2013: a bad year for pimco

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2013: a bad year for pimco

Postby zvez » Fri Jan 03, 2014 8:58 pm

Tough going for pimco in 13.

http://www.cnbc.com/id/101309088
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Re: 2013: a bad year for pimco

Postby Bungo » Fri Jan 03, 2014 9:47 pm

Not so bad, surely?

PTTRX -1.92%
BND -2.10%

I wouldn't care, except I have to use PTTRX as a proxy for BND for part of my bond holdings due to poor 401(k) choices.
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Re: 2013: a bad year for BONDs

Postby jda » Sat Jan 04, 2014 3:43 am

bad title, it should be 2013 a bad year for BONDs.

No point cherry picking an active management bond fund when corresponding passive bond funds did just as bad.
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Re: 2013: a bad year for BONDs

Postby Call_Me_Op » Sat Jan 04, 2014 9:10 am

jda wrote:bad title, it should be 2013 a bad year for BONDs.

No point cherry picking an active management bond fund when corresponding passive bond funds did just as bad.


+1
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Re: 2013: a bad year for BONDs

Postby YDNAL » Sat Jan 04, 2014 9:50 am

jda wrote:bad title, it should be 2013 a bad year for BONDs.

No point cherry picking an active management bond fund when corresponding passive bond funds did just as bad.

Did you read the article? Its emphasis is more on PIMCO's decisions and outflow of capital than Bond returns.
The Pimco Total Return Fund, the world's largest bond fund, saw its assets sink by a record $41.1 billion last year after a mistaken bet on U.S. Treasuries resulted in the fund's worst annual performance in nearly two decades.

Investors pulled $4.2 billion from the fund in December, marking the eighth straight month of outflows and reducing the fund's assets to $237 billion....
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Re: 2013: a bad year for pimco

Postby columbia » Sat Jan 04, 2014 9:58 am

I would be interested to know where that money flowed to.
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Re: 2013: a bad year for pimco

Postby billyt » Sat Jan 04, 2014 10:36 am

Its been a great year for bonds, unless you sold bonds or bond funds this year. Future returns (interest rates) have increased. Over the long term, virtually 100% of a bond funds return comes from the interest.
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Re: 2013: a bad year for BONDs

Postby tibbitts » Sat Jan 04, 2014 10:39 am

YDNAL wrote:
jda wrote:bad title, it should be 2013 a bad year for BONDs.

No point cherry picking an active management bond fund when corresponding passive bond funds did just as bad.

Did you read the article? Its emphasis is more on PIMCO's decisions and outflow of capital than Bond returns.
The Pimco Total Return Fund, the world's largest bond fund, saw its assets sink by a record $41.1 billion last year after a mistaken bet on U.S. Treasuries resulted in the fund's worst annual performance in nearly two decades.

Investors pulled $4.2 billion from the fund in December, marking the eighth straight month of outflows and reducing the fund's assets to $237 billion....

I think the outflow issue is simple: people got into the fund because of a long history of gains and its resulting reputation. They didn't get into it by analyzing every move into or out of emerging markets, high yield, treasuries, etc. Those same people will dump it when there aren't any gains, again without really caring whether it was some bet on treasuries that might have contributed to those losses. Beyond that, many people invest in Pimco through advisers, and you'll probably find that many advisers went the "terrified of bonds" route in 2013. So, you get outflows. So I'm not convinced the bond bet mattered, because the fund's overall performance was just not that out-of-line.

If you want a case where a bond bet should have caused investors to flee (but didn't, as far as I know), look no farther than VG's legendary mistakes with those swaps in total bond market a few years ago. When your only objective is to match an index and you fail by that much, investors have a reason to flee, because there's zero possibility of a recovery, ever.
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Re: 2013: a bad year for pimco

Postby billyt » Sat Jan 04, 2014 10:46 am

Hi Tibbits: I am not familiar with this issue. Could you give specific details? Looking at growth or rolling return charts on Morningstar, I do not see any substantial differences between TBM and its index that would substantiate your claim.

Thanks
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Re: 2013: a bad year for pimco

Postby G-Money » Sat Jan 04, 2014 10:51 am

billyt wrote:Hi Tibbits: I am not familiar with this issue. Could you give specific details? Looking at growth or rolling return charts on Morningstar, I do not see any substantial differences between TBM and its index that would substantiate your claim.

Thanks

2002 total return:

Vanguard Total Bond Fund (VBMFX): 8.26%
Barclays U.S. Aggregate Index: 10.25%

Source: https://personal.vanguard.com/us/funds/ ... INT#tab=1a

That is tremendous underperformance for a broad market investment grade bond index fund.

Explanation from Vanguard for the underperformance:

Of course, the objective of an index fund is to track its target benchmark
closely. On this score, three of our four funds came up significantly short. The
Total Bond Market Index Fund--our oldest and biggest bond index fund--returned
8.3%, well below the 10.3% return of the Lehman Aggregate Bond Index. Our
Short-Term and Intermediate-Term Bond Index Funds also trailed their target
indexes by about 2 percentage points. The Long-Term Bond Index Fund's return was
within 0.4 percentage point of the target.

. . .

Although this extremely challenging market environment does not excuse our
funds' shortfalls to their indexes, it does help to explain them. For our funds,
the trouble began in June and intensified in July.

. . .

At that time, our funds had larger stakes than their indexes in several subsectors. In
particular, at a subsector level we had heavier weightings in bonds issued by
telecommunications and energy-trading companies. These groups were hit extremely
hard by the WorldCom bankruptcy, the Enron scandal, and accounting
irregularities at a number of other companies.

http://www.sec.gov/Archives/edgar/data/ ... inprog.txt
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Re: 2013: a bad year for pimco

Postby billyt » Sat Jan 04, 2014 11:00 am

Thanks for that. That 2% miss doesn't really show up on Morningstar until you zoom in.
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Re: 2013: a bad year for pimco

Postby Dandy » Sat Jan 04, 2014 12:08 pm

Tough to actively manage a huge bond fund especially in such a low interest rate environment. Fees make it even harder to beat index funds. IT has been very successful. Have to take outsize risks otherwise you end up being a closet index fund. Maybe the co CEO's of PIMCO should spend less time pontificating on Bloomberg or CNBC? Smart, knowledgeable people with top notch access and info doesn't guarantee success.
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Re: 2013: a bad year for pimco

Postby fundtalk » Sat Jan 04, 2014 2:21 pm

That was a really worthless article. Gross didn't have a great year, but he did beat AGG by a small margin.

The interesting article would be about two of PIMCO's other star managers, Rob Arnott and Mohamed El-Erian. They run asset allocation funds that returned -5.47% and -8.89% in 2013. That is stunningly bad performance. That is a BAD YEAR...for their investors. I'm sure Arnott and El-Erian made out just fine in 2013.
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Re: 2013: a bad year for pimco

Postby abuss368 » Sat Jan 04, 2014 2:26 pm

G-Money wrote:
billyt wrote:Hi Tibbits: I am not familiar with this issue. Could you give specific details? Looking at growth or rolling return charts on Morningstar, I do not see any substantial differences between TBM and its index that would substantiate your claim.

Thanks

2002 total return:

Vanguard Total Bond Fund (VBMFX): 8.26%
Barclays U.S. Aggregate Index: 10.25%

Source: https://personal.vanguard.com/us/funds/ ... INT#tab=1a

That is tremendous underperformance for a broad market investment grade bond index fund.

Explanation from Vanguard for the underperformance:

Of course, the objective of an index fund is to track its target benchmark
closely. On this score, three of our four funds came up significantly short. The
Total Bond Market Index Fund--our oldest and biggest bond index fund--returned
8.3%, well below the 10.3% return of the Lehman Aggregate Bond Index. Our
Short-Term and Intermediate-Term Bond Index Funds also trailed their target
indexes by about 2 percentage points. The Long-Term Bond Index Fund's return was
within 0.4 percentage point of the target.

. . .

Although this extremely challenging market environment does not excuse our
funds' shortfalls to their indexes, it does help to explain them. For our funds,
the trouble began in June and intensified in July.

. . .

At that time, our funds had larger stakes than their indexes in several subsectors. In
particular, at a subsector level we had heavier weightings in bonds issued by
telecommunications and energy-trading companies. These groups were hit extremely
hard by the WorldCom bankruptcy, the Enron scandal, and accounting
irregularities at a number of other companies.

http://www.sec.gov/Archives/edgar/data/ ... inprog.txt


What I never quite understood there was how the fund was allowed to deviate from the index.
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Re: 2013: a bad year for pimco

Postby G-Money » Sat Jan 04, 2014 2:36 pm

abuss368 wrote:What I never quite understood there was how the fund was allowed to deviate from the index.

TBM can still deviate from its index.

From Vanguard Total Bond Market Fund's Investment Strategy:

The fund invests by sampling the index, meaning that it holds a range of securities that, in the aggregate, approximate the full index in terms of key risk factors and other characteristics. All of the fund’s investments will be selected through the sampling process, and at least 80% of the fund’s assets will be invested in bonds held in the index. The fund maintains a dollar-weighted average maturity consistent with that of the index, which currently ranges between 5 and 10 years.

https://personal.vanguard.com/us/FundsS ... IntExt=INT

From Vanguard Total Bond Market Fund's "Plain Talk About Risk":
An investment in the fund could lose money over short or even long periods. You should expect the fund’s share price and total return to fluctuate within a wide range, like the fluctuations of the overall bond market. The fund’s performance could be hurt by:
. . .
Index sampling risk: The chance that the securities selected for the fund, in the aggregate, will not provide investment performance matching that of the index. Index sampling risk for the fund should be low.

https://personal.vanguard.com/us/funds/ ... =INT#tab=2

Vanguard may have better internal controls to reduce the risk of these things showing up. But even now, it has the leeway to deviate from the index materially.

I should also note that I don't mean to pick on Vanguard. I use TBM for a portion of my bond holdings. As far as I know, the 80% rule is mandated by the SEC, and so every fund's prospectus contains similar language. In the years since 2002, including during the credit meltdown in 2008, Vanguard TBM did an excellent job of tracking the index. So I would assume that Vanguard is doing a much better job of controlling these risks than it did in 2002. But history could still repeat itself, be it at Vanguard or elsewhere.
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Re: 2013: a bad year for BONDs

Postby nisiprius » Sat Jan 04, 2014 5:52 pm

tibbitts wrote:...If you want a case where a bond bet should have caused investors to flee (but didn't, as far as I know), look no farther than VG's legendary mistakes with those swaps in total bond market a few years ago...
Not in any way to excuse Vanguard, but they are not the only company to have that kind of issue. Perhaps tracking a bond index isn't perfectly easy.

Image
2002, Vanguard stumbles. Irrevocable, permanent 2% loss going forward. While Fidelity faithfully tracks the index.

Image
2007, Fidelity stumbles. Irrevocable, permanent 2.8% loss going forward. While Vanguard faithfully tracks the index

And the big one. To be fair, Schwab Total Bond was not an index fund, but for fourteen years it certainly behaved like one.
Image

2007. Schwab takes a pratfall. Irrevocable, permanent 12% loss going forward. While Vanguard faithfully tracks the index.
Image

If investors had decided to flee Total Bond in 2002, what would you suggest for the fund they should have fled to? Not a rhetorical question, I haven't looked--but is there a Barclay's Aggregate index fund that has done conspicuously better than Vanguard's?
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Re: 2013: a bad year for pimco

Postby drewhaa » Sat Jan 04, 2014 7:11 pm

Probably a bit off topic, but it baffles me how PIMCO gets away with running such a risky fund without most people recognizing it. Why do I say risky? Two main reasons, but I'm sure there are others:

1. Leverage - PTTRX extensively uses derivative products. Here's a snap of it's top five holdings as of 9/30/2013 taken directly from M*:

Image

All five of these holdings appear to be derivatives. I'm guessing the majority of PTTRX owners can't begin to explain what "IRS Usd 1.5 03/18/15-1y (Red) Cme" is, nor what effect it has on PTTRX's performance or could have if interest rates change. I know I can't. Using these derivatives leads to a long exposure of > 100% - as listed in this M* Snap:

Image

This image leads me to believe that the derivatives are used as leverage to increase exposure/enhance returns and not used as a hedge to limit downside risk (like some other funds).

2. Turnover - PTTRX ran a turnover rate of 380% as of 9/30/2013. VBMFX (Total Bond Market) ran at 80%, for comparison. I understand that the nature of bond funds is that they have built in turnover - bonds mature, bonds are called, duration exceeds limits due to changes in interest rates, etc. However, this level of turnover indicates that Mr. Gross changes strategies multiple times a year, with the effect of turning the portfolio 4 times during 2013. I didn't take the time to look up historical turnover rates, but I remember PTTRX having similarly high turnover rates.


PTTRX has a long history of beating the broader bond market. Mr. Gross is well respected within the "financial industry" (whatever that is). If someone wanted to take a part of their investments and allocate it to a speculative bond category, then I would think that PTTRX is a fine choice. However, PTTRX is not a good choice for a core bond holding - at least a core bond holding that is meant to be a less-volatile part of a broader asset allocation. It seems what Mr. Gross does is simply stock picking with bonds/derivatives.

I might be way off base. Feel free to correct me if I am.
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Re: 2013: a bad year for pimco

Postby magician » Sun Jan 05, 2014 2:56 am

fundtalk wrote:. . . two of PIMCO's other star managers, Rob Arnott and Mohamed El-Erian.

I'm pretty sure that the people at Research Affiliates would be surprised to learn that Rob Arnott is a star manager at PIMCO.

(Those at PIMCO might be, as well.)
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Re: 2013: a bad year for pimco

Postby talzara » Fri Jan 10, 2014 2:06 am

The secondary market for bonds is much less liquid and has much higher spreads than the stock market. That's why bond funds have to sample. Total replication simply isn't practical.

The tracking error that Vanguard Total Bond experienced in 2002 is much less likely to occur today. The fund now holds a much larger sampling of Barclay's US Aggregate Bond Index. It's still not full replication, but it's a lot closer.

  • In December 2002, Vanguard Total Bond had $25 billion in net assets, and held 1067 bonds (plus 0.1% in "Other", whatever that means).
  • In November 2013, Vanguard Total Bond had $108.9 billion in net assets, and held 6172 bonds. This is pretty good coverage of a 8625-bond index.
Last edited by talzara on Fri Jan 10, 2014 12:58 pm, edited 1 time in total.
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Re: 2013: a bad year for pimco

Postby ray.james » Fri Jan 10, 2014 3:57 am

Very informative thread.

Why do bonds have such a high turnover, even 80% for TBM? Do they need to return and undertake every bond for its old duration every year?
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Re: 2013: a bad year for pimco

Postby insein » Fri Jan 10, 2014 4:28 am

PONDX at the first half of the year was decent. I dumped it in mid-year together with VWELX, VWAHX.

I kept PIXDX which was up 30+% in 2013.
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Re: 2013: a bad year for pimco

Postby YDNAL » Fri Jan 10, 2014 7:10 am

insein wrote:PONDX [PIMCO Income, 3,775 holdings] at the first half of the year was decent. I dumped it in mid-year together with VWELX [Vanguard Wellington, balanced fund], VWAHX [Vanguard High Yield Tax exempt].

I kept PIXDX which was up 30+% in 2013.

You must have *insein*ly good insight. :) Dumping 3 holdings and keeping 1 that owns this (top 7 by %):
http://portfolios.morningstar.com/fund/ ... ture=en-US
Code: Select all
Erauslt Trs Equity 1ml+26.5 *Bullet* Brc    31.80       4,905,210
Fin Fut Euro$ Cme 06/15/15                  25.32   2,884,000,000
Fin Fut Euro$ Cme 12/14/15                  15.09   1,726,000,000
Cdx Ig21 5y Bp Ice                          10.40     291,300,000
Erauslt Trs Equity 1ml+35 Jpm                9.60       1,480,827
Erauslt Trs Equity 1ml+29 *Bullet* Jpm       9.15       1,412,141
Erauslt Trs Equity 1ml+46 Boa                8.82       1,361,284
Question: Were the previous holdings, and the 1 you kept, part of your investment plan?
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Re: 2013: a bad year for pimco

Postby haban01 » Fri Jan 10, 2014 9:29 am

Good comments on the hedging of Pimco Total Return. The real problem is that in most options this is the ONLY fixed income option in many 401K plans. Bill has been able to "average out" over time. This whole Death of Bonds, Great Rotation, etc. is more hype and spin than anything. Dump your bonds and say PTTRAX and put that in equities at all time highs. That is what the talking heads in the financial media are advising. My advice would be to DO NOTHING!
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Re: 2013: a bad year for pimco

Postby insein » Fri Jan 10, 2014 10:52 am

@YDNAL,

I dumped most of the bond funds (FNMIX, SXFIX, FTBNX, FHIFX and most of SPHIX) also in mid-2013. However, I kept FAGIX, and double FHYTX.
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Re: 2013: a bad year for pimco

Postby YDNAL » Fri Jan 10, 2014 11:01 am

insein wrote:@YDNAL,

I dumped most of the bond funds (FNMIX, SXFIX, FTBNX, FHIFX and most of SPHIX) also in mid-2013. However, I kept FAGIX, and double FHYTX.

Thanks.

I'm not looking further to see what all these new ticker symbols represent, but it is always helpful to name the fund for the reading public who doesn't now one ticker from another. There must be change(s) in your personal circumstances to "dump" now 8 holdings (5 above plus PONDX, VWELX and VWAHX previously).
insein wrote:PONDX [PIMCO Income, 3,775 holdings] at the first half of the year was decent. I dumped it in mid-year together with VWELX [Vanguard Wellington, balanced fund], VWAHX [Vanguard High Yield Tax exempt].

I kept PIXDX which was up 30+% in 2013.

IMO, it seems that your plan may be geared to create a *collection* of funds.

Good luck!
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Re: 2013: a bad year for pimco

Postby Doc » Fri Jan 10, 2014 1:16 pm

drewhaa wrote:Probably a bit off topic, but it baffles me how PIMCO gets away with running such a risky fund without most people recognizing it. Why do I say risky? Two main reasons, but I'm sure there are others:

1. Leverage - PTTRX extensively uses derivative products.
...

2. Turnover - PTTRX ran a turnover rate of 380% as of 9/30/2013. VBMFX (Total Bond Market) ran at 80%, for comparison.
...
I might be way off base. Feel free to correct me if I am.


1. Leverage and derivatives are two different things. Yes you can use derivatives for leverage but there are other reasons to use derivatives.

2. One of the reasons for using derivatives is so that you can attain the risk profile of a segment without having to take a long position in that segment (lowers transaction cost and limits risk.) If you turn over that short derivative in weeks instead of the years that the underlying instrument would require your "turnover" looks larger.

How do you define risky?

Here's a rolling return chart showing the difference in return for 24 months periods for PTTRX and Vg TBM. Change the rolling return to other lengths and then make your own judgment as to which is more "risky".

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

If you define "risky" as loss of income/capital going forward I suggest you look at the thread discussing Boogle's desire to change the BarCap Agg index.
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Re: 2013: a bad year for pimco

Postby fareastwarriors » Fri Jan 10, 2014 2:20 pm

I still use PTTRX in my 401k. Best of the lot. No regrets.
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