BND combined with PIMCO Total Return (PTTRX)

[clearwater]

I current have 40% of my portfolio in bonds. The percentages within bond holdings look like this:

20% Inflation protected (VIPSX)
48% Total Bond (BND)
12% PIMCO Total Return (PTTRX)
20% High Yield Corporates (VWEHX)
---
100%

I maintain the high yield since it's not in BND, and I agree with Rick Ferri that combined with Inflation Protected, an allocation along with BND gets closer to the actual "total bond market". (I'm comfortable with this choice; I know this is controversial.)

I have had PIMCO as a holdover from an earlier time. Combined with BND, I consider the "total bond" component at 60%. The expense ratio is of course high (0.46%, compared to just 0.10% for BND). In terms of simplicity, I'm considering finally selling the PIMCO at the beginning of the new year, and rolling the proceeds into BND, which would increase to 60%.

Does anyone see a reason why I should actually *keep* the PIMCO fund? I don't know if Bill Gross has any special magic; he's certainly done fine but I don't believe long term I should keep giving him my money as the fund gets more and more complex, with increasing use of derivative products and hedging.... it's starting to "smell bad", somehow. That being said, it has in the past outperformed BND, perhaps because of use of those very hedging strategies. BND is Vanguard and suburban Philadelphia, PTTRX is PIMCO and offices on the beach in Southern California....closely related in theory but different approaches to the problem.

I suspect selling it is the right thing to do. Of course once it's gone, it's gone (I can't buy back in since it's institutional class).

Any thoughts on this much appreciated.

[Call_Me_Op]

What do you view is the role for TIPS in your portfolio?

[scone]

"I don't know if Bill Gross has any special magic; he's certainly done fine but I don't believe long term I should keep giving him my money as the fund gets more and more complex, with increasing use of derivative products and hedging.... it's starting to "smell bad", somehow."

This. If PTTRX blows up, it will be the shock heard 'round the world, as it is one of the largest mutual funds out there, held in so many 401k and pension plans. I admire Bill's brains and hard work tremendously, but very smart people can, like the rest of us, make terrible mistakes. Think Long Term Capital Management. As they say, I have a bad feeling about this.

[Call_Me_Op]

PIMCO Total Return is a managed fund, and in efficient markets (and the bond market is certainly that if anything is) managed funds tend to lag the applicable index due primarily to expenses. It doesn't really matter whether you think the fund manager is smart.

[livesoft]

I love these "Please predict the future for me" posts.

Jack Bogle, age 83.
Bill Gross, age 68.

I predict they will be one year older next year.

[Jebediah]

This. If PTTRX blows up, it will be the shock heard 'round the world, as it is one of the largest mutual funds out there, held in so many 401k and pension plans. I admire Bill's brains and hard work tremendously, but very smart people can, like the rest of us, make terrible mistakes. Think Long Term Capital Management. As they say, I have a bad feeling about this.

I think it's hyperbole to say PTTRX could 'blow up'. It's definitely hyperbole to compare it to LTCM

[scone]

This. If PTTRX blows up, it will be the shock heard 'round the world, as it is one of the largest mutual funds out there, held in so many 401k and pension plans. I admire Bill's brains and hard work tremendously, but very smart people can, like the rest of us, make terrible mistakes. Think Long Term Capital Management. As they say, I have a bad feeling about this.

I think it's hyperbole to say PTTRX could 'blow up'. It's definitely hyperbole to compare it to LTCM

Do you charge by the hour to look at your crystal ball? Seriously, if a bunch of genius PhDs, including Myron Scholes himself, could screw up as badly as they did, then surely Bill Gross, another genius, could do the same. And you don't get a YTD return of 10.03% on PTTRX, in this interest rate environment, by going low risk. That's not credible. Risks don't "go away" simply because they have not yet shown up.

"Do not confuse the unlikely with the impossible."

[johnep]

This. If PTTRX blows up, it will be the shock heard 'round the world, as it is one of the largest mutual funds out there, held in so many 401k and pension plans. I admire Bill's brains and hard work tremendously, but very smart people can, like the rest of us, make terrible mistakes. Think Long Term Capital Management. As they say, I have a bad feeling about this.

I think it's hyperbole to say PTTRX could 'blow up'. It's definitely hyperbole to compare it to LTCM

I agree. PTTRX has out performed its index and Vanguard Bond Mkt Index over last 5 and 10 years. ER is very important but Gross has somehow still beat index and competition with higher ER. I believe he will continue to do so. That said, if OP does not believe this is right for his portfolio, then sell.

[Call_Me_Op]

This. If PTTRX blows up, it will be the shock heard 'round the world, as it is one of the largest mutual funds out there, held in so many 401k and pension plans. I admire Bill's brains and hard work tremendously, but very smart people can, like the rest of us, make terrible mistakes. Think Long Term Capital Management. As they say, I have a bad feeling about this.

I think it's hyperbole to say PTTRX could 'blow up'. It's definitely hyperbole to compare it to LTCM

I agree. PTTRX has out performed its index and Vanguard Bond Mkt Index over last 5 and 10 years. ER is very important but Gross has somehow still beat index and competition with higher ER. I believe he will continue to do so. That said, if OP does not believe this is right for his portfolio, then sell.

You are comparing apples with oranges. PIMCO Total Return invests partly in high-yield bonds, and high-yield bonds (as an asset class) have greatly outperformed both total bond and PIMCO Total Return over the past decade. You need to compare a managed fund against the appropriate index or combination of indexes in order to make a fair comparison.

[clearwater]

I love these "Please predict the future for me" posts.

I didn't ask that.

This is actually a situation that is pretty interesting. Is it worthwhile to keep around a managed fund which fundamentally is run pretty darned close to an index mix.... but uses some rather complex strategies to do so.

My primary concern is not particularly the expense ratio. It's that (as others have rightfully pointed out) Bill Gross makes one big, blockheaded move, which negates any small advantage they had by their complicated hedging.

I could certainly do much worse than owning PIMCO Total Return, so this isn't a make or break decision. This would just reduce my funds by one (simplicity), eliminate manager risk, and track the "true" index instead of a "index style mix".

[pkcrafter]

PIMCO TR has a shorter duration than total bond, but has ~1% higher return after costs. In the Ratings and Risk section, M* says PIMCO's risk is above average and Vanguard total bond is below average, but M* does not provide a quality rating in the portfolio section for PIMCO. It's pretty simple though, if a fund has a higher return it must have higher risk. In PIMCO's case, it's leverage.

Other funds that investors seem to attribute outperformance to manager skill and not increased risk are Doubleline and TCW. PIMCO, Doubleline, and TCW all call their funds Total Return and M* compares them to Barclay's US Agg Bond. It's easy for an actively managed bond fund to outperform a bench, all the manager needs to do is increase duration, lower quality, or add leverage. PIMCO could experience a downturn that would surprise investors, and just because it hasn't happened yet does not mean it can't. The added risk to get higher returns is embedded in the fund.

Clearwater, if you keep PIMCO, understand that it does carry higher risk than Vanguard Total Bond, but since you have only 12% it could be argued that the amount is acceptable, or it could be argued that since it's only 12% it has very little impact and you don't need it. You've got a pretty big holding in high yield and that is going to act similar to a stock fund in a market crash, so maybe you should reconsider that.

Paul

[Whatyear?]

I certainly hope PTTRX does not blow up, as it is the largest single component of my retirement accounts by far (31% of my tax-deferred and 17% of my total portfolio). I was planning on adding to it $ for $ as I invest more in equities in the taxable account . . . so on that basis is this discussion considered noise that I should tune out? .

[STC]

Sacrilege coming:

In an environment where central banks are massively manipulating the interest rates of sovereign debt, I don't want to be dogmatic about indexing primarily to US Treasuries. I believe the pragmatic approach is to diversify my fixed income holdings away from Treasuries. So the choice was to add corporate bonds, or international bonds, or junk, or whatever to the core BND holding - OR, find an active manager who views the interest rate manipulation the same way I do (as a threat to capital preservation) and is diversifying for me.

I think that as soon as the market is no longer efficient due to the manipulation of influential parties that do not have a profit motive, active may be the way to go.

[Call_Me_Op]

I certainly hope PTTRX does not blow up, as it is the largest single component of my retirement accounts by far (31% of my tax-deferred and 17% of my total portfolio). I was planning on adding to it $ for $ as I invest more in equities in the taxable account . . . so on that basis is this discussion considered noise that I should tune out? .

Discussions on this board may in fact be your only inputs that should not be characterized as noise.

[Call_Me_Op]

Sacrilege coming:

In an environment where central banks are massively manipulating the interest rates of sovereign debt, I don't want to be dogmatic about indexing primarily to US Treasuries. I believe the pragmatic approach is to diversify my fixed income holdings away from Treasuries. So the choice was to add corporate bonds, or international bonds, or junk, or whatever to the core BND holding - OR, find an active manager who views the interest rate manipulation the same way I do (as a threat to capital preservation) and is diversifying for me.

I think that as soon as the market is no longer efficient due to the manipulation of influential parties that do not have a profit motive, active may be the way to go.

I strongly disagree that active is EVER the way to go - and I don't know what central bank policy has to do with it. I can understand a bias against treasuries at the moment, but I don't know why you need (or would want) to pay an active manager to do this.

[nisiprius]

I don't know if John C. Bogle would agree, but to me "staying the course" and "time is your friend, impulse is your enemy" mean that one should deliberately cultivate inertia and resist the urge to tinker. If you think you have something reasonably sensible and workable, something that "avoids serious mistakes," then you just leave it alone. I think it means setting a high threshold for new information to overcome. You don't change because the weight of the evidence is that some other course is a little better than the course you're following. You would have something close to proof beyond a reasonable doubt that your course is actually wrong and that some other course is a lot better.

Columbus could have steered due west, west by north, west by south, west-southwest, any number of courses, and reached the American continent in varying lengths of time, some sooner than others, some "better" than others in terms of commercial potential. But they all would have worked. What would not have worked was indecision.

[livesoft]

I didn't ask that.

Yes, true.

FWIW, in my spouse's previous 401(k), the lowest fee option was the PIMCO total return bond with an overall expense ratio close to 2%. Her 401(k) was invested 100% in that fund for many years. She was recently able to rollover the 401(k) to an IRA whereupon she purchased BIV and VCSH which are Vanguard index bond funds, so she no longer owns any shares of PIMCO total return.

What I have learned about bond funds is that there is no free lunch. If a bond fund has a better return than another bond fund, then that higher returning fund invested in something riskier and/or with longer duration. But many times folks want someone else to make the decision for them about the risk level they should take in a bond fund. Many folks are very happy to let PIMCO make that decision for them.

I also learned that some folks are petrified in taking on more risk, but if the risk is hidden away in a bond fund or in a balanced fund, then they are no worse off for it and can even benefit since they were probably too conservative in the first place. Other folks like risk in a bond fund and are happy to go to long duration or corporates or junk bonds at least for some of their portfolio.

What that means is that there is really no harm in owning PIMCO if you accept the risk that it gives one ... including the manager risk, but you are paying for the managers of that fund to do what they do.

[jlg]

+1 to livesoft's reply.

I find myself having no problem (what so ever) saying NO to actively managed equity funds. However, when it comes to PIMCO Total Return, something weird happens to my brain.

Here is a recent example:

My wife started a new job this year and we will be able to start contributing to her new 401k plan in January (she had maxed out her contributions for the year to another plan in 2012.) Her 401k options rock compared to mine. She's got all of these low cost (all ERs <0.11) Fidelity Spartan Index funds: S&P500, Extended Market, Total International and Bond Index. The best funds I have (when we ignore all the expensive active funds) are: PIMCO Total Return (ER 0.46), Vanguard Int'l Value (ER 0.41) and S&P500 Index (ER .04) In 2012, I make 100% of my 401k contributions to PIMCO. Now, when my wife starts contributing will I contribute 100% to her Bond Index? This would make sense! However, my brain starts saying something about Bill Gross out performing the Aggregate Bond Index and low rate environments and all sorts of other garbage WHICH I WOULD IGNORE FOR EQUITY.

In any case, my happiness with PIMCO is that it has served a purpose in my portfolio (given that I have NO OTHER BOND OPTION IN MY 401K and I need to hold bonds there) and has not gone wildly off the rails. I guess if I only had, say, Vanguard Windsor as my only option for buying equities, I might have a different brain fart about not-horrible active funds.

[Jebediah]

Sacrilege coming:

In an environment where central banks are massively manipulating the interest rates of sovereign debt, I don't want to be dogmatic about indexing primarily to US Treasuries. I believe the pragmatic approach is to diversify my fixed income holdings away from Treasuries. So the choice was to add corporate bonds, or international bonds, or junk, or whatever to the core BND holding - OR, find an active manager who views the interest rate manipulation the same way I do (as a threat to capital preservation) and is diversifying for me.

I think that as soon as the market is no longer efficient due to the manipulation of influential parties that do not have a profit motive, active may be the way to go.

+1

I find PTTRX and DBLTX (Doubleline Total Return) compelling for these reasons. But I waffle on whether to account for them as part of my Bond allocation or as an 'alternative' one-off with a risk profile somewhere inbetween BND and stocks

[nisiprius]

In an environment where central banks are massively manipulating the interest rates of sovereign debt, I don't want to be dogmatic about indexing primarily to US Treasuries.

1) Nobody is talking about indexing primarily to U.S. Treasuries. 2) There has never been an environment when central banks weren't "manipulating" the interest rates of sovereign debt. Call it "policy" or call it "manipulation," there's nothing new or special about it.

[STC]

In an environment where central banks are massively manipulating the interest rates of sovereign debt, I don't want to be dogmatic about indexing primarily to US Treasuries.

1) Nobody is talking about indexing primarily to U.S. Treasuries. 2) There has never been an environment when central banks weren't "manipulating" the interest rates of sovereign debt. Call it "policy" or call it "manipulation," there's nothing new or special about it.

Not sure how unprecedented volume of central bank intervention... Orders of magnitude more volume... Could be considered "business as usual"? I disagree. And both returns and sharpe ratio for 1,3,5,10,and 15y periods argue that pttrx can deliver a premium.

[nisiprius]

One of the more interesting things I took from Future Babble: Why Expert Predictions Are Next to Worthless, and You Can Do Better, by Dan Gardner, is that it is always perceived that the present time is a time of unprecedented peril and uncertainty, utterly unlike the "normal" conditions of the past. But when you go back and read what people were writing during those "normal" times, they always say that those were times of unprecedented peril and uncertainty, utterly unlike the "normal" conditions of the past.

The past looks normal to us only because we know how things turned out.

...both returns and sharpe ratio for 1,3,5,10,and 15y periods argue that pttrx can deliver a premium.

Yep, just like Legg Mason Value Trust, LMVTX, did.



Active funds always beat the index, nobody would buy them if they didn't. Or, at least, the only ones you hear about are the ones that did. Or, at least, they do until they don't. LMVTX; as the late Paul Harvey would say, here's "the rest of the story."

[livesoft]

It would be nice if there was a chart method for comparison that any time point T the value would be difference in performance between 2 funds over the next or previous N months. Users could select N = 3 months, 6 months, 12 months, etc.

The chart shown above by nisiprius kinda shows that the funds track each other in the middle, so that if one was not in on the early action, then no joy. A "difference chart" might help in this instance.

[STC]

One of the more interesting things I took from Future Babble: Why Expert Predictions Are Next to Worthless, and You Can Do Better, by Dan Gardner, is that it is always perceived that the present time is a time of unprecedented peril and uncertainty, utterly unlike the "normal" conditions of the past. But when you go back and read what people were writing during those "normal" times, they always say that those were times of unprecedented peril and uncertainty, utterly unlike the "normal" conditions of the past.

The past looks normal to us only because we know how things turned out.

...both returns and sharpe ratio for 1,3,5,10,and 15y periods argue that pttrx can deliver a premium.

Yep, just like Legg Mason Value Trust, LMVTX, did.



Active funds always beat the index, nobody would buy them if they didn't. Or, at least, the only ones you hear about are the ones that did. Or, at least, they do until they don't. LMVTX; as the late Paul Harvey would say, here's "the rest of the story."

So there is another point in history you can point to where central banks have delivered this level of intervention? Or not?

[nisiprius]

So there is another point in history you can point to where central banks have delivered this level of intervention? Or not?

But my point is, if it weren't one thing, it would be another. There is always something. It always seems like the past was "normal" but that now

"things fall apart/The center cannot hold"
or
"The time is out of joint"
or
"The world has gone mad today/And good's bad today/And black's white today/And day's night today." But since you ask:

1995. Five guys representing five central banks get together in secret in New York at the Plaza Hotel and decide that the dollar really needs to weaken. I don't know how they did it, but perhaps they consulted Eloise, who said "I go to the Powder Room as often as I can. You just step on it."

[STC]

So there is another point in history you can point to where central banks have delivered this level of intervention? Or not?

1995. Five guys representing five central banks get together in secret in New York at the Plaza Hotel and decide that the dollar really needs to weaken. I don't know how they did it, but perhaps they consulted Eloise, who said "I go to the Powder Room as often as I can. You just step on it."

So in 1995 central banks spent trillions on bond buying to stimulate the economy and depress interest rates? I must have missed that. My bad.

[nisiprius]

While you were replying to my post, I was editing to it. My point is that if it's not one thing, it's another. It is always easy to see the present moment as a time of exceptional, unprecedented, never-before-in-history chaos.

[STC]

While you were replying to my post, I was editing to it. My point is that if it's not one thing, it's another. It is always easy to see the present moment as a time of exceptional, unprecedented, never-before-in-history chaos.

I see. So lets ignore the next comet aimed at the earth, since other comets exist.. And we are still here. Sounds very ostrich.

I'll add that I am not saying do something. But to ignore that it exists is silly

[midareff]

Certainly PTTRX has a strong record of performance, and will continue to have a strong record until ... ?? maybe forever, maybe not. For me, I find a bond fund with long and short positions, and many other less straightforward positions, which are not particularly what I want in the portion of my portfolio which is to minimize risk.

[steve roy]

Experts are only prescient (brilliant?) in hindsight. Nisi is right, bankers have cooked various books for years. We have more regs then less regs. Markets go up then crash.

As Vonnegut said, so it goes.

The only thing investors can do is analyze present and past and make their best calculated guess where things are going. And invest accordingly. When new info comes in, they can adjust.

[nisiprius]

While you were replying to my post, I was editing to it. My point is that if it's not one thing, it's another. It is always easy to see the present moment as a time of exceptional, unprecedented, never-before-in-history chaos.

I see. So lets ignore the next comet aimed at the earth, since other comets exist.. And we are still here. Sounds very ostrich. I'll add that I am not saying do something. But to ignore that it exists is silly

1) Ostriches don't really do that. 2) Since you say "I am not saying do something," then you and I in agreement about the important thing.

[STC]

I don't advocate others act. I advocate that they look at reality, and not be so dismissive of unprecedented events. It is very dangerous do do as you suggest. Likewise, taking action should be something done within the IPS process and within the guidelines of an overall plan

[maddyken]

My bonds are actively managed, they're also highly diversified.

I think my PIMCO fund holds bond funds managed by Gross and I have no problem with that.

I think multi-sector and strategic income funds are good options for those looking for a highly diversified bond fund, they're the all-encompassing options.

I wouldn't hold TIPS or HY in targeted funds, too much skill required. I think BND is weighted so I wouldn't hold that either. I guess I'd default into Gross's fund. Again, I'd have no problem with that.

FWIW...I agree with STC, I approach my whole portfolio with his caution though.