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Bond Mutual Funds are getting Killed

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Jun 12, 2007 8:35 pm

[quote=BankFC]

[quote=AllREIT]

If you don’t mind the bounce, then TIPS are the place to be.

When I build portfolios I tend to go along the lines of

TIPS --> REITs --> Dividend Stocks --> General Market.

[/quote]

Call me a "unsophisticated" adviser if you want, but you are building portfolios around TIPS???  With yields less than 3% (not including the management fee), who on earth is dumb enough to invest their money with you?  I can use the freaking MONEY MARKET within our brokerage accounts and earn 4.39% for the clients and not charge them a fee to do so.[/quote]

Don't worry, you are unsophisticated.

Of course TIPS are the baseline asset, as they should be. They are the only sure thing real return asset.

But they don't generate most of the final portfolio's income or return which comes from mainly from the REITs and dividend stocks etc. The total blended portfolio's have yields ranging 5% to about 9%.

The main question currently, has been should people own cash vs TIPS  given the imputed real return on cash vs TIPS. Right now my thinking is that TIPS are insanely cheap relative to nominal bonds.



Jun 12, 2007 8:40 pm

[quote=Vin Diesel]

I have clients holding funds that are down 10-15% from last week

what do I tell clients(besides that I was wrong)?

[/quote]

Wrong about what?

Umm, what funds are off by that amount? We have major positions in 4 high yield funds. The worst is off by about 2% from it's yearly high and about 1.8% from a week or so ago, and it's still trading above where it started the year. The others down less than 1%. Hardly a burst bubble and nothing to worry about. Especially considering their near term performance.

Jun 12, 2007 8:42 pm

[quote=BankFC]By the way, I have been using the ING Senior Income Fund for awhile now, and it has not been “killed” at all.[/quote]

Well of course, that ING fund’s duration is going to be very close to zero, and thus current value is unaffected by interest rate movements. OTH declinging interest rates will lower the funds yeilds, while rising interest rates will squeeze the obligors.

But, go look up the credit ratings and then see if you still like it. I find it fascinating that ING does not disclose a weighted average credit rating for the fund. Try logging into Moody’s and run a few names

I’m reminded of what Seth Klarman said about Junk Bank loans,

“The bank’s may be senior, but everyone’s at risk”

Jun 12, 2007 8:52 pm

[quote=Whomitmayconcer]

Who Knew?   Ka…    BOOM!

[/quote]

That’s just because Lew Ranieri and crew sold all those those CMO’s to people who would look only at the term sheet, and not the prospectus.

Alot of fixed income managers didn’t have a chance as they had never delt with bonds with complex embedded options.

Remarkably similar to people buying ABS today…

Bond portfolio managers were not used to the strong negative convexity of residential mortgages.

They also didn’t have clue with things like PO’s which have a duration greater than Zero Coupon bonds, and IO’s which have negative duration (e.g value goes up when interest rates go up) but are deathly sensitive to prepayment rates etc etc.

It was a fun time.


Jun 12, 2007 9:09 pm

[quote=AllREIT]
For our company, we are basicly positioned with a core TIPS allocation, and remainder is in very Short treasury...[/quote]

"WE"? 

Jun 12, 2007 9:11 pm

[quote=mikebutler222]

[quote=AllREIT]
For our company, we are basicly positioned with a core TIPS allocation, and remainder is in very Short treasury…[/quote]

“WE”? 

[/quote]

Yep we have four people in our company, small office but growing.
Jun 12, 2007 9:12 pm

Bond funds? Who owns bond funds?

Jun 12, 2007 9:13 pm

[quote=AllREIT]
But they don't generate most of the final portfolio's income or return which comes from mainly from the REITs and dividend stocks etc. The total blended portfolio's have yields ranging 5% to about 9%.


[/quote]

More like 3.5% to 4.25% if you're using Tips in the manner you claim and counting on REITs and equity dividends for the yeild bump.

Jun 12, 2007 9:15 pm

[quote=AllREIT] [quote=mikebutler222]

[quote=AllREIT]
For our company, we are basicly positioned with a core TIPS allocation, and remainder is in very Short treasury...[/quote]

"WE"? 

[/quote]

Yep we have four people in our company, small office but growing.
[/quote]

Ok, how about a count not including the two guys filling the vending machine and the guy who stopped in looking for the Subway....

Jun 12, 2007 9:16 pm

[quote=mikebutler222]

Bond funds? Who owns bond funds?

[/quote]

Some of my clients do.  I figure the fund managers can choose individual bonds better than me.

Jun 12, 2007 9:18 pm

[quote=mikebutler222][quote=AllREIT] [quote=mikebutler222]

[quote=AllREIT]
For our company, we are basicly positioned with a core TIPS allocation, and remainder is in very Short treasury...[/quote]

"WE"? 

[/quote]

Yep we have four people in our company, small office but growing.
[/quote]

Ok, how about a count not including the two guys filling the vending machine and the guy who stopped in looking for the Subway....

[/quote]

Wow, you can actually be funny. 

Jun 12, 2007 9:36 pm

[quote=mikebutler222]

More like 3.5% to 4.25% if you're using Tips in the manner you claim and counting on REITs and equity dividends for the yeild bump.

[/quote]

That would really depend on what REITs/stocks and how much is allocated to them. Be very careful about assumptions.

Jun 13, 2007 1:05 am

[quote=AllREIT][quote=mikebutler222]

More like 3.5% to 4.25% if you're using Tips in the manner you claim and counting on REITs and equity dividends for the yeild bump.

[/quote]

That would really depend on what REITs/stocks and how much is allocated to them. Be very careful about assumptions.

[/quote]

The fixed income part of your portfolio, what should be the majority creator of yield, is plugged with your low yielding TIPs. To overcome that and produce the kind of portfolio yield you claim you'd have to grossly overweight REITs and dividend paying stocks.

ALLREIT, just a hint, but not everyone here entered the biz yesterday. Many of us can sniff out BS easily.

Jun 13, 2007 1:11 am

[quote=BondGuy][quote=Vin Diesel]

I have clients holding funds that are down 10-15% from last week

what do I tell clients(besides that I was wrong)?

[/quote]

Wrong about what?

Umm, what funds are off by that amount? We have major positions in 4 high yield funds. The worst is off by about 2% from it's yearly high and about 1.8% from a week or so ago, and it's still trading above where it started the year. The others down less than 1%. Hardly a burst bubble and nothing to worry about. Especially considering their near term performance.

[/quote]

Hey BG....how much you want to bet this guy is loaded up on relatively new high yield CLOSED END funds....?
Jun 13, 2007 1:12 am
mikebutler222:

Bond funds? Who owns bond funds?




ME! And all of my clients. I'm going golfing tomorrow w/ a client who absolutely refused to position ANYTHING in a fund that said 'bond' on it. I'm gonna get hell.
Jun 13, 2007 2:16 am

[quote=Ashland] [quote=mikebutler222]

Bond funds? Who owns bond funds?

[/quote]


ME! And all of my clients. I'm going golfing tomorrow w/ a client who absolutely refused to position ANYTHING in a fund that said 'bond' on it. I'm gonna get hell.[/quote]

 Sorry to hear that..

Jun 13, 2007 4:29 am

[quote=mikebutler222][quote=AllREIT][quote=mikebutler222]

More like 3.5% to 4.25% if you're using Tips in the manner you claim and counting on REITs and equity dividends for the yeild bump.

[/quote]

That would really depend on what REITs/stocks and how much is allocated to them. Be very careful about assumptions.

[/quote]

The fixed income part of your portfolio, what should be the majority creator of yield, is plugged with your low yielding TIPs. To overcome that and produce the kind of portfolio yield you claim you'd have to grossly overweight REITs and dividend paying stocks.

ALLREIT, just a hint, but not everyone here entered the biz yesterday. Many of us can sniff out BS easily. [/quote]


Why should the fixed income portion of a portfolio be the main source of yeild? Fixed income is about safety of principal and the interest payments based on it. If you want more than the risk free rate, you either take on large amounts of duration or credit risk.

I'd never send a bond out to do a man's job.

So indeed I expect the equity/hybrid portion of the portfolio to generate most of the income and most importantly to grow that income at a rate faster than inflation.

If the income isn't growing at/faster than inflation, you are losing purchasing power. So the core TIPS grow at the rate of inflation, and REITs/Dividend stocks hopefully grow faster.

Investing for absolute real returns is very different than investing with the hope of beating (not trailing too much) some market benchmark that is not relavent to the clients goals.
 
Jun 13, 2007 4:34 am

[quote=Ashland]ME! And all of my clients. I’m going golfing tomorrow
w/ a client who absolutely refused to position ANYTHING in a fund that
said ‘bond’ on it. I’m gonna get hell.[/quote]



Welcome to interest rate risk.



What I’d do is talk about the role of bonds in a portfolio and how
interest rate risk (which is the main risk of bonds) is only weakly related to equities.



Read this, and you should have plenty of things to say.



http://www.pimco.com/LeftNav/Viewpoints/2006/Role+of+Bonds+6 -2006.htm



And most importantly you should listen, let him vent out, and then
explain that part of having an advisor, is having someone who tells you
to do the right thing even if you don’t want to hear it.


Jun 13, 2007 5:56 pm

[quote=AllREIT] [quote=mikebutler222][quote=AllREIT][quote=mikebutler222]

More like 3.5% to 4.25% if you're using Tips in the manner you claim and counting on REITs and equity dividends for the yeild bump.

[/quote]

That would really depend on what REITs/stocks and how much is allocated to them. Be very careful about assumptions.

[/quote]

The fixed income part of your portfolio, what should be the majority creator of yield, is plugged with your low yielding TIPs. To overcome that and produce the kind of portfolio yield you claim you'd have to grossly overweight REITs and dividend paying stocks.

ALLREIT, just a hint, but not everyone here entered the biz yesterday. Many of us can sniff out BS easily. [/quote]


Why should the fixed income portion of a portfolio be the main source of yeild? Fixed income is about safety of principal and the interest payments based on it. If you want more than the risk free rate, you either take on large amounts of duration or credit risk.

I'd never send a bond out to do a man's job.

So indeed I expect the equity/hybrid portion of the portfolio to generate most of the income and most importantly to grow that income at a rate faster than inflation.

If the income isn't growing at/faster than inflation, you are losing purchasing power. So the core TIPS grow at the rate of inflation, and REITs/Dividend stocks hopefully grow faster.

Investing for absolute real returns is very different than investing with the hope of beating (not trailing too much) some market benchmark that is not relavent to the clients goals.
 [/quote]

You are so full of yourself and so in love with hearing yourself talk (or type, as the case may be) that you cannot stand the fact that REAL PROFESSIONALS on this board have called you out on your BS.

Risk free rate?  The risk free rate is far above what your sorry TIPS are generating.  One year and less CD's are paying north of 5%. Agencies, which are IMPLICITLY backed by the fed gov't are also in the mid 5%, and as I said before, even our FDIC INSURED MONEY MARKET is paying 4.39%.

In a million dollar portfolio, with a 50/50 equity/debt split, you are costing your clients over 200 bps on $500,000 =  $10,000 a year!!!

Not to mention your fee for such good advice...

Jun 13, 2007 6:20 pm

"I'm going golfing tomorrow w/ a client who absolutely refused to position ANYTHING in a fund that said 'bond' on it. I'm gonna get hell."

If that is the case, why does he have a bond fund?

Hell? You'll be lucky if all you get is hell. You ought to get an acat form. Hopefully you won't have a mark on your U4.

There are so many ways to skin a cat, why would you go putting a client who doesn't want to be, into a bond fund?

Because it's easier than seeking out alternatives.

You could have suggested that your client purchase an Adjustable rate preferred share (like the one that is trading at 42, has a 1.79 dividend which is a rate of 3.58% based on the $50 par value which is based on the constant maturity rate of the five year treasury, the one that resets in January of 2010) but I'm not naming names!

Don't mean to be mean, but, LEARN!