Vanguard study on high yield

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Vanguard study on high yield

Postby larryswedroe » Tue Jan 22, 2013 12:48 pm

and given that they run a high yield fund a skeptic might say the are biased

https://advisors.vanguard.com/VGApp/iip/site/advisor/research/article/ArticleTemplate.xhtml?iigbundle=IWE_InvResWorthTheRisk&oeaut=bxVQcKiRxo

The author of a new Vanguard research paper arrived at several conclusions. Chief among them: High-yield bonds, on average, would not have improved the risk and return characteristics of a traditional balanced portfolio after accounting for liquidity and investability.



high-yield bonds have been more closely correlated to the risk factors commonly associated with the equity market and less so to yield curve dynamics.


the downside risks have tended to outweigh
the diversification benefits. This is because high-yield
bonds historically have delivered characteristics of
both equity and fixed income, each of which are
already represented in most portfolios. Finally,
investors may find it difficult to effectively capture
the performance of the asset class because of
liquidity constraints, which, we have shown, have
led to widespread underperformance versus the
broadest high-yield index.


And remember this doesn't even consider issues of location for those investors with choice, nor the fact that you can eliminate the fund expenses if you stick with investments like Treasuries and CDs and agencies.

Best wishes
Larry
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Re: Vanguard study on high yield

Postby Beagler » Tue Jan 22, 2013 1:27 pm

How long until they close their high-yield bond fund? :D

Anyone holding their breath?
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Re: Vanguard study on high yield

Postby tadamsmar » Tue Jan 22, 2013 1:30 pm

Beagler wrote:How long until they close their high-yield bond fund? :D

Anyone holding their breath?


Vanguard High-Yield Corporate Fund closed to most new investors (3/24/2012)
Due to a sharp increase in cash flow into Vanguard High-Yield Corporate Fund—more than $2 billion in the last six months alone—we've closed the fund to most new investors.

https://personal.vanguard.com/us/insigh ... t-05242012
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Re: Vanguard study on high yield

Postby Sam I Am » Tue Jan 22, 2013 1:42 pm

Message deleted.
Last edited by Sam I Am on Mon Oct 07, 2013 12:16 pm, edited 1 time in total.
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Re: Vanguard study on high yield

Postby tadamsmar » Tue Jan 22, 2013 1:56 pm

"The Vanguard Group junk-bond fund that closed to new investors in May could reopen soon, predicts a leading outside observer."

"Wiener’s other item of note is a news scoop — he says Vanguard is “out there beating the bushes” for outside junk-bond managers who could potentially join as a new sub-adviser. If so, it would mark the first time that Vanguard takes the multi-manager approach in fixed income, he notes. The fund’s advisor is Wellington Management Co."

http://blogs.barrons.com/focusonfunds/2 ... n-analyst/
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Re: Vanguard study on high yield

Postby Browser » Tue Jan 22, 2013 2:25 pm

What about HY in lieu of stocks, or if you have a small allocation to stocks. Does it work in a portfolio then? Some people might prefer a higher allocation to HY and a lower allocation to stocks.
If we have data, let’s look at data. If all we have are opinions, let’s go with mine. – Jim Barksdale
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Re: Vanguard study on high yield

Postby tc101 » Tue Jan 22, 2013 2:54 pm

What about HY in lieu of stocks, or if you have a small allocation to stocks. Does it work in a portfolio then? Some people might prefer a higher allocation to HY and a lower allocation to stocks.


I believe the problem with that is the HY bonds don't have the upside potential of stocks.
. | The most important thing you should know about me is that I am not an expert.
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Re: Vanguard study on high yield

Postby larryswedroe » Tue Jan 22, 2013 2:56 pm

Browser
It doesn't make sense IMO, all you are doing is taking a combination of stock and bond risk basically, at higher costs and less tax efficiency and with unwanted call risks.
David Swensen is pretty smart guy and investors should carefully consider his advice. He knows the evidence.

Best wishes
Larry
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Re: Vanguard study on high yield

Postby Browser » Tue Jan 22, 2013 6:16 pm

larryswedroe wrote:Browser
It doesn't make sense IMO, all you are doing is taking a combination of stock and bond risk basically, at higher costs and less tax efficiency and with unwanted call risks.
David Swensen is pretty smart guy and investors should carefully consider his advice. He knows the evidence.

Best wishes
Larry

How did David Swensen get into the discussion? :confused
If we have data, let’s look at data. If all we have are opinions, let’s go with mine. – Jim Barksdale
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Re: Vanguard study on high yield

Postby EyeYield » Tue Jan 22, 2013 9:33 pm

Larry,
I've read your disapproval of high yield so often that I've begun to think of this clip every time you post about it.
http://www.youtube.com/watch?v=pBbTIGNnwjU
Just substitute high yield for "cans" and this is what I hear when I read those posts.

I hope you have a sense of humor, because no disrespect intended.
"The stock market is a giant distraction from the business of investing." - Jack Bogle
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Re: Vanguard study on high yield

Postby larryswedroe » Tue Jan 22, 2013 11:24 pm

Browser
Swensen is one of the most respected investors in the US. In the category of Buffett, I think it's fair to say. While you may not necessarily agree with his opinions I think at least one should consider them. His books are IMO must reads for serious investors
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Larry
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Re: Vanguard study on high yield

Postby larryswedroe » Tue Jan 22, 2013 11:28 pm

eyeyield
There are IMO worse mistakes investors can make than including HY. At very least one must recognize they are not like safe bonds and thus one should at least account for the equity like risk in their AA.

Now all the evidence IMO weighs against using them. I cannot think of any reason to include them. The fact that they make up part of the market is a reason to own them IMO is what is absurd. How come that argument isn't used to buy subprime mortgages when they were probably as large or larger part of market then high yield debt? Have you heard anyone make that argument? I don't think so. So why is it good to buy HY corporate debt but not HY mortgage debt? Or HY muni debt? Yet you rarely here that.

Best wishes
Larry
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Re: Vanguard study on high yield

Postby Browser » Tue Jan 22, 2013 11:39 pm

larryswedroe wrote:Browser
Swensen is one of the most respected investors in the US. In the category of Buffett, I think it's fair to say. While you may not necessarily agree with his opinions I think at least one should consider them. His books are IMO must reads for serious investors
Best wishes
Larry

Larry - meant to say that I wondered how he popped into the discussion, because I wasn't aware you had referenced him in this piece. Maybe I missed something. I agree with you regarding his credentials, but wasn't aware that he had specifically discussed HY.
If we have data, let’s look at data. If all we have are opinions, let’s go with mine. – Jim Barksdale
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Re: Vanguard study on high yield

Postby EyeYield » Wed Jan 23, 2013 12:35 am

larryswedroe wrote:eyeyield
There are IMO worse mistakes investors can make than including HY. At very least one must recognize they are not like safe bonds and thus one should at least account for the equity like risk in their AA.

Now all the evidence IMO weighs against using them. I cannot think of any reason to include them. The fact that they make up part of the market is a reason to own them IMO is what is absurd. How come that argument isn't used to buy subprime mortgages when they were probably as large or larger part of market then high yield debt? Have you heard anyone make that argument? I don't think so. So why is it good to buy HY corporate debt but not HY mortgage debt? Or HY muni debt? Yet you rarely here that.

Best wishes
Larry

Larry,
I was making a joke and not an argument. I don't necessarily agree or disagree with you on your point though. I can see both sides and personally don't see HY as a major part of my portfolio. But ha ha right?
"The stock market is a giant distraction from the business of investing." - Jack Bogle
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Re: Vanguard study on high yield

Postby johnep » Wed Jan 23, 2013 12:14 pm

Thanks for the article. It had some good information. Vanguard and Larry make good points about the risks inherent within HY bonds. Interestingly, Vanguard rates the risk potential of their HY bond fund (VWEAX) a 3 as compared to a 2 for their total bond index (VBTLX)and a 4 for the total stock market (VTSAX). So HY is more risky than the total bond but less risky than total stock. However, the HY bond has also outperformed total stock the past 10 years.
The Vanguard performance for these funds over last 5 and 10 years are:
VWEAX VBTLX VTSAX
5 year return 8.68% 5.91% 2.29%
10 year return 8.21% 5.17% 7.93%

According to the experts, HY should underperform stock over the long term but that did not happen the last 10 years despite two severe financial crises. I have to assume all the bad risks associated with HY showed up in this time frame. But in spite of that, VWEAX has had good performance. In fact, VWEAX has only had a negative return in one year since its inception in 2001.

VWEAX has actually underperformed its benchmark, the Barclays US Corp HY Index which has yielded 10.82% the past 10 years as compared to 8.21% for VWEAX. I believe this is because VWEAX invests in less risky junk bonds than the average HY fund. This makes it an even better choice for me but also illustrates that the past 10 years have been very strong overall for HY bond funds.

I think it is important to recognize both the pros and cons to HY bonds. They are indeed hybrid investments and have some unique risks that must be recognized. Some experts believe HY bonds are a bad investment and others think they are a viable investment. I am certainly no expert but I am comfortable with a 5 to 10% allocation (I believe the Vanguard article said 5% was ok).
Last edited by johnep on Wed Jan 23, 2013 1:10 pm, edited 1 time in total.
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Re: Vanguard study on high yield

Postby strafe » Wed Jan 23, 2013 12:23 pm

johnep wrote:[...] Vanguard rates the risk potential of their HY bond fund (VWEAX) a 3 as compared to a 2 for their total bond index (VBTLX)and a 4 for the total stock market (VTSAX). So HY is more risky than the total bond but less risky than total stock. However, the HY bond has also outperformed total stock the past 10 years even though it is less risky. [...]
Code: Select all
The Vanguard performance for these funds over last 5 and 10 years are:
      VWEAX   VBTLX   VTSAX
 5 year return       8.68%     5.91%    2.29%
10 year return       8.21%     5.17%    7.93%


According to the experts, HY should underperform stock over the long term but that did not happen the last 10 years despite two severe financial crises. I have to assume all the bad risks associated with HY showed up in this time frame. But in spite of that, VWEAX has had good performance. In fact, VWEAX has only had a negative return in one year since its inception in 2001.


You're confusing expected returns and realized returns. Stocks are expected to have higher returns to compensate for the risk that they will at times perform poorly. The fact that HY outperformed equities over 10 years does not indicate that equities are less risky. In fact, it indicates just the opposite.
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Re: Vanguard study on high yield

Postby larryswedroe » Wed Jan 23, 2013 12:27 pm

johnep
what would you conclude when Long term government bonds outperformed large growth and small growth stocks for 40 years, which is what happened?
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Re: Vanguard study on high yield

Postby johnep » Wed Jan 23, 2013 1:01 pm

larryswedroe wrote:johnep
what would you conclude when Long term government bonds outperformed large growth and small growth stocks for 40 years, which is what happened?
Larry


Again, I am not an expert, just looking at data. But bonds enjoyed a bull market due to declining interest rates for about 30 years, so I assume that attributed to their outperformance. Sorry, but I do not see how this relates to the HY discussion. Can you elaborate?
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Re: Vanguard study on high yield

Postby johnep » Wed Jan 23, 2013 1:09 pm

strafe wrote:
johnep wrote:[...] Vanguard rates the risk potential of their HY bond fund (VWEAX) a 3 as compared to a 2 for their total bond index (VBTLX)and a 4 for the total stock market (VTSAX). So HY is more risky than the total bond but less risky than total stock. However, the HY bond has also outperformed total stock the past 10 years even though it is less risky. [...]
Code: Select all
The Vanguard performance for these funds over last 5 and 10 years are:
      VWEAX   VBTLX   VTSAX
 5 year return       8.68%     5.91%    2.29%
10 year return       8.21%     5.17%    7.93%


According to the experts, HY should underperform stock over the long term but that did not happen the last 10 years despite two severe financial crises. I have to assume all the bad risks associated with HY showed up in this time frame. But in spite of that, VWEAX has had good performance. In fact, VWEAX has only had a negative return in one year since its inception in 2001.


You're confusing expected returns and realized returns. Stocks are expected to have higher returns to compensate for the risk that they will at times perform poorly. The fact that HY outperformed equities over 10 years does not indicate that equities are less risky. In fact, it indicates just the opposite.


Strafe,
Sorry, I meant to say that HY was less risky but obviously said the opposite in highlighted sentence. Thanks for catching that.
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Re: Vanguard study on high yield

Postby larryswedroe » Wed Jan 23, 2013 3:43 pm

johnep
For the very same reasons.
First, very long periods may not tell you anything.
Second, HY started the period with high spreads and ended with lowest spreads I think on record. Do you want to base your decisions on that particular period?

Best wishes
Larry
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Re: Vanguard study on high yield

Postby CaveatEmptor » Thu Jan 24, 2013 5:41 am

Some of Vanguard's offerings are not consistent with the contents of their very useful educational articles. Their educational material is negative on the benefits of High-Yield, but they offer investors a High-Yield bond fund. Fine. But their educational materials are also repeatedly positive on collateralized commodity futures (CCFs), yet they choose to not offer any fund for that asset class, even though they could do so at little extra cost (they already have a CCF vehicle for their managed payout funds to invest in). I say this not to comment on the virtues (or lack thereof) of High-Yield or CCF investments, but to express my puzzlement at what looks like large inconsistencies between what Vanguard says and what Vanguard offers. And let's not even talk about when *both* their educational materials and the fund offerings consistent therewith are flat-out wrong, like in their positive rationale for (and offering of) a market-neutral fund, whose awfulness was easy for any Boglehead to predict (and it certainly has lived up to that expectation).

BTW Vanguard has most of my money, and I am deeply grateful for what they have done for investors, but even this greatest of fund families can become better.
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Re: Vanguard study on high yield

Postby Valuethinker » Thu Jan 24, 2013 7:07 am

CaveatEmptor wrote:Some of Vanguard's offerings are not consistent with the contents of their very useful educational articles. Their educational material is negative on the benefits of High-Yield, but they offer investors a High-Yield bond fund. Fine. But their educational materials are also repeatedly positive on collateralized commodity futures (CCFs), yet they choose to not offer any fund for that asset class, even though they could do so at little extra cost (they already have a CCF vehicle for their managed payout funds to invest in). I say this not to comment on the virtues (or lack thereof) of High-Yield or CCF investments, but to express my puzzlement at what looks like large inconsistencies between what Vanguard says and what Vanguard offers. And let's not even talk about when *both* their educational materials and the fund offerings consistent therewith are flat-out wrong, like in their positive rationale for (and offering of) a market-neutral fund, whose awfulness was easy for any Boglehead to predict (and it certainly has lived up to that expectation).

BTW Vanguard has most of my money, and I am deeply grateful for what they have done for investors, but even this greatest of fund families can become better.


The first point is that companies are not homogeneous entities. Research may think something is a great idea, but product or marketing could nix it.

Companies don't have infinite resources to pursue all possible products, and the have to prioritize and get a consistent marketing message. It might just not fit the VG brand.

Also fund management companies in general should avoid new products that will attract risk-perverse or 'hot' money, 'flavour of the month' investing or expose individual investors, who tend to be unsophisticated and under-diversified and momentum driven, to high risk of loss.

You can see the Business Committee of VG thinking through all the risks of launching such a fund to individual investors, watching money pile in (as it did to commodities in the 70s) from individual investors and, as happened in the 80s, them taking a huge bath. Thus damaging VG's brand and reputation.

VG may come around to offering this, but I don't see it as VG's DNA to be the absolute market leader in new products-- relatively slow to embrace ETFs, I believe, for example.

They are very adverse to the impacts of hot money and momentum investors, as well. So a limited liquidity product would be more appropriate. And there might be significant regulatory obstacles in marketing this to individual investors.

Intellectually I know Bogle is no longer there, but commodities have no inherent return (Soros points this out) so you would be creating an investment product that invests in nothing, in an economic sense. Soros views it as investing sophistry and I suspect Bogle might similarly. The point about commodities markets is to hedge real physical consumers and producers *not* to facilitate financial speculation. See recent fines on the banks in energy trading.

PS I have no doubt that having made this post, VG will shortly announce just such a CCF product ;-). ;-).
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Re: Vanguard study on high yield

Postby CaveatEmptor » Thu Jan 24, 2013 1:35 pm

Thank you VT for your well-thought-out reply -- your explanation is very plausible. BTW I don't like CCFs either, I merely mentioned them (and High-Yield) to illustrate the difference between what Vanguard educational articles say, and what Vanguard ends up offering. The following thread http://www.bogleheads.org/forum/viewtopic.php?f=10&t=109409 discussing the three Vanguard managed-payout-funds contains other examples.
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