move $ from cref bond market to pimco total return fund?

[manuvns]

tiaa-cref recently started offering pimco total return fund (expense Gross 0.89% | Net 0.71%) in my 403b plan . should i move my cref bond market assets(expense 0.46%) to the same for better returns? please comment .

here are the fund fact sheet

http://enroll.tiaa-cref.org/resources/ffs/693390726.pdf

http://enroll.tiaa-cref.org/resources/ffs/194408407.pdf

[NightOwl]

pimco total return fund (expense Gross 0.89%]

Precisely. Is he worth it?

[manuvns]

pimco total return fund (expense Gross 0.89%]

Precisely. Is he worth it?

Bill Gross is bond Guru . he has made (himself and investors ) billions trading bonds

[NightOwl]

pimco total return fund (expense Gross 0.89%]

Precisely. Is he worth it?

Bill Gross is bond Guru . he has made (himself and investors ) billions trading bonds

Sorry -- it was a joke. I know who he is. Gross expense, Bill Gross, etc. I thought "expense Gross .89%" was funny. Perhaps you disagree.

I have no idea whether Bill Gross, bond guru, is worth that money. I've heard some (including ValueThinker, fwiw) say that the sheer size of Pimco Total Return may hinder its return. I also know that Bill Miller of Legg Mason was worth every penny, until he wasn't.

NightOwl

[46goat]

I had a very long and detailed reply to your question all typed out and when I went to submit it, the forum wouldn't accept it because I supplied you with some links to web pages. I am not yet allowed to do this because I am new to these forums, or so the error message told me. When I clicked on the "back button", my post was gone ! Anyway, the answer to your question is that you should go for the Pimco Total Return Fund despite the higher expenses. Go to Morningstar and get a quote for PTTDX ( these are the D class shares which are available to me, so that is what I have been researching ) and then click on the chart tab. Just above the chart, there is a little box where you can type in the symbol of any other bond fund that you want to compare to PTTDX. I must have done this for about 50 other comparable bond funds and I can't find a one that can compare to PTTDX for a combination of stability and total return.

[gw]

tiaa-cref recently started offering pimco total return fund (expense Gross 0.89% | Net 0.71%) in my 403b plan . should i move my cref bond market assets(expense 0.46%) to the same for better returns? please comment .

here are the fund fact sheet

http://enroll.tiaa-cref.org/resources/ffs/693390726.pdf

http://enroll.tiaa-cref.org/resources/ffs/194408407.pdf

Expenses should almost always be the dominant consideration. This is no exception. Keep the cheaper fund. Switch to an even cheaper index fund if it's possible.

[46goat]

I have only just joined these forums and I have only posted on two threads so far. In both of those threads I have mentioned PIMCO funds and in both of those threads, gw has trashed the idea of using them.

First off, I have no relationship with PIMCO Funds and am not trying to promote them in any way. I am just looking for the best funds to use to construct a highly-safe portfolio to use for my retirement years.

Secondly, no offense to gw, but the statement that a fund's expense ratio is almost always the most important thing to consider is obviously absurd !
If fund A has returned 10% per year for the last ten years and has an expense ratio of 1% and fund B has returned 2% per year and has an expense ratio of 0.5%, which fund are you going to choose ? This is a very simplistic explanation, but the point I am trying to make is that net return after expenses is what counts.

I am hardly the most sophisticated investor around. I still have a lot to learn. However, I have to ask gw what I am missing here ? Peace !

[bottlecap]

The reason expense are important is because it is the only factor you can control in a fund and past performance is not indicative of future returns.

I, too, am interested in the PIMCO Total Return question, as it is now the only bond fund offered in my company's new 401k. I suspect the answer is that you could do worse than the PIMCO Total Return fund but that we can't expect its outperformance to continue.

My larger concern is that of risk. Does the fund invest in riskier assets than your typical bond index fund? If so, I'm concerned, because bonds are the assets I want to use to reduce risk. I think ValueThinker has suggested that the funds performance is not due to increased risk, but to well-timed bets. I don't know how we can tell this, but even if it's true, one of these days, Gross is going to be wrong an the outperformance is not likely to continue. But again, I'm more concerned about the risk than the outperformance.

JT

[gw]

I have only just joined these forums and I have only posted on two threads so far. In both of those threads I have mentioned PIMCO funds and in both of those threads, gw has trashed the idea of using them.

First off, I have no relationship with PIMCO Funds and am not trying to promote them in any way. I am just looking for the best funds to use to construct a highly-safe portfolio to use for my retirement years.

Secondly, no offense to gw, but the statement that a fund's expense ratio is almost always the most important thing to consider is obviously absurd !
If fund A has returned 10% per year for the last ten years and has an expense ratio of 1% and fund B has returned 2% per year and has an expense ratio of 0.5%, which fund are you going to choose ? This is a very simplistic explanation, but the point I am trying to make is that net return after expenses is what counts.

I am hardly the most sophisticated investor around. I still have a lot to learn. However, I have to ask gw what I am missing here ? Peace !

First of all, as I've recently posted in the other thread, I apologize for overreacting. I don't doubt that your posts were well-intentioned, and whether or not they're overpriced, the PIMCO funds that you mentioned implement a great idea.

However, I will defend the statement that expenses are almost always the most important thing. It's true that net, risk-adjusted return after expenses is what counts. But the dirty little secret of the finance industry, and possibly the most important thing to know as an investor, is that nobody adds value. That's a blanket statement, so of course it can't be precisely true, but a rigorous analysis leads to the same conclusion: funds are essentially never able to add enough value to make up for higher expenses.

We can discuss that point in more detail, and I'll happily continue trashing the PIMCO funds, but I apologize again for making things sound personal.

[tibbitts]

Secondly, no offense to gw, but the statement that a fund's expense ratio is almost always the most important thing to consider is obviously absurd !
If fund A has returned 10% per year for the last ten years and has an expense ratio of 1% and fund B has returned 2% per year and has an expense ratio of 0.5%, which fund are you going to choose ? This is a very simplistic explanation, but the point I am trying to make is that net return after expenses is what counts.

I am hardly the most sophisticated investor around. I still have a lot to learn. However, I have to ask gw what I am missing here ? Peace !

What you are missing is that past performance is not a predictor of future results. So most people here entirely discount past performance of active funds. Expenses are the only factor that predictably influence future fund returns.

Paul

[46goat]

HAHAHAHAHAHA !!!! Hey gw, no need to apologize. This is fun and I ain't backing down either.

The person who originated this thread, manuvns, provided the performance data for both the TIAA-CREF bond fund and the PIMCO bond fund in those pdfs that he included in his first post. I may be wrong about this, but as I understand it, performance data such as this can include only net performance after expenses have been deducted. Conceding that the future is unknowable, why wouldn't the PIMCO fund be a better choice since it has beaten the TIAA-CREF fund in all time frames in the past ?

Also, in the best of all possible worlds, a person would be able to chose from every bond fund out there. So gw, my friend, what would your choice or choices be and why ? I am not trying to set you up or be a smart ass. You are obviously a smart guy ( I assume you are a guy because you are so stubborn and competitive ) and I think I would find your answer to be very helpful to me in my own quest to assemble a great retirement portfolio. Thanks.

Also, in response to Paul : yes, technically speaking, you are certainly correct about past performance not being a predictor of future results, but we are talking about Bill Gross here. I think it is safe to say that he should be able to navigate the future pretty well since he has seen it all. The originator of this thread said he had a choice between the PIMCO Total Return Fund and a TIAA-CREF bond fund. I don't know if the TIAA-CREF fund is actively managed or an index fund, so I can't correctly compare the two without this knowledge, but I don't think he can go wrong by going with Bill Gross since he has beaten the pants off the TIAA-CREF fund from day one ! So Paul, what would you do in this situation where you had only two choices ?

[cinghiale]

You could split your money between the more actively managed Pimco Total Return and the broader CREF bond fund. I own both funds and like them both.

[MarcMyWord]

. . . but we are talking about Bill Gross here. I think it is safe to say that he should be able to navigate the future pretty well . . .

I'd just like to point out one of the hazards of all actively managed funds with genius managers: Even genius managers eventually want to stop. Unless I'm mistaken, Bill Gross is 64 or 65 years old. While I'm not tuned in to "matters PIMCO" and am not aware of specific retirement plans, you should not expect Mr. Gross to be around forever in that future that must be navigated.

Marc

[gw]

HAHAHAHAHAHA !!!! Hey gw, no need to apologize. This is fun and I ain't backing down either.

The person who originated this thread, manuvns, provided the performance data for both the TIAA-CREF bond fund and the PIMCO bond fund in those pdfs that he included in his first post. I may be wrong about this, but as I understand it, performance data such as this can include only net performance after expenses have been deducted. Conceding that the future is unknowable, why wouldn't the PIMCO fund be a better choice since it has beaten the TIAA-CREF fund in all time frames in the past ?

I believe you're right that expenses are already deducted from the past performance figures.

My position here is essentially the same as Paul's: past performance is an uncertain predictor of future performance, but the fees are certain.

You seem to be convinced by the last 10 years' relative returns (which were an impressive 1.5% higher for PIMCO than CREF) and by the reputation of Bill Gross (who certainly has a very good reputation). That's fine, and you may be right, but I think you're betting on pretty limited information. At least realize the strength of what you're saying: "What I've seen has convinced me that the investments of PIMCO's fund will probably outperform those of CREF's fund each year by more than the extra 0.43% in fees." 0.43% is a pretty big number in the context of investments that make about 2% after inflation. If you had bet ten years ago that Gross would outperform his index by more than his extra fees, you would have been very right today. But what about the next 10 years?

Two asides: (1) Note that the PIMCO fund did extremely well over the last year or two. Skill? Luck? I'm not sure, but I notice that last year's outperformance alone increased the 10-year average by some 0.6%. In other words, Gross would have looked a little bit closer to average a year ago. (2) Notice that CREF outperformed its index by 1% in the 1-year average and underperformed by more than 1% in the 3-year average. I'm not sure why it doesn't track more closely, but I do notice that its 10-year average is almost exactly equal to index-minus-fees.

We could continue the analysis, but absent truly compelling evidence that one fund will be extraordinary (in the future), or that another fund is a mess, I'm strongly biased toward taking the bird-in-the-hand of lower fees. I have serious doubts about my ability to predict whether one fund will outperform another before fees, and 0.43% is an awfully big hurdle.

Also, in the best of all possible worlds, a person would be able to chose from every bond fund out there. So gw, my friend, what would your choice or choices be and why ?

Vanguard's total bond market index, VBMFX, looks pretty good to me. It's dirt cheap (0.22%, or 0.14% for Admiral class), it's tax-efficient (not that it should matter much), and it has simple and totally transparent indexed management. Best of all, it's guaranteed to outperform the average bond fund.

With the cheapest index fund as my default option, I can skip the whole question of whether I'm better at identifying bond funds than the average investor. I get to focus on more important things, like saving/spending rates, overall asset allocation, and taxes---not to mention going to the beach. That's a huge win in my book.

[46goat]

MarcMyWord wrote :

I'd just like to point out one of the hazards of all actively managed funds with genius managers: Even genius managers eventually want to stop. Unless I'm mistaken, Bill Gross is 64 or 65 years old. While I'm not tuned in to "matters PIMCO" and am not aware of specific retirement plans, you should not expect Mr. Gross to be around forever in that future that must be navigated.

This is a good point and undeniably true. However, he still looks pretty vigorous for his age and appears to be enjoying his work. He certainly hasn't lost his touch for picking good investments. Also, I think he is having a gigantic mansion built for himself somewhere in California, so he will probably have to continue working for awhile to pay for that sucker

I am a huge college basketball fan and I just watched the men's championship game last night where Duke University beat Butler. Duke is coached by one of the legends of the game, Mike Krzyzewski, or Coach K as he is known to most people who don't want to try to pronounce that tongue-twister of a last name of his. This is from an article in USA Today :

Krzyzewski, 63, often has been asked whether the experience, while rewarding, exacted a physical and mental toll combined with his duties at Duke.

On the contrary, Krzyzewski has said. He says he came back energized and a better coach. Those close to him agreed.

"He's enjoying things a lot more," associate head coach Chris Collins said Monday. "He's been more trusting of our staff. He's delegating more responsibilities to us so he can really enjoy this portion of his career, which he deserves."

Whether it's looking for his assistants to run practices more or do more scouting, the changes are subtle and effective, Collins added.

I would suspect that at PIMCO, Bill Gross has an excellent staff upon whom he can rely more heavily as he gets older, similar to what Coach K is doing at Duke. Bill Gross graduated from Duke, which I just found out when I Googled him, and he was born in 1944, so he is either 65 or 66. That certainly isn't young, but I believe there is a Supreme Court justice who is just now talking about retirement at 90 ! I know that doesn't prove anything, but my point is that healthy people these days are regularly living and working for much longer than in the past. Just because Bill Gross is in his mid-sixties is no reason to assume that he will die or retire in the next few years. I also found out he was a gambler in Las Vegas for awhile, which is where I live, but I don't think a person would be "gambling" if they were to give him some of their money to manage.


tibbitts wrote :

What you are missing is that past performance is not a predictor of future results. So most people here entirely discount past performance of active funds. Expenses are the only factor that predictably influence future fund returns.

and gw wrote something very similar :

My position here is essentially the same as Paul's: past performance is an uncertain predictor of future performance, but the fees are certain.

and George Santayana wrote :

"Those who cannot remember the past are condemned to repeat it."

I don't know what the Santayana quote has to do with anything, but I couldn't resist throwing it in there. Well, actually it is quite relevant to our discussion because he is pointing out that the past should not be ignored.

I believe the past performance thing is a "disclaimer" required by the Securities and Exchange Commission when an investment advisor is advertising about what a financial genius he is, when a company is advertising its investment vehicles, etc. and I believe the correct wording is : "Past performance is not necessarily indicative of future results". What I am getting at is that this is just a statement devised by lawyers to help better inform investors about the realities of investing. This is NOT a divine revelation from God stating an eternal truth ! I'm getting the feeling that you fellas have turned this statement into some kind of religion that requires strict obediance to this dogma, and I say that respectfully and with tongue in cheek. Also, it doesn't say, "Past performance is NEVER indicative of future results". Also, notice the inclusion of the word "necessarily", which is of huge importance because it means that past performance could very well be HIGHLY indicative of future results, just not 100% of the time.

Just for the sake of argument, let's leave out the word "necessarily" and assume that there have been scientific studies done to prove the assertion of "Past performance is not indicative of future results". There very well could have been, but I don't feel like researching it right now. Anyway, how would you go about proving such a statement ? Well, you would have to examine........wait for it.......THE PAST !!!! How could you possibly prove that the past was irrelevant by examining only the past ? Since we are always in the present and we don't yet know the future, for all we know, the past could be perfectly predictive of the future from this point forward !

What it all boils down to is that we have no idea how the future is going to play out when it comes to actively managed mutual funds, or anything else for that matter. Will the past be at least somewhat predictive or won't it ?
Let's go back to Coach K for a moment if you will humor me for a bit longer. He has been at Duke for 30 years, has won 4 national titles, almost always wins at least 20 games per year, usually wins 30 or more games per year and almost always gets into the NCAA Tournament. You might say that he is kind of like the Bill Gross of college basketball coaching. Certain people in all fields of endeavor sometimes rise to superstar status. When they do, my position is that past performance takes a leap forward into much higher relevancy. Can I prove it ? No, but then you guys can't prove your position either. I think it makes perfect sense to assume Coach K and Bill Gross are going to continue to edge out the "index funds" of their respective world, but even if they don't, their performance will still be very near that of their competition. Either way, we are both gambling on the future---I just think that my gamble has a better chance of finishing in first place. Let the games begin !

Rick

[gw]

I am a huge college basketball fan and I just watched the men's championship game last night where Duke University beat Butler.

...

Bill Gross graduated from Duke.

Nuts! I forgot to make the Duke reference in my post this morning, so you beat me to it.

I believe the past performance thing is a "disclaimer" required by the Securities and Exchange Commission when an investment advisor is advertising about what a financial genius he is, when a company is advertising its investment vehicles, etc. and I believe the correct wording is : "Past performance is not necessarily indicative of future results". What I am getting at is that this is just a statement devised by lawyers to help better inform investors about the realities of investing.

...

Just for the sake of argument, let's leave out the word "necessarily" and assume that there have been scientific studies done to prove the assertion of "Past performance is not indicative of future results". There very well could have been, but I don't feel like researching it right now. Anyway, how would you go about proving such a statement ? Well, you would have to examine........wait for it.......THE PAST !!!! How could you possibly prove that the past was irrelevant by examining only the past ? Since we are always in the present and we don't yet know the future, for all we know, the past could be perfectly predictive of the future from this point forward !

Those investment advisors would love to have you believe that the SEC statement is just an empty disclaimer. In fact, it seems to me that many of them go out of their way to make it appear so. The truth is that the disclaimer is an understatement. Not only is past performance not necessarily a good predictor of future performance, but in fact numerous scientific studies have shown that past performance of mutual funds is an awful predictor of future performance. Perhaps others around here have links to some studies handy.

There are lots of decent ways to test whether past returns have been predictive (in the past). For example, you could take a prior ten year period and see how the first five years' winners did in the second five years. It's easy to find such studies, and the results won't encourage you that it's easy to identify good funds. The clarity of the evidence is what makes it so criminal (IMHO) that the finance industry continues to promote actively-managed funds.

These big questions about active/passive management and expenses are pretty much the foundation of this forum, and they're discussed extensively here, so I won't try to rehash all the arguments. But I think you might find it interesting to read up on people's opinions about index investing vis-a-vis efficient markets. When you consider the fact that a cheap index fund must by definition outperform the average actively-managed fund, and if you have any humility whatsoever about your own abilities relative to the average invested dollar, then everything should come into focus.

On the other hand, if someone wanted to bet me that Buffett and Gross would beat the S&P 500 and Barclay's bond index, respectively, over the next 10 years, I'd be pretty reluctant to take the bet. But there's speculating and there's investing, and the essence of smart investing is to let other people do the speculating.

[46goat]

This is kind of like a cheap horror movie---"The Discussion That Wouldn't Die !" I just have a little fine tuning to add here.


gw wrote :

When you consider the fact that a cheap index fund must by definition outperform the average actively-managed fund

and

On the other hand, if someone wanted to bet me that Buffett and Gross would beat the S&P 500 and Barclay's bond index, respectively, over the next 10 years, I'd be pretty reluctant to take the bet.

Well, that kind of sums up the whole thing right there, at least to me. When it comes to "the average actively-managed fund" , how could I possibly argue with anything you have said ? I didn't get on the Bogleheads forums by accident. John Bogle is a giant, just like Buffet and Gross, and I am familiar with his work and agree with his theories. However, there are exceptions to every rule and Bill Gross is one of them. He doesn't run an AVERAGE actively-managed fund, so he can and does outperform the index.

By the way, gw, what do you mean that a cheap index fund must "by definition" outperform the average actively-managed fund ? Why would that be part of the definition of a cheap index fund ? It sounds to me like you might be embellishing a bit here

Rick

[gw]

gw wrote :

When you consider the fact that a cheap index fund must by definition outperform the average actively-managed fund

and

On the other hand, if someone wanted to bet me that Buffett and Gross would beat the S&P 500 and Barclay's bond index, respectively, over the next 10 years, I'd be pretty reluctant to take the bet.

Well, that kind of sums up the whole thing right there, at least to me. When it comes to "the average actively-managed fund" , how could I possibly argue with anything you have said ? I didn't get on the Bogleheads forums by accident. John Bogle is a giant, just like Buffet and Gross, and I am familiar with his work and agree with his theories. However, there are exceptions to every rule and Bill Gross is one of them. He doesn't run an AVERAGE actively-managed fund, so he can and does outperform the index.

He also can and might underperform the index. You seem to be convinced that you've identified him as the elusive manager who can consistently outperform the index after fees. But you have to ask yourself---are others incapable of looking at the last 10 year's returns and reaching the same conclusion, or is there some other reason that not every bond mutual fund owner owns Gross's fund? For every dollar that correctly picked a fund that outperformed the index, there was more than one dollar that picked a fund that underperformed the index. What's your special skill in picking the good side? I'm playing devil's advocate here, and I'll admit that Gross's performance looks impressive. But one also has to worry about the slippery slope of trying to outperform the market---it's a bad habit.

By the way, gw, what do you mean that a cheap index fund must "by definition" outperform the average actively-managed fund ? Why would that be part of the definition of a cheap index fund ? It sounds to me like you might be embellishing a bit here

Well, that's the key insight, right? Holding the index is equivalent to holding a weighted average of all mutual funds, except without paying their fees and other costs. Holding an index fund is also equivalent to holding the average mutual fund, except with much less than average costs. So almost by definition, an index fund must outperform the average mutual fund.

To prove that costs are the only thing that matters in investing, the remaining step is simply to decide that you're no better at picking mutual funds than the average invested dollar. And if you do think you know a better way to pick funds, despite all the theoretical and empirical evidence of the odds being against you, remember that being smarter than average isn't good enough---you have to be so smart that you can beat the extra fees, too.

It's a really heavily stacked deck, so I think one should always maintain extreme bias toward lower costs. A manager's good reputation and a modest excess in the last ten year's returns are far from enough to convince me that I should pay higher fees.

[46goat]

Hey, gw, I have some more ammo both for your side and mine ( see what a fair-minded guy I am ), but this discussion is currently too hard for me to do properly because I still can't include links in my posts. I'll get back to you in a couple days. Until then, here is something that you might have written if I didn't know better :

Further, a recent study by Marlena Lee of Dimensional Fund Advisors reviewed the performance of more than 2,300 actively managed bond funds from 1991 to 2008. The average actively managed fund underperformed comparable index funds by 0.9% a year.
Active bond managers are not throwing in the towel.
Giant bond manager Pimco believes active bond management adds value. It tries to support this view in its own study. The firm compared the risk and return of the Pimco Total Return Fund to two benchmark indexes over the 10-year period studied. However, the Total Return Fund invested in sectors not included in its benchmark indexes, like emerging-market bonds, European government bonds and foreign currencies, including the yen and the euro.
Therefore, it is not accurate to state that the Total Return Fund beat either index since it includes bonds that were not in those indexes. A similar mix of bond index funds from U.S., international and emerging markets may have done just as well, or even better considering the studies mentioned above.
On balance, it is difficult to quarrel with the overwhelming data indicating the likelihood of active bond managers' beating a comparable bond index is very small.

So why would I shoot myself in the foot and include this info that sabatoges my own case ? Well, because, in a way, it actually helps PROVE my case. The writer of this article is named Dan Solin and he is a senior vice-president of a company called Index Fund Advisors, so guess what religion he practices and how strong his faith is. He can't just come out and admit that PTTRX beat whatever these two benchmark indexes were, so he has to say that it isn't fair because PTTRX contains bonds that weren't in those indexes. His exact words were : "Therefore, it is not accurate to state that the Total Return Fund beat either index since it includes bonds that were not in those indexes." This is absolute BS !!!
It is ENTIRELY accurate to state that PTTRX beat these indexes because it did ! He could have said something like this : "Although PTTRX beat these two indexes over this ten-year period, it is not really an apples-to-apples comparison because PTTRX contained bonds that weren't in those indexes." OK, that would have been a valid statement, but what he said were the weasel-words of a liar trying to defend his religion against the doubts of a skeptic. He then goes on to say, "A similar mix of bond index funds from U.S., international and emerging markets may have done just as well, or even better considering the studies mentioned above." Yeah, sure, if you were a genius and knew what percentage of each to use in your portfolio and when to get in and out of them. You could also open a currency trading account and buy and sell yen and euros like PTTRX supposedly has done. Here is where I completely agree with you in that I am not smart enough to do this kind of thing, but that's not really the point. The point really is that I am smart enough to do a little simple research that almost anyone could handle and try to find out if anyone exists that IS smart enough to do this stuff. As it turns out, there are several such people and Bill Gross is one of them. Whoever manages HABDX, DODIX and MWTRX seem to be in this category too. Can they continue their run into the future ? Neither of us can answer that with any certainty, but given the length of their track record, I think it is reasonable to think that they will. However, that doesn't mean that I also won't invest in VBMFX, VBIIX or VBLTX as well. I don't see any bad choices here.

Rick

[46goat]

Here is another reason that this Dan Solin guy I mentioned in my last post is full of it. Also, it may open your eyes a bit to the possibility that Vanguard funds are not exactly what you thought they were. Don't get me wrong---I am not dumping on Vanguard bond funds, but it is not like they are pure as the driven snow and PIMCO Total Return is some kind of evil mutant :

Hardly "Passive" Management

Kenneth Volpert, senior manager of Vanguard's bond index funds, likes to say, "People say that these funds can be run by a monkey. That's not true." He understates his case. The truth is that these managers tinker a lot with their portfolios, though not as much so as the so-called "active managers." Usually bond index funds hold only a little more than 80% of their assets in bonds enumerated in the Lehman Bothers index. The other 20% of the bonds have characteristics - like maturity, credit quality, and issuer type-similar to those in the index, but not the actual issues enumerated there.

And, as the Vanguard bond index funds prospectus puts it, "To the extent that the funds invest outside of the index, they may employ active management strategies. The index and non-index securities, in combination, will have characteristics and risks similar to the index." The prospectus goes on to authorize further managerial latitude for these managers. For instance, Vanguard fund managers nearly always make use of an option in the prospectus called "corporate substitution," whereby managers can overweight particular types of corporate bonds relative to their representation in the index.

A favorite gambit is to snap up corporate issues late in the fourth quarter after they've been dumped by Wall Street firm, as happens almost every year. (Business Week online 3/13/98). Vanguard bond index funds limit corporate substitution to bonds with less than four years remaining to maturity, and each bond index fund limits corporate substitutions to about 15% of assets.

It's astonishing how far beyond the indexes these prospectuses allow their fund managers to go. Vanguard's short, intermediate, and long term bond index funds are at times composed of a basket of securities, 35% of which are outside the Lehman Brothers subindexes, including smaller public issues or medium term notes not in the index because they're too small. These funds managers may also buy money market instruments and some derivatives in order to manage cash flow, to reduce transaction costs, or to take advantage of arbitrage opportunities when they arise. One example of such an arbitrage opportunity occurs when Treasury bond futures prices are significantly lower than the cash index. In such a situation Volpert and other bond index fund managers will often buy bond futures and hold them until near expiration because at expiration cash and futures prices are, by definition, identical. (Business Week online 3/13/98)

The Vanguard prospectus stipulates that each bond index fund's obligation to buy bonds under futures contracts may not exceed 20% of the fund's total assets. This alone would hardly be comforting to anyone suspecting fund managers of wild speculation. The fact is though, that managers at Vanguard and most other houses use these various investment options very conservatively to make up their miniscule (0.20%-0.50%) operating expenses and perhaps a couple of basis points more. It should be noted that some of the smaller bond index funds have more vaguely-worded prospectuses, although they contain otherwise similar stipulations. Investors should investigate these funds more thoroughly before investing in them and understand that under these prospectuses their managers are allowed even greater latitude from the pure indexing ideal.

Those smiley faces are supposed to be parentheses, but I couldn't correct it for some reason.

[gw]

Well, I guess this has pretty clearly moved into thread-jack territory. If anyone objects, I'm happy to move the conversation to another thread.

...

So why would I shoot myself in the foot and include this info that sabatoges my own case ? Well, because, in a way, it actually helps PROVE my case. The writer of this article is named Dan Solin and he is a senior vice-president of a company called Index Fund Advisors, so guess what religion he practices and how strong his faith is. He can't just come out and admit that PTTRX beat whatever these two benchmark indexes were, so he has to say that it isn't fair because PTTRX contains bonds that weren't in those indexes. His exact words were : "Therefore, it is not accurate to state that the Total Return Fund beat either index since it includes bonds that were not in those indexes." This is absolute BS !!!
It is ENTIRELY accurate to state that PTTRX beat these indexes because it did ! He could have said something like this : "Although PTTRX beat these two indexes over this ten-year period, it is not really an apples-to-apples comparison because PTTRX contained bonds that weren't in those indexes." OK, that would have been a valid statement, but what he said were the weasel-words of a liar trying to defend his religion against the doubts of a skeptic. He then goes on to say, "A similar mix of bond index funds from U.S., international and emerging markets may have done just as well, or even better considering the studies mentioned above." Yeah, sure, if you were a genius and knew what percentage of each to use in your portfolio and when to get in and out of them. You could also open a currency trading account and buy and sell yen and euros like PTTRX supposedly has done. Here is where I completely agree with you in that I am not smart enough to do this kind of thing, but that's not really the point. The point really is that I am smart enough to do a little simple research that almost anyone could handle and try to find out if anyone exists that IS smart enough to do this stuff. As it turns out, there are several such people and Bill Gross is one of them. Whoever manages HABDX, DODIX and MWTRX seem to be in this category too. Can they continue their run into the future ? Neither of us can answer that with any certainty, but given the length of their track record, I think it is reasonable to think that they will. However, that doesn't mean that I also won't invest in VBMFX, VBIIX or VBLTX as well. I don't see any bad choices here.

No straw men, please. Dan Solin and IFA have a product to sell. It makes my eyes roll---the first line of defense for the finance industry is to admit that they can't outperform the index, but then try to convince their clients that asset allocation, not stock-picking, is the thing that ordinary investors can't accomplish on their own without paying the advisor his fees. Unfortunately, there's a lot of that garbage even on these forums. I guess bogleheads.org looks like a nice sheep suit to some folks (who, in fairness, may very well drink their own Kool-Aid).

There are valid points lurking within his arguments. It's one thing if PIMCO is generating excess returns within a well-defined asset class. It's another thing if PIMCO generated excess returns by being good at sector rotation among a broader class of assets. It's another thing still if a more suitable benchmark could have been decided on a priori, and PIMCO simply matched a more reasonable benchmark that outperformed the wrong benchmark---nobody would say that bond fund managers are better than stock fund managers simply because bond funds outperformed stock funds over the last 10 years.

Anyway, I agree that Solin seems to be grinding an axe, so it makes sense to get out the salt shaker. It's a shame that he didn't follow up on his argument and check whether in fact a reasonable benchmark that included international bonds would have tracked PIMCO better.

[gw]

Here is another reason that this Dan Solin guy I mentioned in my last post is full of it. Also, it may open your eyes a bit to the possibility that Vanguard funds are not exactly what you thought they were. Don't get me wrong---I am not dumping on Vanguard bond funds, but it is not like they are pure as the driven snow and PIMCO Total Return is some kind of evil mutant :

Hardly "Passive" Management
...

I'm not bothered by those things---i.e., they don't conflict with my (non-expert) idea of how to build an index fund. I guess the test is to see whether the index fund has diverged significantly from the index, modulo fees. I think Vanguard's fund does very well in that respect.

By the way, I notice by looking at graphs on Morningstar that PTTAX seems to derive most of its excess gains in the last two years from diverging from Barclay's total bond index and tracking an intermediate-term index instead. You can make pretty striking graphs. Before 2009/01, all four of VBMFX, PTTAX, the broad market index, and an intermediate-term bond index track each other very closely. Taking somewhat arbitrary periods (due to the awkward graph controls), from 2006/03 to 2007/06, PTTAX lags the other three, all of which track each other closely (with VBMFX dead on the broad index); from 2007/07 to 2008/07, the intermediate index begins to lag the broad index and the index fund substantially, while PTTAX beats the index by almost exactly the amount the intermediates lag; from 2009/03 to present, the intermediates beat the broad market, and PTTAX now tracks them closely (the correlation of returns relative to the broad market has gone from -1 to 1, with PTTAX on the right side both times). Vanguard's index tracks the broad market very closely throughout. Is this Gross making good moves, or is it Gross holding steady while the broad market has a flight to safety and a retreat therefrom? Interesting....

[Valuethinker]

tiaa-cref recently started offering pimco total return fund (expense Gross 0.89% | Net 0.71%) in my 403b plan . should i move my cref bond market assets(expense 0.46%) to the same for better returns? please comment .

here are the fund fact sheet

http://enroll.tiaa-cref.org/resources/ffs/693390726.pdf

http://enroll.tiaa-cref.org/resources/ffs/194408407.pdf

Hi


I guess it comes down to whether Gross (who is, I think, pushing 70, not 65) can keep the magic coming: Mohamed El-Erian is being shaped up to be his successor, I think (having come back from Harvard). That's just a guess.

If the TIAA CREF fund performance has been adequate then I would be tempted to stay in place. Adequate in the sense of close to index.

The history of exceptional fund managers is usually that when they retire (think Peter Lynch of Fidelity Magellan) the funds decline to indifferent performance. There are 'hot hands' in this world (Warren Buffett and Charlie Munger) but they are few, rare, and most investors don't get the benefit (because when they make the big money, the funds are relatively small).

As usual in finance, if you don't know, it's often best to 'minimize regret' a strategy also called 'splitting the difference'.

The reason (in finance speak) is the declining marginal utility of wealth-- half the cake provides more satisfaction than the second half of the cake, in life.

Another way of phrasing that (same basic principle) is 'always leave a party before you want to, because then what you remember is what a great party it was and you didn't want to leave. Otherwise the risk is you stay until it is no longer fun'.

[MarcMyWord]

I guess it comes down to whether Gross (who is, I think, pushing 70, not 65) can keep the magic coming.

I assume that this is an indirect comment on my own post, above in this thread, which first raised the point of Bill Gross's age and presumed someday retirement. It's a fact easily checked.

Born 1944.
http://en.wikipedia.org/wiki/William_H._Gross

And see also his own March 2008 investment outlook column, in which he refers to himself as "about to turn 64."
http://www.pimco.com/LeftNav/Featured+M ... h+2008.htm

Marc