Bill Gross (PIMCO) likes bonds / 5-yr treasury now

[jane1]

Bill Gross (PIMCO) like bonds / 5-yr treasury now.
http://seekingalpha.com/article/1109031 ... urce=yahoo

What do you think of his assumptions? The one that stands out in the article "Assuming rates stay relatively stable between the time you purchase the bond and the time that you sell it...."

[larryswedroe]

Same guy who dumped them when the 10 year was 380 or so and then it fell by more than half. Who cares what he says? He has no more clue than the proverbial monkey (nor does anyone else)
Larry

[phantom]

Pretty impressive long-term record for a monkey, though ... one really only has to be right 51% of the time to be successful. That being said, his opinion at some particular point in time is pretty useless to the rest of us. He could change his mind tomorrow and we won't know about it. The only way to profit from him (if you believe that he has an edge) is to invest in his fund.

[brick-house]

larryswedroe wrote:

Same guy who dumped them when the 10 year was 380 or so and then it fell by more than half. Who cares what he says? He has no more clue than the proverbial monkey (nor does anyone else)

Uhhhh... I do. I also like to hear what you say [rude comment removed by admin LadyGeek].

Please show me the proverbial monkey (or bond index) with Bill Gross's long run track record with PIMCO Total Return?

It is about the long run right? Your comment is similar to [rude comment removed by admin LadyGeek] your commodity call in 2008-2009.

[sscritic]

I am even handed. I don't read Bill Gross, and I don't read Larry. Fair is fair.

[Taylor Larimore]

I am even handed. I don't read Bill Gross, and I don't read Larry. Fair is fair.

I'm "even handed" too. I read both.

Best wishes.
Taylor

[nisiprius]

Even if Bill Gross can foresee bond futures, most of the value of this insight would derive from its being exclusive to PIMCO--from his thinking something different from what his competitors think. I don't know why he would give away this valuable insight for free in press interviews and blog posts. If he wants to buy 5-year Treasuries, why would he want to talk them up and drive up their price? The cynic in me says that the best reason for someone do that would be for that person to have finished buying them and to be ready to sell them.

As phantom said, if one believes Bill Gross is the man with the crystal ball, the way to profit from it would not be to act on what he says publicly, but to buy shares of his fund.

[BlueEars]

Bill Gross (PIMCO) like bonds / 5-yr treasury now.
http://seekingalpha.com/article/1109031 ... urce=yahoo

What do you think of his assumptions? The one that stands out in the article "Assuming rates stay relatively stable between the time you purchase the bond and the time that you sell it...."

I think Gross's strategies are interesting and appreciate articles that show strategic or tactical thinking. This is just from an educational standpoint as I'd not try to do this myself. With the 5yr Treasury choice, I think he is assuming the Fed will stay stable through the near future and that longer dated maturities carry more risk of the market pushing rates up, independent of the Fed's attempts to keep rates low to stimulate the economy.

Since PIMCO has come out with BOND, it appears many of their strategies are in full view for professionals to copy -- as I understand it, the holdings of BOND are available daily. So maybe Gross is not giving away any info with some of these comments.

[Browser]

I don't understand the uncertain benefits of Gross's strategy of "rolling down the yield curve." In the example given, if interest rates don't change (yeh, right) then I can pick up about 1.5% per year using this strategy - which is what I can earn on a 5-year CD w/o doing all this trading. Oh, but I don't have to lock up the money for 5 years - but I don't have to do this with a CD either if I buy one with early redemption privileges. I can understand why I might want to use the rolling strategy if I'm running a few billion dollars in fixed income because I need the liquidity of treasuries. But this doesn't apply to Joe Smoe investors like me. I'm agile, I'm small, I can dart in and out and live off the crumbs falling from the mouth of the big eaters like Pimco. I'll take those CDs he's leaving on table.

[Calm Man]

A guy publicly dumps all his treasuries a few years ago and now tells you to buy them when the yields are far lower. Why would you give3 a second of your time to what he says?

[555]

Forget about predictions. Sometimes you can learn something from these articles, such as what "rolling down the yield curve" means. It's educational.

[larryswedroe]

Brick house
1) My standard prediction is that my crystal ball is always cloudy. I did not make any predictions about commodities as you stated I did
2) There are many with excellent PAST records, Gross among them. Unfortunately that tells us nothing about the future returns. As to Gross yes he has a good record but much of it comes from taking more risk than the benchmarks. But a good record nonetheless.

Best wishes
Larry

[Browser]

if I'd only known that Gross would have had a pretty good record in my past life, I would have invested more with him. Ten years from now, I wonder who I'll be wishing I'd invested with today.

[stlutz]

Forget about predictions. Sometimes you can learn something from these articles, such as what "rolling down the yield curve" means. It's educational.

+1

Suppose someone had started a thread saying that buying Vanguard Intermediate-Term Treasury fund was a better buy than you think because the combined effect of the yield + riding the yield curve produces an expected return over the next year of about 1.5%? That would (or should) have been completely non-controversial. The math doesn't change because Bill Gross is explaining it.

The takeaway is that the expected 1 year return of a treasury bond fund is always greater than the indicated SEC yield, if one assumes that the yield curve will remain unchanged over that time period. (Exception is if the yield curve is inverted).

[brick-house]

larryswedroe wrote:

Brick house
1) My standard prediction is that my crystal ball is always cloudy. I did not make any predictions about commodities as you stated I did
2) There are many with excellent PAST records, Gross among them. Unfortunately that tells us nothing about the future returns. As to Gross yes he has a good record but much of it comes from taking more risk than the benchmarks. But a good record nonetheless.

Good record, eh? I guess Ted Williams was just a good hitter.

http://investments.pimco.com/Products/pages/346.aspx

----------------------------------------- 1 yr-------3 yr------5yr-------10 yr-------Since Inception -5-11-1987

PIMCO Total Return-------------------10.36----7.75-----8.34-----6.81---------8.35

Barclay's U.S Aggregate Index--------4.22-----6.19-----5.95-----5.18---------7.20

Of course, Bill Gross takes extra risk. Yes, he made a mistake with the Treasury call. However, based on a track record going back to 1987 - he is right more than he is wrong. He also admitted his mistake and adjusted. Thus, I thank the OP for posting the article and reiterate that I care what Bill Gross has to say. I will not act on it, but I will listen.

After rereading my post, I apologize it was clumsily worded - I did not mean to imply you made a prediction on commodities.

However -Don't you suggest taking extra risk with commodities and small cap value? In the short term is that extra risk always rewarded? Commodities didn't provide negative correlation in 2008-2009, but they may in the future. IMHO - Cherry picking Bill Gross's recent mistake is similar to focusing on commodities in isolation both as part of an overall portfolio and in a short time frame (08-09).

[rj49]

Forget about predictions. Sometimes you can learn something from these articles, such as what "rolling down the yield curve" means. It's educational.

+1

Suppose someone had started a thread saying that buying Vanguard Intermediate-Term Treasury fund was a better buy than you think because the combined effect of the yield + riding the yield curve produces an expected return over the next year of about 1.5%? That would (or should) have been completely non-controversial. The math doesn't change because Bill Gross is explaining it.

The takeaway is that the expected 1 year return of a treasury bond fund is always greater than the indicated SEC yield, if one assumes that the yield curve will remain unchanged over that time period. (Exception is if the yield curve is inverted).

If the same person had posted the year before to sell Treasuries because they were going to be hammered, and was quite wrong, then I would probably not completely take his current post to heart (especially if he also predicted a huge stock market decline in 2002 and the death of equities in 2012). I'd also ask him why I should jump through all the hoops for a 1.5% yield with transaction costs and possibility of capital loss instead of investing in CDs or ibonds or some other safer form of fixed income. That said, I enjoy BIll Gross's monthly commentary for his clever metaphors and personal stories, just as I enjoy Jeremy Grantham's newsletters, with their fine writing style and his commitment to environmental issues. I just wouldn't trust their investing advice.

[ofcmetz]

Interesting link, but I don't see who would get excited about buying 5 year treasuries yielding 81 basis points. Bill was wrong on his call a while back, but his fund seems to keep chugging along.

[Noobvestor]

----------------------------------------- 1 yr-------3 yr------5yr-------10 yr-------Since Inception -5-11-1987

PIMCO Total Return-------------------10.36----7.75-----8.34-----6.81---------8.35

Barclay's U.S Aggregate Index--------4.22-----6.19-----5.95-----5.18---------7.20

Of course, Bill Gross takes extra risk.

It's funny ... I hear people talk about 'well he has a great record' a lot, but I rarely glance at what it has been. Seeing this, above, now, all I can say is: wow, for all of that effort, and all of that extra risk using emerging market bonds, swaps, shorts, and whatever else he does, he has only managed to beat a US aggregate index (comprised mainly of vanilla Treasuries and high-grade corporates) by 1.15%/year?

Or maybe I'm wrong, and he's just a closet Treasury fund? http://quote.morningstar.com/fund/chart ... %2C0%22%7D

[Call_Me_Op]

Attempting to ride down the yield curve in this environment is quite a risky strategy.

[nisiprius]

It's funny ... I hear people talk about 'well he has a great record' a lot, but I rarely glance at what it has been. Seeing this, above, now, all I can say is: wow, for all of that effort, and all of that extra risk using emerging market bonds, swaps, shorts, and whatever else he does, he has only managed to beat a US aggregate index (comprised mainly of vanilla Treasuries and high-grade corporates) by 1.15%/year?

Well, you're looking at a retail fund with a moderately high expense ratio (0.85% for the share class you chose). One thing to remember is that, apparently, there are a fair number of ordinary folk who have access to the Institutional share class (PTTRX, ER 0.46%) in their 401(k) plans. Maybe it would be fairer to compare it to PTTRX, at least as a measure of Bill Gross's personal magic. When you do this, it looks a lot more impressive.

Of course, 401(k) plans usually have their own layer of expenses. But the 401(k) leeches would presumably be drawing the same amount of blood from you whether you invested in PTTRX, Vanguard Intermediate-Term Treasury if available, or Vanguard Total Bond Index. So the chart comparison would apply, even if the actual chart numbers didn't.

To me, the case for class A or C shares is pretty weak. It's another case where the manager might be adding alpha, but he gives all of it to his firm and doesn't give me any.[I was wrong, he's giving it to the sales channel, see tfb's post below.] But institutional shares, PTTRX, sure look awfully good to me and the track record is awfully long. It can only be sour grapes to doubt it. Well, yes, I personally suspect those grapes might be sour. The tough question with any active manager is the need for the investor to be constantly judging and assessing the manager.

There are just too many examples of active managers whose strategy stops working, and they begin taking larger and larger, riskier and riskier bets in an effort to maintain their edge, and then it all blows up. On the basis of his own shareholders' letters, the failure of Gross's dramatic move, dumping Treasuries in 2011--"Error--center field"--stunned and shocked Gross himself. This might be an example of exactly what you want active managers to do--be active; win some, lose some, but win more. However, if his fund were to do something like Legg Mason Value Trust--rather suddenly lost all the gains it had made over the index--then in retrospect 2011 would probably be seen as an example of trying too hard and taking too much risk.

So that's the puzzle. Assessing Bill Gross as a manager, is it clear that he is in a different category than Bill Miller appeared to be in 2005? Is there actually information available to you or to me that would let us judge this? I don't think there is. Of course, Miller's winning streak was "only" 15 years and Gross's general outperformance over the BarCap has been going on for 25 years now.

Note that PTTRX also goes back much further than A-class, and it looks much better if you extend the time interval back to inception of PTTRX. Live chart

One thing: an actively managed fund can seemingly follow a clear pattern for a long time and then depart from it. Here is a bond fund that, to the shame of everyone concerned, was available in 401(k) plans. I do not not not think Bill Gross is the sort of manager this fund evidently had, but my point is that with active management, you can have sudden departures from a long-established pattern (in this case, a 20-year very consistent pattern of slightly lagging the index). Watching "Titanic" should not make you afraid to take a cruise, but I do think everyone should know and remember this particular chart:

[BlueEars]

Some thoughts on recent posts:

1) You can buy PTTRX through Vanguard's VBS. Minimum initial is 25k. So this is not limited to 401k's.

2) Some monthly standard deviations for Aug 1996 to present:

PTTRX = 0.012
Total stock mkt = 0.010
Intermediate Treasury = 0.013

3) This period shows some extra risk when equities take a beating, for Sept 2008 through Feb 2009:

PTTRX = 1.4 %
Total Stock Mkt = 2.2%
Intermediate Treasury = 6.2%

Probably we can say that PTTRX has more equity correlation.

P.S. Who says Bogleheads are dull level headed passionless investors? Some of the above posts show a lot of emotion ... but it would be great if they would stick to facts.

[Browser]

Active management strategies often work - until they don't. Plain vanilla index returns are difficult and relentless bogeys to keep beating year-after-year-after-year. To become a legend in your own time, you need to (1) achieve dramatic results, (2) preferably in the initial years so you can build up a nice lead that will be maintained for a really long time if you don't puke, and (3) retire or die while you're still ahead. #3 is key. If you forget that last step, your legendary status is likely to vaporize. Think Peter Lynch and Magellan Fund. He did all the steps right.

[555]

"Attempting to ride down the yield curve in this environment is quite a risky strategy."

How is this any different from simply saying "Owning bonds in this environment is quite a risky strategy."?

"Rolling down the yield curve" is just part of the mathematics of bonds. After one year a 5-year bond becomes a 4-year bond. For bonds with a fixed maturity date you can't not roll down the yield curve. (If the yield curve is inverted then roll up but it's the same maths with some signs changed.)

[BlueEars]

I keep seeing posters bringing up active equity fund managers that blew up in the past in reference to Gross's record. Since PTTRX is an active bond fund, if it goes through a rough patch we can expect it to be very much muted compared to active equity fund rough patches. I do not think PTTRX goes to extremes, it tends to be diversified in its strategies -- not one big bet on a given bond sector.

While others see Gross as a shameless self-promoter, I tend to see him as a good capitalist taking advantage of free advertising. That is the job of a head of PIMCO. Along the way he is entertaining and informative, I think. There are plenty here who will disagree with my characterization. I do hold mostly index funds but I guess I cannot agree with the thought that "all active funds are bad, bad, bad". Oh well, that's the markets for you. We will disagree but hopefully remain gentlemen (and gentle ladies) about it. And hopefully we will stick to facts as we tend to share a common goal of getting good returns.

[grayfox]

Bill Gross (PIMCO) like bonds / 5-yr treasury now.
http://seekingalpha.com/article/1109031 ... urce=yahoo

What do you think of his assumptions? The one that stands out in the article "Assuming rates stay relatively stable between the time you purchase the bond and the time that you sell it...."

What I am understanding from this is PIMCO is now forecasting that the Treasury Yield Curve will be stable over one year. In other words, more or less the same in Jan-2014 as it is in Jan-2013. And their investing strategy for 5-year Treasuries is based on this forecast. We'll see how that forecast turns out. All I can say is, it is rare to see interest rates not budge over the course of a year.

And if the forecast turns out correct the payoff is......1.50%.....whoop-de-doo.

This doesn't seem like very much upside for something as hard as predicting interest rates correctly. Good luck with that.

[Noobvestor]

Good points one and all, Nis - and as for the share class: I never *do* know which fund to pick when there are so damned many classes to choose from on M*! I suspect the 'fairest' way to evaluate him would be to figure out what the total average ER is paid to the fund, by all its different-class investors, and use that as the baseline.

As for Gross ... per the poster above me, I wonder how much blood Gross can squeeze from these lemony yields. The lower yields go, the higher the fund ER is as a percentage of potential gains. If his big strategy now is at best going to give him a 1.5% boost for the year, well, it just doesn't seem like much.

I will concede, I've tested some other theories - benchmarked Gross against long bonds, for instance - but nothing explains away all his outperformance to do. It's not just the falling-rate environment behind his success (he has done better than some long bonds, AND more importantly: done it with less volatility).

Maybe his secret sauce is simply that he can move the markets and bet against his own public calls

[tfb]

To me, the case for class A or C shares is pretty weak. It's another case where the manager might be adding alpha, but he gives all of it to his firm and doesn't give me any.

To be fair, the extra cost in A or C shares is used to compensate the channel -- retail brokers. His firm is not getting that part. The investors using the channel get the service of a retail broker. The service may or may not be worth the cost, but only the investors can make that judgment. It's not PIMCO's fault that investors decided to use an expensive channel for services not worth the cost.

[nisiprius]

Since PTTRX is an active bond fund, if it goes through a rough patch we can expect it to be very much muted compared to active equity fund rough patches.... I do not think PTTRX goes to extremes.

I agree with you. But, just for a complete survey of possibilities, the uttermost extreme of how bad an actively bond fund can be... how would you characterize Oppenheimer Core Bond Fund's (OPIGX) "rough patch?"

I wouldn't call a 43% drop "muted." I'd call it a loud, clear blast--of flatulence, perhaps? Indeed, it was more than some equity funds dropped, such as the one shown in the orange line, above.

If bond funds only held bonds, then I'd agree about "muted." But they don't. What happened with OPIGX was that it was making very heavy use of leverage--a columnist says 180% and, apparently, all but hiding the extent in its disclosure documents.

Now, PTTRX makes use of leverage, too--very light use of leverage; columnist Charles Sizemore says that in 2011 Gross made a move that increased it from 9% to 19%.

I'm not sure how you go about watching how much leverage a bond fund is using. I guess it shows up in Morningstar's "portfolio" chart, though I don't know just how to go about reading it. Some help, please, from those who do? Is that chart saying that PTTRX is leveraged 33.93%, up from the 19% Sizemore mentioned? Is it now holding 28.17% more bonds than it has paid for? Is this an increase from the 19% Charles Sizemore was talking about, or do I need to subtract the short bond positions or something?

If I were actually invested in this fund, I think I really would try to find out how to interpret these charts, and the semiannual reports, and try to keep an eye on those "short" positions and what they mean. Vanguard Total Bond, as I expected, holds no short positions.

[BlueEars]

Nisiprius, you ask some interesting questions. I do not claim to be a bond expert, just a guy trying to get a good return. If you or others want to be extremely careful in your FI allocations, I respect that. Funds like Total Bond Market are just fine though they have lagged PTTRX over the years on a rolling return basis.

Here are a few thoughts:

Since PTTRX is an active bond fund, if it goes through a rough patch we can expect it to be very much muted compared to active equity fund rough patches.... I do not think PTTRX goes to extremes.

I agree with you. But, just for a complete survey of possibilities, the uttermost extreme of how bad an actively bond fund can be... how would you characterize Oppenheimer Core Bond Fund's (OPIGX) "rough patch?"
...(snipped chart out)....
I wouldn't call a 43% drop "muted." I'd call it a loud, clear blast--of flatulence, perhaps? Indeed, it was more than some equity funds dropped, such as the one shown in the orange line, above.

Regarding my "muted" comment, it certainly didn't refer to the bizarre behavior of OPIGX. Maybe the P-I-G in the name gave that one away?

If bond funds only held bonds, then I'd agree about "muted." But they don't. What happened with OPIGX was that it was making very heavy use of leverage--a columnist says 180% and, apparently, all but hiding the extent in its disclosure documents.

This does not sound like something I would expect from PTTRX. It sounds like OPIGX's ethics were deeply flawed. I would guess OPIGX was a tiny fund that tried to goose returns. It certainly is a tiny fund compared to PTTRX which is much studied by the market. If PTTRX took that sort of position it would be in the bond market news very quickly. Is it really a fair example to bring up OPIGX in this context? I would answer no.

Now, PTTRX makes use of leverage, too--very light use of leverage; columnist Charles Sizemore says that in 2011 Gross made a move that increased it from 9% to 19%.

I'm not sure how you go about watching how much leverage a bond fund is using. I guess it shows up in Morningstar's "portfolio" chart, though I don't know just how to go about reading it. Some help, please, from those who do? Is that chart saying that PTTRX is leveraged 33.93%, up from the 19% Sizemore mentioned? Is it now holding 28.17% more bonds than it has paid for? Is this an increase from the 19% Charles Sizemore was talking about, or do I need to subtract the short bond positions or something?

If I were actually invested in this fund, I think I really would try to find out how to interpret these charts, and the semiannual reports, and try to keep an eye on those "short" positions and what they mean. Vanguard Total Bond, as I expected, holds no short positions.

I thought that PTTRX uses derivatives to some extent to manage their positions and is not net leveraged. The new offering, BOND an ETF, does not use derivatives.

Here is a picture of PTTRX sector allocations, notice the swaps balance out to apparently 100%:


the link is here: http://investments.pimco.com/MarketingPrograms/External%20Documents/Total_Return_Asset_Allocation_ProductChart_PPC40052.pdf

My own investment methodology involves a swing into Intermediate Treasuries based on my own algorithms. I'm not your average PTTRX or BOND buy-hold type. Even with PTTRX's low standard deviation, I would have been in Intermediate Treasuries back in that 2008 drop. Those are backtest results and I cannot claim this works flawlessly going forward -- nobody has a lock on the future.

[Jack]

... one really only has to be right 51% of the time to be successful.

That is a very dangerous belief, both for airplane pilots and investors.

[gkaplan]

... one really only has to be right 51% of the time to be successful.

That is a very dangerous belief, both for airplane pilots and investors.

And for patients.

[billjohnson]

What is meant by skill? Is it skill in bond picking ala Gross or skill in execution which reduces costs ala Bogle?

Look at this chart for three year rolling returns comparing Pimco Total Bond Institutional with with VG TBM Admiral.



http://quote.morningstar.com/fund/chart ... %2C0%22%7D

Guys that ain't luck. Maybe it's skill in execution. If your costs are low enough it is not that hard to obtain profits in bond trading by riding the yield curve. Pimco's derivative tactics lower the cost therefore allowing them to exploit the strategy more efficiently. That's skill not luck. (Size also helps in this case.) And this skill is able to be taught to others in Gross's organization and it likely has been unless you believe that Bill is trading all those derivatives by himself.

viewtopic.php?p=1462271#p1462271

[jginseattle]

Oh, good. I've got some 5-year Treasuries around here somewhere...

[Jack]

Guys that ain't luck.

You could have beaten Bill Gross by simply buying and holding the Vanguard Long Term Bond Index Fund over that same period.

And for those who say that the Long Bond Index is not the same as the Total Bond Index, neither is Pimco Total Return.

[billjohnson]

You could have beaten Bill Gross by simply buying and holding the Vanguard Long Term Bond Index Fund over that same period.

Well, I guess you should load up on those long bonds then. Meanwhile, some of us are interested in intermediate-term bonds...
viewtopic.php?f=1&t=100620&newpost=1462144

[Jack]

You could have beaten Bill Gross by simply buying and holding the Vanguard Long Term Bond Index Fund over that same period. And for those who say that the Long Bond Index is not the same as the Total Bond Index, neither is Pimco Total Return.

Well, I guess you should should load up on those long bonds then. Meanwhile, some of us are interested in intermediate term bonds...
viewtopic.php?f=1&t=100620&newpost=1462144

Well, that is sort of the point. People are claiming that Bill Gross has skill at changing maturities to follow the yield curve, yet if he really knew what he was doing, he would have just gone long and stuck with it. With his back and forth strategy he underperformed the long bond index.

Another way of looking at it is that Pimco Total Return has returns over 20 years that were consistently half way between Total Bond Index and Long Bond Index. So on the one hand you have Bill Gross with his sophisticated maturity shifting strategy. On the other hand you have that stock picking cat Orlando who each year randomly tilts either to Total Bond or Long Bond. I'm guessing both end up with a return about half way between Total Bond and the Long Bond returns over the last 20 years.

[billjohnson]

Another way of looking at it is that Pimco Total Return has returns over 20 years that were consistently half way between Total Bond Index and Long Bond Index. So on the one hand you have Bill Gross with his sophisticated maturity shifting strategy. On the other hand you have that stock picking cat Orlando who each year randomly tilts either to Total Bond or Long Bond. I'm guessing both end up with a return about half way between Total Bond and the Long Bond returns over the last 20 years.

Jack...I don't think anyone is suggesting the outperformance is strictly due to Gross riding the yield curve. Whether there is even a risk premia associated with this strategy is contested.

But let's say this was exactly what Gross was doing ... then it should be reflected in the duration. Yet, average duration numbers are currently PTTRX 4.04, VBMFX 4.97, and VBTLX 14.92. In contrast, what you seem to be suggesting, via your random switching strategy, is to more than double your interest rate risk [avg eff duration roughly 10] in hopes of obtaining a similar return as PIMCO Total Return???

[nisiprius]

You could have beaten Bill Gross by simply buying and holding the Vanguard Long Term Bond Index Fund over that same period. And for those who say that the Long Bond Index is not the same as the Total Bond Index, neither is Pimco Total Return.

To my eyeball, it seems perfectly clear that Vanguard Long-Term Bond Index Fund had much more fluctuation than PIMCO Total Return.

Look at that zigzag in 2008. And even ignoring that, imagine how annoying it might have been to watch Long-Term Bond Index lose 5% while PIMCO Total Return was gaining 3%.

The extra gain in Long-Term Bond Index clearly came with extra pain.

To me, speaking as an admitted Vanguard fan, what is so annoying about PIMCO Total Return is that it has outperformed Vanguard Total Bond without any obvious extra volatility. It is not unlike the debate between those who hold the Vanguard GNMA Fund, which has also outperformed Total Bond without obvious extra volatility. People who dislike GNMAs keep saying "Just wait, the risks will show up, the risks will show up, the risks will show up..." but it just keeps nosing out VBMFX without any glitches, at least not yet. And PTTRX keeps nosing out both of 'em--again without any glitches, at least not yet.

[Akiva]

Of course, Bill Gross takes extra risk. Yes, he made a mistake with the Treasury call. However, based on a track record going back to 1987 - he is right more than he is wrong.

He doesn't have to be right more often that he's wrong. Suppose he's wrong 2/3 of the time and only right 1/3 of the time, but that when he's right he makes 3x as much as loses when he's wrong. So the expected value of any Bill Gross prediction would be E = 1/3*3 - 2/3 * 1 = 1/3. So on net you'd make money despite his being wrong most of the time.

He also admitted his mistake and adjusted.

Successful active managers seem to share this attribute.

Commodities didn't provide negative correlation in 2008-2009,

Commodities did what they were expected to do. Since they have positive exposure to unexpected inflation, when inflation turns out to be unexpectedly low, these funds lose value. Since everyone was worried about deflation during that time period, they fell quite dramatically.

[hoops777]

There are special people in the world with skill,intelligence and talent that are able to outperform the rest of us.Steve Jobs,Bill Gates,Lebron James,Tiger Woods,etc.There are some people who can outperform the stock index and the bond index.I get a little annoyed at those bogleheads who seem to think there is only the bogle way and nobody can do better.I agree that probably 95% of people would be better off being bogleheads,but have a little admiration for gifted people who are able to beat the market instead of just showing disdain.Besides the fact that there are quite a few people able to beat the market over many years.I of course am not one of them.

[BlueEars]

...(snip)...
To me, speaking as an admitted Vanguard fan, what is so annoying about PIMCO Total Return is that it has outperformed Vanguard Total Bond without any obvious extra volatility. It is not unlike the debate between those who hold the Vanguard GNMA Fund, which has also outperformed Total Bond without obvious extra volatility. People who dislike GNMAs keep saying "Just wait, the risks will show up, the risks will show up, the risks will show up..." but it just keeps nosing out VBMFX without any glitches, at least not yet. And PTTRX keeps nosing out both of 'em--again without any glitches, at least not yet.

I'm wondering why you find PTTRX's outperformance annoying?

If Total Bond Mkt were doing the same in reverse I'd go with it. If the index consistently beat this active fund, I'd most likely go 100% with Total Bond Mkt. I'm a Vanguard fan too and have most of my assets in VG's offerings, but not all.

I have been annoyed myself at choices I've made that did not beat the other selection I could have made. Nowadays I try to correct that situation if it does not appear that I'm just jumping on the bandwagon late. Since PTTRX has been pretty consistent (but not perfect) in various market environments (up and down rate changes) I'd think there is not much risk that it will suddenly change like, for example, growth stocks in the year 2000. When I do change selections I sometimes do it over a period of time, but not always.

Another thought, PTTRX has outperformed Total Bond Mkt by about 1.33% over the 15 year period. If this were 25% of one's portfolio, then that is about a 0.33% portfolio improvement. On a $1M portfolio that is $3300 more per year. Nice but not the end of the world if one chooses to go with Total Bond Mkt and if the outperformance were to continue.

[Noobvestor]

I always like the example of the Magellan fund. For decades (!) it outperformed the index, consistently and steadily. It looked like a sure bet. A lot of people put their entire 401k stock allocation into it - after all, it was as smooth as the index just ... better. But, over the last decade, it has returned half as much as the index.

http://quote.morningstar.com/fund/chart ... ture=en-US

Don't take my word for it, though. Play around with the charts - go back out to the maximum, zoom in on periods, etc... To my eye, it seems no more volatile than the market, and its outperformance - while not a static amount - was consistent for a very long time.

Unlike the drop-off example (which I also think is great, just different) there is no point at which you can say 'whoa, something big happened there and they lost their clients' shirts' - it just slowly ... stopped outperforming, and started underperforming. There was no visible clue that the party was over.

I guess my question is: how do you know whether you're jumping on the bandwagon too late?

[Akiva]

I always like the example of the Magellan fund. For decades (!) it outperformed the index, consistently and steadily. It looked like a sure bet. A lot of people put their entire 401k stock allocation into it - after all, it was as smooth as the index just ... better. But, over the last decade, it has returned half as much as the index.

http://quote.morningstar.com/fund/chart ... ture=en-US

Don't take my word for it, though. Play around with the charts - go back out to the maximum, zoom in on periods, etc... To my eye, it seems no more volatile than the market, and its outperformance - while not a static amount - was consistent for a very long time.

Unlike the drop-off example (which I also think is great, just different) there is no point at which you can say 'whoa, something big happened there and they lost their clients' shirts' - it just slowly ... stopped outperforming, and started underperforming. There was no visible clue that the party was over.

I guess my question is: how do you know whether you're jumping on the bandwagon too late?

I think Peter Lynch leaving was probably a good clue...

[BlueEars]

I always like the example of the Magellan fund. For decades (!) it outperformed the index, consistently and steadily. It looked like a sure bet.
...(snip)...
I guess my question is: how do you know whether you're jumping on the bandwagon too late?

I remember debating with myself about buying Magellan in a 401k. I never saw it as a sure bet. I think I even owned it for awhile back there before Bogleheads was around, maybe in the 1980's.

We don't know if PTTRX outperformance with regard to VBTLX will continue. There are no guarantees. There are no sure things in investing.
I doubt that the performance loss if PTTRX stumbles would be very great though. Probably either choice is fine for an intermediate bond fund.

[Keep It Simple]

I am even handed. I don't read Bill Gross, and I don't read Larry. Fair is fair.

I'm "even handed" too. I read both.

Best wishes.
Taylor

Exactly - the more info I can have the better.

K. I. S.

[Jack]

I am even handed. I don't read Bill Gross, and I don't read Larry. Fair is fair.

I'm "even handed" too. I read both.

Best wishes.
Taylor

Exactly - the more info I can have the better.

K. I. S.

Just be very careful about what info you believe.

For example, remember when Bill Gross when on about how "the cult of equity is dying." How the last 100 years of the stock market is just a ponzi scheme because stocks mathematically cannot return more than the growth rate of the GDP. This is wrong not in the sense of everyone has an opinion, but in the sense of claiming 2 + 2 = 5 wrong. This was such an elementary and fundamental mistake, which he has never retracted despite the error being pointed out by numerous economists and financial scholars, that it calls into question his judgement about all topics in general. You may never know when he is just spouting complete nonsense.

[Akiva]

I am even handed. I don't read Bill Gross, and I don't read Larry. Fair is fair.

I'm "even handed" too. I read both.

Best wishes.
Taylor

Exactly - the more info I can have the better.

K. I. S.

Just be very careful about what info you believe.

For example, remember when Bill Gross when on about how "the cult of equity is dying." How the last 100 years of the stock market is just a ponzi scheme because stocks mathematically cannot return more than the growth rate of the GDP. This is wrong not in the sense of everyone has an opinion, but in the sense of claiming 2 + 2 = 5 wrong. This was such an elementary and fundamental mistake, which he has never retracted despite the error being pointed out by numerous economists and financial scholars, that it calls into question his judgement about all topics in general. You may never know when he is just spouting complete nonsense.

I've seen it argued that if you assume that the GDP grows at 3% and that stocks return 5%, then in ~50 years stock dividends end up equaling GDP which is absurd.

I'm not sure this is right because GDP subtracts out a lot of stuff that those market returns don't. So really it would probably be more accurate to say that the stock market can't grow faster than net national product (which is defined as total consumption spending + net investment and in aggregate equals profits + wages + interest income + rental income). I don't know of anywhere you can go to get a history of this statistic to see what the long-run rate is for the US, but you could pull the data they use to generate GDP and calculate it manually. It should be higher than GDP growth because of that net investment term.

OTOH, if you look at actual long run average equity returns seen by all investors (instead of long run returns to the few investors who follow Bogleheads-like advice; i.e. what the index returns look like), you'll see that what the average equity investor gets is statistically indistinguishable from the risk-free rate. So in point of fact, normal investors haven't seen growth rates that even equal GDP growth. But I'm not sure how relevant this is since we are concerned with people who follow good investing habits, not random fools whose errors drive up the returns to the stock indexes we follow...

[midareff]

and what happens when a not so nimble 281 billion dollar fund meets the unexpected? Jamie just took a "whale" of a pay cut on a bad call/prediction. Why is PTTRX immune to that?

[pkcrafter]

I got into a discussion on M* with PIMCO fund owners.

M* article posted by PIMCO owner-- "Christene Benz: Let's talk about fixed income a little bit, Bridget. A lot of the firm's money is indexed. How did Vanguard Total Bond Market Index, that is sort of their bread-and-butter product, do relative to its intermediate-term bond peer group?"

Bridget Hughes: "Well, not so well, compared with the peer group."

My reply to the PIMCO owner who posted the article: The peer group? Really??

The problem is M* uses Barclay's Agg Bond TR as the benchmark for all kinds of bond funds. Here's M*s definition of the category that Vanguard Total Bond is in.

"Category CI, Intermediate-Term Bond: A fund that focuses on corporate, government, foreign or other issues with an average duration of greater than or equal to 3.5 years but less than or equal to six years, or an average effective maturity of more than four years but less than 10 years."

As you can see, there are all kinds of funds in that category because M* does not consider risk or composition. Even the category average is way off the composition of the benchmark. Now, let's look at VG total Bond. This fund tracks the index and it is rated AA. Many other funds, including some that you mention (PIMCO), are in that category, but that's where the similarity ends. It's no surprise that an index fund that is rated AA doesn't generate the same yield as your funds, or lots of other funds. It is what it is, a safer bond fund with a yield that reflects it's duration and overall risk. Bond funds in M* category CI just can't be judged on performance because funds can be very different and still be in CI.

One last comment - The expense ratio comes out of the bond yield, so if you have two bond funds with equal holdings, the lower cost fund must have a higher yield. That means index bond funds are going to beat all actively managed funds all things being equal. It also means that when you see a bond fund in the CI category with a higher ER, it must be taking more risk if it's outperforming Vanguard's index fund.

PIMCO has a fund called total bond, but the only similarity to Vanguard's TB index is they are in the same M* category. It doesn't take any effort to see that PIMCO funds take more risk--many are leveraged and don't even carry M* bond ratings. Many investors don't seem to get this. It's inappropriate to compare performance between any PIMCO bond fund and Vanguard TB index fund. There is more risk, and just because the risk has not shown up does not mean it isn't there.

Paul

[BlueEars]

Paul, you make some good points. The problem is we don't get a continuous array of risk choices at Vanguard with their bond funds. We seem to get point choices that may or may not meet our needs. I don't mean to complain about VG though, after all we have most of our money in VG index funds.

Then there are the debates about what is the right bond index to use. Is that Barclays Agg Bond index the correct one in terms of risk attributes? Should it be the benchmark for my choice? I really don't have a good numerically based answer. Larry Swedroe seems to say it's too risky for the intermediate bond category. Others disagree. That's the market for you.