Bond allocation in a single managed fund?

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Bond allocation in a single managed fund?

Postby krem1234 » Thu Apr 04, 2013 11:16 pm

Hi all, I got some good advice from the forum a while back and had a pretty basic question - currently I have about $80k in a bond fund, DBLTX, a managed intermediate-term bond fund (avg. duration ~2.3 years), focuses mainly on mortgage-backed securities. I spoke w/ a broker recently who thought this was a big risk as the money is in a single fund and isn't diversified across different maturities. I've looked at past data and MBS bond funds didn't really take a hit even during the housing crisis, and I wasn't concerned much about the effects of a change in management as again past data didn't show much/any of a NAV change. Yields for short-term bonds are horrible and I wouldn't put in money into long-term bonds right now as they'll get killed once interest rates start rising which is why I only planned to invest in an intermediate-term fund. I don't have definite plans w/ the investment but currently plan to sell everything and access the money over the next 2-5 years which is why I want to keep it very conservative. Not very concerned w/ interest rate risk as the avg. duration is so low and it has holdings in non-guaranteed mortgages which I've read increase in value if interests rates rise.

So, any thoughts on whether this is really any riskier than buying a more diversified or multiple bond funds? The broker kept trying to convince me that investing in a single bond fund was a large risk and could lead to large losses, though that didn't seem realistic to me.

Thanks
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Re: Bond allocation in a single managed fund?

Postby grabiner » Thu Apr 04, 2013 11:40 pm

I looked up the fund; it's very risky in other respects. 1/4 of its bonds are junk (BB or lower), with most of that C-rated. That is the reason for the fund's high return since inception; it wasn't around when junk bonds got killed in 2008, and when they did well in 2009-2010, it shared the returns.

I've looked at past data and MBS bond funds didn't really take a hit even during the housing crisis


This depends on the type of MBS. Most MBS funds hold GNMA bonds, which are guaranteed by the government, and they did fine in 2008; the non-guaranteed MBS were the "toxic assets" that dominated the crisis.

Also, although the fund is considered "intermediate-term" by Morningstar, that is based on its long-term holdings; the current 2.3-year duration is consistent with a short-term fund. For your time horizon, you do want a short-term fund, but also one that is well diversified; Limited-Term Tax-Exempt would be a natural choice for a taxable account if you are in a high tax bracket, or Short-Term Investment-Grade if you are in a low tax bracket or the fund is in an IRA.
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Re: Bond allocation in a single managed fund?

Postby krem1234 » Thu Apr 04, 2013 11:53 pm

Since it's a new fund, to look at more historical data I checked out TGMNX - same fund manager, also an intermediate-term bond fund focusing on MBS and with a very similar allocation (about 1/3 junk bonds) - in 2008 it basically flat-lined but didn't really lose any money - in that sense I don't think there's much risk.

In suggesting a more diversified fund, do you think focusing on an MBS fund opens yourself up to more volatility risk? Or would you be concerned about a downturn in the MBS market?

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Re: Bond allocation in a single managed fund?

Postby grabiner » Fri Apr 05, 2013 9:14 pm

krem1234 wrote:In suggesting a more diversified fund, do you think focusing on an MBS fund opens yourself up to more volatility risk? Or would you be concerned about a downturn in the MBS market?


Both of these are the case. The bond market contains mortgage-backed bonds, corporate bonds, and Treasury bonds; none of the three sectors is that risky (unless you have a lot of high-yield within a sector), but they aren't well correlated. A fund such as Total Bond Market which owns all three should be less volative than a fund of equal yield in any one of the three sectors, so you get a better trade-off between risk and return.
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