PIMCO Total Return vs. Vanguard Total Bond Index

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Postby Doc » Thu Aug 19, 2010 11:57 am

Valuethinker wrote:
T Bills are an interest rate risk if longer interest rates go *down*. ie benchmark risk.

Probably they are pledged as collateral against the derivative hedges.

The question then is can the fund speculate using derivatives? Probably the documentation is not 100% clear on this.


I don't understand your point about the T-bills. Would you please elaborate.

I assume by "speculate" you mean leverage. Speculate can mean a lot of different things, some good some bad. As far as leverage is concerned, the documentation is indeed vague. I did look once and saw that the liabilities were matched by short term investments which indicated to me an accounting thing and not leverage per se. If Pimco was leveraging I think we would know it from the media. For example M*'s analysis report doesn't mention leverage in their risk summary:

Risks

• Some retail share classes are too pricey for our taste.

• Fund sometimes makes aggressive bets, which could result in more short-term volatility.
http://analysis.morningstar.com/analyst ... ountry=USA
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PIMCO Total Return is available at Vanguard, right?

Postby atp » Thu Aug 19, 2010 1:24 pm

Perhaps this is a dumb question, but many comments above imply that it's difficult to get access to the PIMCO Total Return fund at reasonable cost. However, PTTRX, PIMCO Total Return Instl, is listed on Vanguard FundAccess with a 0.64% ER and $25k minimum. Yes, the 0.64 isn't as good as the 0.40% ER someone mentioned earlier, but it's not crazy high. So am I confused and getting PTTRX through Vanguard doesn't actually work? Or are the "hard to get" comments just referring to 401k accounts with the usual very restricted menu of available mutual funds?

(Grr, since I'm a new user this forum won't let me give link to PTTRX at Vanguard. It is FundId=1416 there.)
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Re: PIMCO Total Return is available at Vanguard, right?

Postby Doc » Thu Aug 19, 2010 2:23 pm

atp wrote:Perhaps this is a dumb question, but many comments above imply that it's difficult to get access to the PIMCO Total Return fund at reasonable cost. However, PTTRX, PIMCO Total Return Instl, is listed on Vanguard FundAccess with a 0.64% ER and $25k minimum. Yes, the 0.64 isn't as good as the 0.40% ER someone mentioned earlier, but it's not crazy high. So am I confused and getting PTTRX through Vanguard doesn't actually work? Or are the "hard to get" comments just referring to 401k accounts with the usual very restricted menu of available mutual funds?

(Grr, since I'm a new user this forum won't let me give link to PTTRX at Vanguard. It is FundId=1416 there.)

Vanguard is/was using the (maximum?) prospectus numbers instead of the current (semi)annual report numbers. The current e/r is 0.40%. Opps. That was last week. Now Morningstar is reporting both as 0.46% as of 7/31. Vanguard still has 0.64% as of 3/31/10 with the following note:
Expense ratio disclaimer
Non-Vanguard fund expense ratio data provided by Morningstar are for the fund's latest fiscal year and may vary from current expense ratios. Such data do not reflect fee waivers, expense recoupments, or expense reimbursements, which the applicable fund manager may discontinue at any time. For more complete information about fees and expenses, see the fee table in the fund's prospectus. Vanguard is not responsible for the accuracy or timeliness of third-party data


You are correct about the availability of PTTRX at VBS with a $25k minimum. I think the minimum at Schwab and Fido is $100k. A lot of retirement accounts only offer higher cost share classes.
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Postby Valuethinker » Thu Aug 19, 2010 5:41 pm

Doc wrote:
Valuethinker wrote:
T Bills are an interest rate risk if longer interest rates go *down*. ie benchmark risk.

Probably they are pledged as collateral against the derivative hedges.

The question then is can the fund speculate using derivatives? Probably the documentation is not 100% clear on this.


I don't understand your point about the T-bills. Would you please elaborate.



Interest rates fall. Benchmark rises. T Bills in a bond fund mean you do not participate.

I assume by "speculate" you mean leverage. Speculate can mean a lot of different things, some good some bad. As far as leverage is concerned, the documentation is indeed vague. I did look once and saw that the liabilities were matched by short term investments which indicated to me an accounting thing and not leverage per se. If Pimco was leveraging I think we would know it from the media. For example M*'s analysis report doesn't mention leverage in their risk summary:

Risks

• Some retail share classes are too pricey for our taste.

• Fund sometimes makes aggressive bets, which could result in more short-term volatility.
http://analysis.morningstar.com/analyst ... ountry=USA
[/quote]

I am not sure the media would understand the issue.

Probably they are just using the money market instruments as collateral against derivatives positions.

Fine. However with derivatives you can leverage your risk many-fold (increase your portfolio sensitivity to a small change in the price of the underlying index or security).

I doubt they are doing that, but there were some spectacular bond fund blowups in 08-09.
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Re:

Postby chipmonk » Sun Mar 04, 2012 2:17 am

Doc wrote:Pimco Total Return Institutional PTTRX has out performed Vanguard Total Bond Investor Class in nearly all the rolling one year periods for the 23 years since its inception with very simililar credit risk.

This part is pretty hard to argue with, and is the big selling point of PTTRX for me.

If Pimco is making more money on bonds of comparable credit ratings, and of similar duration (granted their duration is a *bit* longer, but nowhere enough to make up for the difference in returns), then it seems to me that they must be buying similar bonds at lower prices, whether by judicious timing or bond selection or trading acumen that allows them to exploit fleeting market inefficiencies.

I think the worries about Bill Gross's retirement and the skill or lack thereof of his successors are misplaced. He's the manager of a mutual fund valued based on its underlying assets, not the CEO of a conglomerate valued partly for predictions of its future growth. Even if Bill Gross drops dead tomorrow, the mutual fund's future prospects won't make its assets suddenly worthless.

The remaining questions in my mind are:
  • Pimco's bond holding may have comparable credit ratings, but do they have comparable credit risk? We already know that different kinds of bonds are held to different standard by ratings agencies: A-rated muni bonds default at around the same rates as AAA-rated corporate bonds, and the ratings agencies totally whiffed by giving high ratings to mortgage-backed bonds because they were supposedly "diversified" even though all their assets were highly correlated.
  • Are there other kinds of risk that are higher for Pimco's fund than for total bond market... call risk, currency risk, inflation risk, counterparty risk from derivatives, etc.? This has been a prominent subject of discussion in this thread. Its history for the last 20 years seems to suggest that Bill Gross has done a good job of managing these risks on both short and long timescales, up to this point. However, the fact that I can't easily summarize or understand those additional risks is somewhat worrying to me.
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Re: PIMCO Total Return vs. Vanguard Total Bond Index

Postby Dandy » Sun Mar 04, 2012 8:46 am

Pimco fund has had very good results. Some active funds had done this for years. They often make bets on market segments and have been right more than wrong. Can they keep this up? As the fund gets larger and gets more attention it has to make bigger bets e.g. the bet against Treasuries last year that went wrong. Also, what happens when the "star" portfolio manager retires (or goes to form a hedge fund)? The expense ratio for Total Return is not too bad for an active managed fund but why pay more to have someone make big bets with your money even if they have a good recent track record. It really goes to the heart of indexing vs active management.

You have to believe that no one knows the future of the market and interest rates etc despite their track record and that the only things you can control are costs and your allocation between stocks, bonds and cash. You have to be satisfied with market based returns (less low costs). It's not exciting but has been very rewarding.
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Re: PIMCO Total Return vs. Vanguard Total Bond Index

Postby kermit » Sun Mar 04, 2012 11:02 am

I have it in my 401k because it is the only available bond fund. If I had a Vanguard Total Bond Index (or Fidelity equivalent) I'd switch in a heartbeat but I'm not losing sleep over it.
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Re: PIMCO Total Return vs. Vanguard Total Bond Index

Postby chipmonk » Sun Mar 04, 2012 3:02 pm

kermit wrote:I have it in my 401k because it is the only available bond fund. If I had a Vanguard Total Bond Index (or Fidelity equivalent) I'd switch in a heartbeat but I'm not losing sleep over it.

My 401k has both PTTRX for .46% ER as well as a recently-added Blackrock collective trust index fund that tracks the Barclay's Aggregate U.S. Bond Index (~same as Vanguard total bond) for a total ER of 0.055%. So I'm trying to decide whether or not to switch, or to split my money between the two. I am not totally convinced by the market-efficiency of bond indices :)
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Re: PIMCO Total Return vs. Vanguard Total Bond Index

Postby mikep » Tue Mar 06, 2012 4:34 pm

chipmonk wrote:
kermit wrote:I have it in my 401k because it is the only available bond fund. If I had a Vanguard Total Bond Index (or Fidelity equivalent) I'd switch in a heartbeat but I'm not losing sleep over it.

My 401k has both PTTRX for .46% ER as well as a recently-added Blackrock collective trust index fund that tracks the Barclay's Aggregate U.S. Bond Index (~same as Vanguard total bond) for a total ER of 0.055%. So I'm trying to decide whether or not to switch, or to split my money between the two. I am not totally convinced by the market-efficiency of bond indices :)


TBM at 0.055% ER wins hands down. Read Larry's books on bond market efficiency.
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Re: PIMCO Total Return vs. Vanguard Total Bond Index

Postby chipmonk » Thu Mar 08, 2012 10:13 pm

mikep wrote:
chipmonk wrote:
kermit wrote:I have it in my 401k because it is the only available bond fund. If I had a Vanguard Total Bond Index (or Fidelity equivalent) I'd switch in a heartbeat but I'm not losing sleep over it.

My 401k has both PTTRX for .46% ER as well as a recently-added Blackrock collective trust index fund that tracks the Barclay's Aggregate U.S. Bond Index (~same as Vanguard total bond) for a total ER of 0.055%. So I'm trying to decide whether or not to switch, or to split my money between the two. I am not totally convinced by the market-efficiency of bond indices :)


TBM at 0.055% ER wins hands down. Read Larry's books on bond market efficiency.

I have read his "Quest for Alpha" but admit that I haven't read his bond book.

I have been looking into PTTRX in more detail, and one of the things that gives me pause is its size. In November 2009, the fund held fully 1.5% of the US bond market (as represented by Barclay's US Aggregate Bond Index). Even if I [cautiously] believe that Pimco might have some outsize skill in buying bonds on the cheap or with good timing, these advantages obviously couldn't be sustained indefinitely in the face of a increased volume requirements and a decreasing number of competitors who will want to trade with Pimco.
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Re: PIMCO Total Return vs. Vanguard Total Bond Index

Postby ofcmetz » Fri Mar 09, 2012 10:11 am

chipmonk wrote:
I have been looking into PTTRX in more detail, and one of the things that gives me pause is its size. In November 2009, the fund held fully 1.5% of the US bond market (as represented by Barclay's US Aggregate Bond Index). Even if I [cautiously] believe that Pimco might have some outsize skill in buying bonds on the cheap or with good timing, these advantages obviously couldn't be sustained indefinitely in the face of a increased volume requirements and a decreasing number of competitors who will want to trade with Pimco.



Unlike Equity funds which suffer in performance due to size, bond funds may have an advantage of scale. In equity funds large purchases cause impact costs on the individual stocks, where as bond funds may be able to actually save money on large purchases using derivatives or other instruments. I'm sure someone like Doc could go into this in more detail.

I would make the difference between the Blackrock Fund and Total Return based on whether or not you want active management. Better yet whether you think active management of that bond fund can add greater than 41 basis points a year heading into the future. I use Total Return in two different accounts because its the cheapest choice available, but I think in your case I would probably pick the Blackrock Trust based on its super low cost and be done with it. Although there is nothing wrong with going 50/50 if you like.
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Re: PIMCO Total Return vs. Vanguard Total Bond Index

Postby mikep » Fri Mar 09, 2012 3:31 pm

ofcmetz wrote:
chipmonk wrote:
I have been looking into PTTRX in more detail, and one of the things that gives me pause is its size. In November 2009, the fund held fully 1.5% of the US bond market (as represented by Barclay's US Aggregate Bond Index). Even if I [cautiously] believe that Pimco might have some outsize skill in buying bonds on the cheap or with good timing, these advantages obviously couldn't be sustained indefinitely in the face of a increased volume requirements and a decreasing number of competitors who will want to trade with Pimco.



Unlike Equity funds which suffer in performance due to size, bond funds may have an advantage of scale. In equity funds large purchases cause impact costs on the individual stocks, where as bond funds may be able to actually save money on large purchases using derivatives or other instruments. I'm sure someone like Doc could go into this in more detail.

I would make the difference between the Blackrock Fund and Total Return based on whether or not you want active management. Better yet whether you think active management of that bond fund can add greater than 41 basis points a year heading into the future. I use Total Return in two different accounts because its the cheapest choice available, but I think in your case I would probably pick the Blackrock Trust based on its super low cost and be done with it. Although there is nothing wrong with going 50/50 if you like.


Size of PIMCO is $250B.. very bloated IMO. It will get nasty if Bill keeps making wrong bets like he did last year on Treasuries. If another bet goes wrong, the derivative bets will unwind and the hot money will flow out.

FWIW I use a blackrock trust bond index fund at .045% ER in my plan for my bond AA.
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Re: PIMCO Total Return vs. Vanguard Total Bond Index

Postby abuss368 » Sat Mar 10, 2012 10:08 am

I prefer the Total Bond Market Index fund as Mr. Bogle reccomends.

Low costs, passive, diverification, no manager risks, etc. The benefits are hard to overcome.
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