here are enamored with RSIVX, mediocre since inception at best and underperforming this year. As to your question - with anything in the junk bond market you have to think *default* It's not a given there would never be a default among the portfolio of this or that fund that holds junk corporates.
The most recent shareholder commentary for RPHYX said that the average maturity of the entire portfolio was 5.8 months, with 48% having an "Expected Effective Maturity" of 30 days or less (perhaps this is due to call options). So my expectation is that while drops in NAV can and do occur due to mark-to-market pricing, the NAV should recover quickly given the short time to maturity. I suppose we'll find out.
You have to be 007 to find that application. Imagine if you really need to ask a question about the fund. Note that there is a 1% short term redemption fee for holding ZEOIX less than 30 days.
I've always said RPHYX is not a good cash substitute primarily because it has never been tested during a bear market in junk bonds. ... Still, YTD it is outperforming cash and has done well as a cash substitute since its inception.
It's done adequately, but I wouldn't say it's done better than cash. It's not hard to find an online account paying around 1%. In comparison, 0.46% YTD is around 3/4% annualized (we're 2/3 through the year).
It's even worse in a taxable account. So far this year RPHYX has spun off around 2% in dividends, and declined about 1.5%, for a net of about 0.5%. But you pay a higher rate of taxes on the dividends (ordinary income) than you get to write off on the capital loss (assuming you've held the shares for over a year).
If you've got $1000 in the fund, and a 25% tax rate, you'll owe taxes YTD of 25% on $20 dividends ($5), but might subtract taxes of 15% of the $15 cap loss ($2.25) if you sell. Your net tax would be $2.75 on net income of $5. Your after tax income YTD would be about 0.22%.
If it loses a bit more, so that it pays 2% in dividends but loses that 2% in value, then your gross income would be $0, but you would still owe net taxes of 0.20%. Not pretty.
The expense ratio at 1.18% is a drag on the 2.85% 30 day yield. Also it holds 25% in cash. In this low yield environment, there are really few viable choices.
Sven said, "In this low yield environment, there are really few viable choices." I think that kind of says it all.
What surprises me a bit is how poorly many income-oriented funds like RPSIX (down) and DODIX (flat) are performing YTD in this environment. Apparently, their meager gains on Treasuries are being eaten up by losses in HY, and (in the case of RPSIX) equities and non-dollar holdings. And yes - in this very low rate environment the fees once seen as reasonable become onerous.
Generally, the kind of year we've had in equities and commodities would benefit intermediate and longer term Treasuries significantly.
Not short duration high yield, but what I've been using for that next risk-rung up from cash is Pimco's PMZIX, an absolute return fund that uses mortgages with ye olde signature Pimco derivative & rate swap strategy. Yield about 3.30%, up 2.4% ytd, duration now ~ 1.4, extremely low volatility, with very rarely a day change other than flat or up/down a penny ... a unique fund from what I've been able to gather.
RPHYX should be just fine as long as junk bonds don't crater any more than they have. With energy rallying so much today and junk bonds too, the bulls are hoping a bottom is in for both.
I would prefer a fund that does not have to be in junk bonds, that can be more flexible. OSTIX fits the bill for us. Talented management team, strong long-term performance, especially compared to "non-traditional" bond funds. The fact that M* put it in the HY asset class and lowered its rating as a result has been a plus...slower asset flow.
I agree with BobC's endorsement of OSTIX. The Zeo and RPHYX folks often point to Osterweis as both their "real" peer group and the area's most distinguished performer.
Here's a point that seems worth stressing: across a number of time periods, OSTIX has repeatedly taken eight or nine months to recover from a drawdown. That's not a criticism of the fund. It's a simple reminder that no one who invests in risk-bearing assets is immune from losses and no one bounces back from turbulence in mere days or weeks. Even in quite conservative funds, you need to anticipate being underwater for two, three or four quarters. If you're irked after one month or six, you might need to consider a strategy using CDs whereby you raise your savings rate and reduce your expectations of returns.
I would prefer a fund that does not have to be in junk bonds, that can be more flexible. OSTIX fits the bill for us.
@BobC I don't understand that statement; I think you intended to write something else. Except for 15.6% cash, and a minuscule 1.9% allotment to BBB bonds, the rest of OSTIX is entirely invested in junk bonds, as of June 30: http://www.osterweis.com/files/OSTIX 2Q15 Fact Sheet.pdf Perhaps your point was they don't have to be in them?
@Junkster But while we're on OSTIX, I should mention that Carl Kaufman, in an end-of-July teleconference recording, has an interesting take on the potential liabilities of junk bond ETFs to which we've alluded several times on the MFO board. There is an amusing quip at the end of that topic's discussion, in the vein of "one man's misfortune can become another man's treasure": http://www.osterweis.com/video/ostix_replay (I think it's at about the 15:00 mark, if you don't want to listen to the whole spool)
@heezsafe, thanks for the video. Will watch it later. Here is my take on OSTIX. Osterweis is a conservative firm who invest much of the old money in the Bay area for a long time. OSTIX has the flexibility to invest in many bond sectors. Kaufman's team chose the higher quality end of high yield bonds based on the best balance between risk and return as part of the portfolio construct. Noted that most are rated in B quality, little in C and below. Duration has been shorten in recent years to anticipate the impact of future rate hike. According to M* X-ray, there is little overlap between OSTIX's individual bond holdings comparing to that of the high yield ETFs such as JNK or HYG. While there are many oil driller bonds in the high yield sector and many will likely to default due to the declining oil prices, but OSTIX has none of these bonds. In addition, the double digit cash position reflects their risk adverse nature in today's market condition. In other times the cash position are in single digits. Of course, some of these bonds are thinly traded and difficult to price in stress times that reflect longer recovery period as David eluded to. Loomis Sayles Bond fund also experienced the liquidity issue in 2008, but it rebounded strongly in 2009. Dan Fuss gave an excellent interview in Wealth Track about a year ago discussing this issue. Overall OSTIX is an excellent multi-sector fund for conservative investors who seek flexible mandate and skillful management team.
Available at Schwab, so must be available at other brokers also?
It is not NTF at any broker
I bought ZEOIX at Vanguard with a $20 fee up front. I bought a large block of it, so the fee didn't hurt much. It is holding up well during this recent environment, certainly better than my other S/T high yield fund, ASHDX. I like both funds, though.
This is a few days old, but it's now a bit more relevant with the market drop. The plus side is that we're seeing somewhat of a "perfect storm" (for RPHYX at least.) It seems to be weathering the storm better than most high-yield bond funds.
Seems to be a couple ongoing threads on the same subject.
ZEOIX has held up better over the last month and year to date. But I do have a concern about this fund's risk. Zeo Strategic Income has 32% invested in its top 5 holdings. There are only 31 holdings across the board. So this fund is very concentrated. Maybe not as concentrated as a Bruce Berkowitz fund, but still doesn't have any diversification. Okay RPHYX has few holdings too, but is a little less focused.
Maybe you have seen it already, but I would check out ZEOIX on MFO as a Great Owl Fund. It has very good numbers for risk, SD, Ulcer Index, etc.
Comments
Just a thought.
David
I am thinking about rising interest rate environment with falling bond prices. Can, for example RSIVX, be considered as good and safe investment, if held for 5 years, for investors who care about total return?
http://www.geminifund.com/NewAccountsWizard/Pages/NewAccountsWizard.aspx?fundFamilyId=172
I like FFRSX better than ZEOIX for my cash.
It's even worse in a taxable account. So far this year RPHYX has spun off around 2% in dividends, and declined about 1.5%, for a net of about 0.5%. But you pay a higher rate of taxes on the dividends (ordinary income) than you get to write off on the capital loss (assuming you've held the shares for over a year).
If you've got $1000 in the fund, and a 25% tax rate, you'll owe taxes YTD of 25% on $20 dividends ($5), but might subtract taxes of 15% of the $15 cap loss ($2.25) if you sell. Your net tax would be $2.75 on net income of $5. Your after tax income YTD would be about 0.22%.
If it loses a bit more, so that it pays 2% in dividends but loses that 2% in value, then your gross income would be $0, but you would still owe net taxes of 0.20%. Not pretty.
What surprises me a bit is how poorly many income-oriented funds like RPSIX (down) and DODIX (flat) are performing YTD in this environment. Apparently, their meager gains on Treasuries are being eaten up by losses in HY, and (in the case of RPSIX) equities and non-dollar holdings. And yes - in this very low rate environment the fees once seen as reasonable become onerous.
Generally, the kind of year we've had in equities and commodities would benefit intermediate and longer term Treasuries significantly.
Andy, nice find on PMZIX/PMZDX.
Here's a point that seems worth stressing: across a number of time periods, OSTIX has repeatedly taken eight or nine months to recover from a drawdown. That's not a criticism of the fund. It's a simple reminder that no one who invests in risk-bearing assets is immune from losses and no one bounces back from turbulence in mere days or weeks. Even in quite conservative funds, you need to anticipate being underwater for two, three or four quarters. If you're irked after one month or six, you might need to consider a strategy using CDs whereby you raise your savings rate and reduce your expectations of returns.
As ever,
David
http://www.osterweis.com/files/OSTIX 2Q15 Fact Sheet.pdf
Perhaps your point was they don't have to be in them?
@Junkster But while we're on OSTIX, I should mention that Carl Kaufman, in an end-of-July teleconference recording, has an interesting take on the potential liabilities of junk bond ETFs to which we've alluded several times on the MFO board. There is an amusing quip at the end of that topic's discussion, in the vein of "one man's misfortune can become another man's treasure":
http://www.osterweis.com/video/ostix_replay
(I think it's at about the 15:00 mark, if you don't want to listen to the whole spool)
I trust it has not gone without notice that many of the funds mentioned in this thread are Great Owls?