Trying to Understand Corporate Bond Risk in Wellesley

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
synergy
Posts: 187
Joined: Mon Oct 13, 2008 8:00 pm

Trying to Understand Corporate Bond Risk in Wellesley

Post by synergy »

As I begin to approach retirement, I am attempting to assess level of risk in my portfolio. I understand the concept that a drop of 50% in the value of equities is a possibility that must be considered. I have seen many references to the notion that equity risk is preferable to be isolated in equities as opposed to being located in corporate bonds. I have a significant portion of my retirement accounts in Wellesley and have been there for a number of years. How should I assess the risk of the corporate bonds in Wellesley?

If 60% of Wellesley is bonds and 78% of the bonds are corporate, how should I assess the risk of the corporate bond allocation? If the equity market suffered a 50% decline, how far would the corporate bond allocation be expected to fall? If 60% of the 78% equals 47% of the Wellesley fund, should I expect that 47% to lose 50% of its value if the equity markets lose 50% of their value? I am assuming that these percentages are equivalent to dollar value of the fund but could not confirm based on a brief review of Vanguard and Morningstar.

Thank you.
jginseattle
Posts: 802
Joined: Fri Jul 01, 2011 7:33 pm

Re: Trying to Understand Corporate Bond Risk in Wellesley

Post by jginseattle »

To assess the risk you would look at credit quality and duration.

Have a look here: https://personal.vanguard.com/us/funds/ ... =INT#tab=2
User avatar
Taylor Larimore
Advisory Board
Posts: 30174
Joined: Tue Feb 27, 2007 8:09 pm
Location: Miami FL

Wellesley's worst loss.

Post by Taylor Larimore »

How should I assess the risk of the corporate bonds in Wellesley?
Synergy:

I don't have a direct answer to your question, but Wellesley's worst cumulative loss (since inception in 1970) was -18.7% during 2008 and 2009.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
dl7848
Posts: 440
Joined: Tue Mar 25, 2014 12:46 am

Re: Trying to Understand Corporate Bond Risk in Wellesley

Post by dl7848 »

[Edit: the material I quoted from Wellesley's SAI was also in Wellington's SAI, so it must be Vanguard boilerplate language.

For those who didn't read it before I deleted, it listed a variety of investment types and strategies that go well beyond corporate bonds.]
Elbowman
Posts: 507
Joined: Tue Apr 03, 2012 2:25 pm

Re: Trying to Understand Corporate Bond Risk in Wellesley

Post by Elbowman »

synergy wrote:If 60% of the 78% equals 47% of the Wellesley fund, should I expect that 47% to lose 50% of its value if the equity markets lose 50% of their value?
No, you should not expect corporate bonds to lose as much of their value as equities. If I were you I'd start by looking at Vanguard's Intermediate-Term Investment-Grade (corporate) bond fund. From peak to trough in the 2008 crash, it looks like it lost 14%.
tibbitts
Posts: 12528
Joined: Tue Feb 27, 2007 6:50 pm

Re: Trying to Understand Corporate Bond Risk in Wellesley

Post by tibbitts »

I'd guess that the correlation of a corporate bond drop to an equity drop would vary depending on what caused the equity drop, so I don't know that you can necessarily draw too many conclusions from 2008-2009.
dl7848
Posts: 440
Joined: Tue Mar 25, 2014 12:46 am

Re: Trying to Understand Corporate Bond Risk in Wellesley

Post by dl7848 »

Okay, this is an example of the kind of thing Wellesley can do. They can lower duration and substitute credit risk for some of the interest rate risk. This is from their last semi-annual report, effective 3/31/2014:

We shortened the duration of the bond portfolio relative to the benchmark during the six months, after beginning with a nearly neutral duration posture. Over time, we expect interest rates to rise as the U.S. recovery lengthens and broadens and less government involvement becomes more likely. With this as our foundation, we are biased toward reducing the portfolio’s interest rate sensitivity.

We believe that increases to risk premiums caused by tight liquidity could create opportunities to add to fixed income risk sectors in general and to credit-sensitive assets in particular [me: I interpret this as high yield or at least junkier credit], as corporate fundamentals still look favorable. We view the U.S. corporate bond sector favorably because it has weathered the economic cycle relatively well and investment-grade issuers continue to produce good earnings, protect their balance sheets, and maintain ample liquidity.

We will maintain some exposure to Treasuries for the foreseeable future. In addition to being extremely liquid, Treasury notes would provide a degree of downside protection should the economic cycle take an unexpected turn for the worse. We also have and expect to maintain a substantial out-of-benchmark allocation to MBS, which offer attractive risk-adjusted yields and much better liquidity than corporate bonds.
It appears the info from the SAI I posted earlier is correct, even though it is not exclusive to Wellesley. Basically, the fund doesn't have to stick to benchmark holdings and has a wide array of tools to help navigate a difficult interest rate environment. I'd recommend people look up the fund on Morningstar, look under "Filings" and read the fund's SAI. The tools include derivatives, security lending, borrowing, high yield, MBS, asset-based securities, muni bonds, futures and options, etc.
pkcrafter
Posts: 14541
Joined: Sun Mar 04, 2007 12:19 pm
Location: CA
Contact:

Re: Trying to Understand Corporate Bond Risk in Wellesley

Post by pkcrafter »

Elbowman wrote:
synergy wrote:If 60% of the 78% equals 47% of the Wellesley fund, should I expect that 47% to lose 50% of its value if the equity markets lose 50% of their value?
No, you should not expect corporate bonds to lose as much of their value as equities. If I were you I'd start by looking at Vanguard's Intermediate-Term Investment-Grade (corporate) bond fund. From peak to trough in the 2008 crash, it looks like it lost 14%.
Elbowman's info is correct, but intermediate-term investment grade is rated BBB and Wellesley's bond portion is rated A. The higher overall quality of Wellesley's bonds will limit downside loss to a total of somewhere around 6-8%.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
dl7848
Posts: 440
Joined: Tue Mar 25, 2014 12:46 am

Re: Trying to Understand Corporate Bond Risk in Wellesley

Post by dl7848 »

Naturally, I misread the OP, which was asking about corporate/credit risk not rate risk. :D

But the same answer applies. Wellesley can overweight Treasuries in it's fixed income allocadtion.
User avatar
Munir
Posts: 2756
Joined: Mon Feb 26, 2007 4:39 pm
Location: Oregon

Re: Trying to Understand Corporate Bond Risk in Wellesley

Post by Munir »

pkcrafter wrote:
Elbowman wrote:
synergy wrote:If 60% of the 78% equals 47% of the Wellesley fund, should I expect that 47% to lose 50% of its value if the equity markets lose 50% of their value?
No, you should not expect corporate bonds to lose as much of their value as equities. If I were you I'd start by looking at Vanguard's Intermediate-Term Investment-Grade (corporate) bond fund. From peak to trough in the 2008 crash, it looks like it lost 14%.
Elbowman's info is correct, but intermediate-term investment grade is rated BBB and Wellesley's bond portion is rated A. The higher overall quality of Wellesley's bonds will limit downside loss to a total of somewhere around 6-8%.

Paul
However, the Intermediate Investment Grade fund has a duration of 5.2 years while Wellesley's duration is 6.2. That could counteract the difference in rating of the bonds in case of rising rates.

Wellesley fell 18% in 2008-2009 while the Intermediate Investment Grade fell 14%- according to posters above. M* ranks both funds as "below average" in risk while Vanguard gives Wellesley a 3 and the other fund a 2 in risk rating (less risk). These risk ratings are not limited to the bond component of Wellesley but include the totality of each fund.

How each fund behaves in falling markets may be a better indicator than the credit rating and duration, but this may be dificult to do because Wellesley is a balanced fund of both equities and bonds while the other fund is strictly bonds.

Is there a way to compare the performance of the bond portion of Wellesley against the Intermediate Investment Grade? I don't know.
User avatar
Sheepdog
Posts: 5664
Joined: Tue Feb 27, 2007 3:05 pm
Location: Indiana, retired 1998 at age 65

Re: Trying to Understand Corporate Bond Risk in Wellesley

Post by Sheepdog »

Past does not equate to the future, I know, but this is worth telling. In 1994, a year with a major bond market collapse, the 30 year treasury interest rate increased 150 basis points. That year, Wellesley lost 4.4%. The rally in 1995, however, yielded a +29% total return for the fund....quite a turnaround. 1999 also had a bond market drop causing a 4.1% drop in Wellesley. That recovered soon after. Wellesley did far worse in 2008 with the stock market drop to cause a loss of 10.3% in the fund . It also recovered the next year.
In the last 34 years, there have only been 4 years with losses with Wellesley. The 4th one not listed here was in 1987 due to bonds with a 1.9% loss.
All that truly matters in the end is that you loved.
jimkinny
Posts: 1464
Joined: Sun Mar 14, 2010 1:51 pm

Re: Trying to Understand Corporate Bond Risk in Wellesley

Post by jimkinny »

I am a bit of a Wellesley skeptic. From 1980 to the present the long term trend of interests rates has been steadily downward.

This has been a golden era for holding bonds. Without looking it up, my guess is that long term Treasuries would have been the best investment to have in 1980 and hold until now.

I am not writing that the managers of Wellesley are not skillful, after all the fund has lasted over 40 years but that it is not reasonable to expect that the boost from declining interest rates can be repeated.

That said, holding bonds is less risky than stocks and i have a portfolio that is similar to Wellesley but use index equity funds and CDs with a a bit of a corporate bonds fund.

jim
kenner
Posts: 3129
Joined: Sat Mar 01, 2008 8:45 am

Re: Trying to Understand Corporate Bond Risk in Wellesley

Post by kenner »

jimkinny wrote:I am a bit of a Wellesley skeptic. From 1980 to the present the long term trend of interests rates has been steadily downward.

This has been a golden era for holding bonds. Without looking it up, my guess is that long term Treasuries would have been the best investment to have in 1980 and hold until now.

I am not writing that the managers of Wellesley are not skillful, after all the fund has lasted over 40 years but that it is not reasonable to expect that the boost from declining interest rates can be repeated.

That said, holding bonds is less risky than stocks and i have a portfolio that is similar to Wellesley but use index equity funds and CDs with a a bit of a corporate bonds fund.

jim
+1. The last few decades have been golden for US bonds. It is unlikely that will persist forever (although we could become like Japan, where interest rates have hovered between 1%, zero and negative for a long, long time).
Topic Author
synergy
Posts: 187
Joined: Mon Oct 13, 2008 8:00 pm

Re: Trying to Understand Corporate Bond Risk in Wellesley

Post by synergy »

This discussion has been very helpful in giving me several ways to think about the risk in the bond section of Wellesley. As usual the thoughtful and knowledgeable responses have served to further my investing education. Thank you.
muffin
Posts: 5
Joined: Sun Jan 12, 2014 3:21 pm

Re: Trying to Understand Corporate Bond Risk in Wellesley

Post by muffin »

Why are people so down on Wellesley. Many people who own it, including myself, are retired and need that mix. In fact, Wellesley has perfomed better than VTSAX Total Stock Market Admiral YTD. I own VTSAX and VBTLX but am thinking of adding to Wellesley.
kenner
Posts: 3129
Joined: Sat Mar 01, 2008 8:45 am

Re: Trying to Understand Corporate Bond Risk in Wellesley

Post by kenner »

muffin wrote:Why are people so down on Wellesley. Many people who own it, including myself, are retired and need that mix. In fact, Wellesley has perfomed better than VTSAX Total Stock Market Admiral YTD. I own VTSAX and VBTLX but am thinking of adding to Wellesley.
I do not think people are "down" on Wellesley. I do think a lot of people are concerned that interest rates will rise and that will depress the value of bonds.

Wellesly has been an excellent fund for a long time. And will likely remain so.
dbr
Posts: 34186
Joined: Sun Mar 04, 2007 9:50 am

Re: Trying to Understand Corporate Bond Risk in Wellesley

Post by dbr »

kenner wrote:
muffin wrote:Why are people so down on Wellesley. Many people who own it, including myself, are retired and need that mix. In fact, Wellesley has perfomed better than VTSAX Total Stock Market Admiral YTD. I own VTSAX and VBTLX but am thinking of adding to Wellesley.
I do not think people are "down" on Wellesley. I do think a lot of people are concerned that interest rates will rise and that will depress the value of bonds.

Wellesly has been an excellent fund for a long time. And will likely remain so.
People are not down on Wellesley. I think it would be fair to be down on the idea that Wellesley is a "magic bullet" retirement investment that can/will do things that no other approach to retirement investing could do. The statement above about Wellesley performing better than VTSAX has YTD would be an example of thinking that makes no sense as a reason to select Wellesley as a retirement investment. It is also true that there is probably no serious harm to be done with Wellesley and it is possible to arrive at choices that are not astute. The two risks in Wellesley that an investor would want to consider is a lack of diversification in both stock style and bond style and the possibility of manager risk, which did hit that fund at one point historically. If the investor has examined and is comfortable with those risks, and the possible benefits of concentrating in those asset selections is appealing, then make that selection, by all means.
tibbitts
Posts: 12528
Joined: Tue Feb 27, 2007 6:50 pm

Re: Trying to Understand Corporate Bond Risk in Wellesley

Post by tibbitts »

It's interesting that in many posts on the forum we read that if a fund is held to its average bond duration (discounting the equity portion of Wellesley at the moment), then rate changes really shouldn't matter much. Yet in this thread (and many others) we have posts attributing wellesley's performance to a 30-year bull market in bonds. I'm not saying which is correct, but it seems that we can't have it both ways. We can say that the last 6yrs or so - not 30yrs - of wellesley's performance was in part due to a bond bull market, or we can say that the effect of rate changes on bond funds can indeed extend well beyond the duration of the fund's holdings.
stlutz
Posts: 5576
Joined: Fri Jan 02, 2009 1:08 am

Re: Trying to Understand Corporate Bond Risk in Wellesley

Post by stlutz »

Yet in this thread (and many others) we have posts attributing wellesley's performance to a 30-year bull market in bonds. I'm not saying which is correct, but it seems that we can't have it both ways.
Good point. It's worth noting that Wellesley (and bonds in general) would have done much better had rates stayed at 15% for all of the past 30 years and not declined to where they are now.

For a long-term investor (someone whose horizon is greater than the bond duration), their interests are best served if rates go up (assuming that rate increase is not driven entirely by higher inflation).
dbr
Posts: 34186
Joined: Sun Mar 04, 2007 9:50 am

Re: Trying to Understand Corporate Bond Risk in Wellesley

Post by dbr »

tibbitts wrote:It's interesting that in many posts on the forum we read that if a fund is held to its average bond duration (discounting the equity portion of Wellesley at the moment), then rate changes really shouldn't matter much. Yet in this thread (and many others) we have posts attributing wellesley's performance to a 30-year bull market in bonds. I'm not saying which is correct, but it seems that we can't have it both ways. We can say that the last 6yrs or so - not 30yrs - of wellesley's performance was in part due to a bond bull market, or we can say that the effect of rate changes on bond funds can indeed extend well beyond the duration of the fund's holdings.
Well, of course that idea about duration does not apply if interest rates continue to change in the same direction for decades, as indeed happened. A look at interest rates in the US in the past hundred years or more shows a huge anomaly of a massive buildup to a peak in the late 70's and early 80's and a long decline since then. Any sort of periodic ups and downs are washed out by that experience. Any recent experience with low rates due to Treasury action, economics, or anything else is almost irrelevant by comparison as well. What projection could be made for the future is hardly to be read from a historical chart of interest rates. If someone has fundamentals that can be applied to that, there would be a different story.

So, of course the answer is that the effect of interest rate changes extends beyond the bond's duration. It extends to the duration after interest rates stop changing. The effect can also be reversed and wiped out if interest rates reverse their direction of change. Since interest rates are constantly changing the effect is to product volatility and only with a long secular drift in interest rates is the result significant to expected average return. I think people who are continuing to be exercised about bond wealth and duration are on a fool's errand. On the other hand those who see current low yields on bonds as a negative outlook for growing wealth and retiring at high withdrawal rates probably have reason for concern.
tibbitts
Posts: 12528
Joined: Tue Feb 27, 2007 6:50 pm

Re: Trying to Understand Corporate Bond Risk in Wellesley

Post by tibbitts »

dbr wrote:
tibbitts wrote:It's interesting that in many posts on the forum we read that if a fund is held to its average bond duration (discounting the equity portion of Wellesley at the moment), then rate changes really shouldn't matter much. Yet in this thread (and many others) we have posts attributing wellesley's performance to a 30-year bull market in bonds. I'm not saying which is correct, but it seems that we can't have it both ways. We can say that the last 6yrs or so - not 30yrs - of wellesley's performance was in part due to a bond bull market, or we can say that the effect of rate changes on bond funds can indeed extend well beyond the duration of the fund's holdings.
Well, of course that idea about duration does not apply if interest rates continue to change in the same direction for decades, as indeed happened. A look at interest rates in the US in the past hundred years or more shows a huge anomaly of a massive buildup to a peak in the late 70's and early 80's and a long decline since then. Any sort of periodic ups and downs are washed out by that experience. Any recent experience with low rates due to Treasury action, economics, or anything else is almost irrelevant by comparison as well. What projection could be made for the future is hardly to be read from a historical chart of interest rates. If someone has fundamentals that can be applied to that, there would be a different story.

So, of course the answer is that the effect of interest rate changes extends beyond the bond's duration. It extends to the duration after interest rates stop changing. The effect can also be reversed and wiped out if interest rates reverse their direction of change. Since interest rates are constantly changing the effect is to product volatility and only with a long secular drift in interest rates is the result significant to expected average return. I think people who are continuing to be exercised about bond wealth and duration are on a fool's errand. On the other hand those who see current low yields on bonds as a negative outlook for growing wealth and retiring at high withdrawal rates probably have reason for concern.
If that's the case, then we really need to stop replying to the "is this a bad time to invest in bonds?" posts with the fairly consistent reply that if you hold your fund to its holdings' average duration, you'll earn an annual total return roughly similar to the fund's current yield at the time you buy it (discounting any possible defaults, etc.) That's been a pretty consistent theme here, and I'm not endorsing it, I'm just saying that we can't both say that and also say that the first 24 years of Wellesley's 30 year bond-portion performance had much if anything to do with its performance for the past 6 years.
dbr
Posts: 34186
Joined: Sun Mar 04, 2007 9:50 am

Re: Trying to Understand Corporate Bond Risk in Wellesley

Post by dbr »

tibbitts wrote:
dbr wrote:
tibbitts wrote:It's interesting that in many posts on the forum we read that if a fund is held to its average bond duration (discounting the equity portion of Wellesley at the moment), then rate changes really shouldn't matter much. Yet in this thread (and many others) we have posts attributing wellesley's performance to a 30-year bull market in bonds. I'm not saying which is correct, but it seems that we can't have it both ways. We can say that the last 6yrs or so - not 30yrs - of wellesley's performance was in part due to a bond bull market, or we can say that the effect of rate changes on bond funds can indeed extend well beyond the duration of the fund's holdings.
Well, of course that idea about duration does not apply if interest rates continue to change in the same direction for decades, as indeed happened. A look at interest rates in the US in the past hundred years or more shows a huge anomaly of a massive buildup to a peak in the late 70's and early 80's and a long decline since then. Any sort of periodic ups and downs are washed out by that experience. Any recent experience with low rates due to Treasury action, economics, or anything else is almost irrelevant by comparison as well. What projection could be made for the future is hardly to be read from a historical chart of interest rates. If someone has fundamentals that can be applied to that, there would be a different story.

So, of course the answer is that the effect of interest rate changes extends beyond the bond's duration. It extends to the duration after interest rates stop changing. The effect can also be reversed and wiped out if interest rates reverse their direction of change. Since interest rates are constantly changing the effect is to product volatility and only with a long secular drift in interest rates is the result significant to expected average return. I think people who are continuing to be exercised about bond wealth and duration are on a fool's errand. On the other hand those who see current low yields on bonds as a negative outlook for growing wealth and retiring at high withdrawal rates probably have reason for concern.
If that's the case, then we really need to stop replying to the "is this a bad time to invest in bonds?" posts with the fairly consistent reply that if you hold your fund to its holdings' average duration, you'll earn an annual total return roughly similar to the fund's current yield at the time you buy it (discounting any possible defaults, etc.) That's been a pretty consistent theme here, and I'm not endorsing it, I'm just saying that we can't both say that and also say that the first 24 years of Wellesley's 30 year bond-portion performance had much if anything to do with its performance for the past 6 years.

The point is that it is not about duration; it is about trying to predict interest rates. If interest rates rise a lot from here for quite a while, it might be a bad time to buy bonds as falling NAVS create a continuous headwind against earnings. As discussed in some other threads, though, one also has the tail wind of rising yields. That is similar to the observation that it would have produced more wealth to have bought bonds at 15% and had them stay there than to have rates fall to 1% even with rising NAVs. To try to respond to this by timing interest rates is not a solution, nor is chasing yield by buying risky bonds or shifting to risky stocks.

The worst result for bond buyers is to buy at 0% and have yields stay there forever, especially if the real yield is actually negative. It would also be a bad result for bond buyers for interest rates to go even lower, and not come back.

I think it is a bad time to be in bonds, but that is not a fixable problem. It is certainly not fixable in the sense that "a bad time to be in bonds" means that people should be in something else instead. There is no quibble that at the level of tactics, an investment such as CD's might be a little better choice than short term bonds, but that does not "fix" the problem. I think it is still true that taking advantage of the yield curve when it is steep makes sense as well.

But here is the real point. An investor invests for the risk and return of the whole portfolio. Bonds at any return dilute the high risk present in equities. You don't change that fundamental calculation by worrying about duration and trying to forecast interest rates. The huge volume of bond discussions on this forum is truly hard to fathom, to be honest. I think if there is any issue retirees should be thinking about it has to do with income steams, annuitization, and understanding costs in retirement, including investment costs and taxes, and not whether or not a bond investment can lose money.
dl7848
Posts: 440
Joined: Tue Mar 25, 2014 12:46 am

Re: Trying to Understand Corporate Bond Risk in Wellesley

Post by dl7848 »

I think you guys are missing the point of investing in an actively managed fund where the manager has tools to navigate vaious economic and market situations. The fund is not locked into a specific percentage of corporate bonds at a specific duration. It has the flexibility of going from corporate to treasury and from intermediate duration to short duration. Or vice versa. Or it can add junk bonds or munis, or anything else that it thinks will add to performance. I haven't read the SAI thoroughly, but I would guess that the derivatives that it is allowed to invest in include interest rate swaps which would help mitigate any rate increases.

This is my understanding after scanning the SAI and looking at the current semi-annual report which plays up it's shortening of duration, the addition of riskier credit and the addition of NON-BENCHMARK bonds.

Granted, one would have to read the prospectus and SAI side by side to pinpoint the precise latitude it's given within the various out-of-benchmark categories, but it is clearly not locked into corporate bonds.

The best way to really pin this down is to go through the annual and semi-annual reports for any period in question where Wellesley "inexplicably" did well given a bad economic situation and actually read about what tools the managers used to boost their performance.

Conversely, the more unproductive way to analyze this (IMO) is to take a current snapshot in time and say Wellesley is X% corporate bonds at X duration and that's how it will always be. That's obviously not the case.
dbr
Posts: 34186
Joined: Sun Mar 04, 2007 9:50 am

Re: Trying to Understand Corporate Bond Risk in Wellesley

Post by dbr »

dl7848 wrote:I think you guys are missing the point of investing in an actively managed fund where the manager has tools to navigate vaious economic and market situations. The fund is not locked into a specific percentage of corporate bonds at a specific duration. It has the flexibility of going from corporate to treasury and from intermediate duration to short duration. Or vice versa. Or it can add junk bonds or munis, or anything else that it thinks will add to performance. I haven't read the SAI thoroughly, but I would guess that the derivatives that it is allowed to invest in include interest rate swaps which would help mitigate any rate increases.

This is my understanding after scanning the SAI and looking at the current semi-annual report which plays up it's shortening of duration, the addition of riskier credit and the addition of NON-BENCHMARK bonds.

Granted, one would have to read the prospectus and SAI side by side to pinpoint the precise latitude it's given within the various out-of-benchmark categories, but it is clearly not locked into corporate bonds.

The best way to really pin this down is to go through the annual and semi-annual reports for any period in question where Wellesley "inexplicably" did well given a bad economic situation and actually read about what tools the managers used to boost their performance.

Conversely, the more unproductive way to analyze this (IMO) is to take a current snapshot in time and say Wellesley is X% corporate bonds at X duration and that's how it will always be. That's obviously not the case.
I have the impression which may be incorrect (but I think I read it here :wink: ) that it cannot be demonstrated that Wellesley has produced any advantageous result in particular that can be ascribed to active management rather than to the general position held in stock style and bond style. There is a historical experience of the fund becoming a victim of bad management at one point in time. If someone can truly document that management has navigated market conditions to the risk/return advantage of the investors and can show that this can be counted on in the future, then the fund is a magic bullet investment. I think extraordinary claims require extraordinary evidence.
User avatar
grabiner
Advisory Board
Posts: 28701
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Trying to Understand Corporate Bond Risk in Wellesley

Post by grabiner »

synergy wrote:If 60% of Wellesley is bonds and 78% of the bonds are corporate, how should I assess the risk of the corporate bond allocation? If the equity market suffered a 50% decline, how far would the corporate bond allocation be expected to fall?
Correlations between stocks and bonds aren't perfect, but you can get some idea from the 2008 market losses. In September and October 2008, Vanguard Intermediate-Term Investment-Grade lost 16%, and Vanguard Long-Term Investment-Grade lost 13%. (The Barclays Aggregate Bond Index lost only 3%, as Treasuries rose.)
Wiki David Grabiner
dl7848
Posts: 440
Joined: Tue Mar 25, 2014 12:46 am

Re: Trying to Understand Corporate Bond Risk in Wellesley

Post by dl7848 »

dbr wrote:
I have the impression which may be incorrect (but I think I read it here :wink: ) that it cannot be demonstrated that Wellesley has produced any advantageous result in particular that can be ascribed to active management rather than to the general position held in stock style and bond style. There is a historical experience of the fund becoming a victim of bad management at one point in time. If someone can truly document that management has navigated market conditions to the risk/return advantage of the investors and can show that this can be counted on in the future, then the fund is a magic bullet investment. I think extraordinary claims require extraordinary evidence.
No extraordinary claims here. I'm simply pointing out that even in their most recent semi-annual report, Wellesley has added bonds outside of it's benchmark. What I see in this thread is people assuming that it will stick to it's benchmark. In an active fund, the managers are given the latitude to use tools for mitigation and from what I read in the fund's SAI, Wellesley has such tools. I believe I read that Wellesley did better than expected during the last rate rise by the Fed, but I don't want to reinvent the wheel on this. If anyone wants to look up the last rate rise, we can analyze it's performance.

For me, though, it's enough that Wellesley has a wide array of tools and has a long track record of good performance. I simply wouldn't expect the fund to maintain a 100% fixed income allocation to intermediate-term, high quality corporate bonds in a rising rate environment. If one wanted that, they would be better served by an index fund.
Desert
Posts: 135
Joined: Thu Nov 11, 2010 7:21 pm

Re: Trying to Understand Corporate Bond Risk in Wellesley

Post by Desert »

dl7848 wrote: No extraordinary claims here. I'm simply pointing out that even in their most recent semi-annual report, Wellesley has added bonds outside of it's benchmark. What I see in this thread is people assuming that it will stick to it's benchmark. In an active fund, the managers are given the latitude to use tools for mitigation and from what I read in the fund's SAI, Wellesley has such tools. I believe I read that Wellesley did better than expected during the last rate rise by the Fed, but I don't want to reinvent the wheel on this. If anyone wants to look up the last rate rise, we can analyze it's performance.

For me, though, it's enough that Wellesley has a wide array of tools and has a long track record of good performance. I simply wouldn't expect the fund to maintain a 100% fixed income allocation to intermediate-term, high quality corporate bonds in a rising rate environment. If one wanted that, they would be better served by an index fund.
But how would the managers accurately determine if they're in a rising rate environment?
Johm221122
Posts: 5209
Joined: Fri May 13, 2011 6:27 pm

Re: Trying to Understand Corporate Bond Risk in Wellesley

Post by Johm221122 »

muffin wrote:Why are people so down on Wellesley. Many people who own it, including myself, are retired and need that mix. In fact, Wellesley has perfomed better than VTSAX Total Stock Market Admiral YTD. I own VTSAX and VBTLX but am thinking of adding to Wellesley.
What actively managed fund are people on this forum "up" on?

John
dl7848
Posts: 440
Joined: Tue Mar 25, 2014 12:46 am

Re: Trying to Understand Corporate Bond Risk in Wellesley

Post by dl7848 »

Desert wrote:
But how would the managers accurately determine if they're in a rising rate environment?
They'd read the FOMC statements, read the FOMC minutes, watch the FOMC conferences, pay special attention to the slides that map out by date, the various intended times of rate rises as well as removal of other accommodation. Perhaps they may even talk with the Fed in special sessions for big market participants (I know hedge funds have participated in these gatherings; it's possible the bigger fund management companies attend as well)

Basically, the coming rate rise will be the most telegraphed rate rise in history.
User avatar
stratton
Posts: 11083
Joined: Sun Mar 04, 2007 5:05 pm
Location: Puget Sound

Re: Trying to Understand Corporate Bond Risk in Wellesley

Post by stratton »

You should read the latest (semi)annual report and look at the footnotes. They are shorting 10 year treasuries to the tune of ~$2 billion. See page 30 of the March 31, 2014 semiannual report.

Paul
...and then Buffy staked Edward. The end.
Levett
Posts: 4177
Joined: Fri Feb 23, 2007 2:10 pm
Location: upper Midwest

Re: Trying to Understand Corporate Bond Risk in Wellesley

Post by Levett »

dbr,

You have done a splendid job of describing how this retiree operates:

"I think if there is any issue retirees should be thinking about it has to do with income steams, annuitization, and understanding costs in retirement, including investment costs and taxes, and not whether or not a bond investment can lose money."

:thumbsup

Lev
User avatar
Sheepdog
Posts: 5664
Joined: Tue Feb 27, 2007 3:05 pm
Location: Indiana, retired 1998 at age 65

Re: Trying to Understand Corporate Bond Risk in Wellesley

Post by Sheepdog »

Levett wrote:dbr,

You have done a splendid job of describing how this retiree operates:

"I think if there is any issue retirees should be thinking about it has to do with income steams, annuitization, and understanding costs in retirement, including investment costs and taxes, and not whether or not a bond investment can lose money."

:thumbsup

Lev
:thumbsup :thumbsup
All that truly matters in the end is that you loved.
User avatar
Taylor Larimore
Advisory Board
Posts: 30174
Joined: Tue Feb 27, 2007 8:09 pm
Location: Miami FL

#1 issue for retirees ?

Post by Taylor Larimore »

"I think if there is any issue retirees should be thinking about it has to do with income steams, annuitization, and understanding costs in retirement, including investment costs and taxes, and not whether or not a bond investment can lose money."
Bogleheads:

I respectfully suggest that the #1 issue for most retirees is not to lose money.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
User avatar
thursdaysd
Posts: 90
Joined: Tue May 13, 2014 10:55 am
Location: NC
Contact:

Re: Trying to Understand Corporate Bond Risk in Wellesley

Post by thursdaysd »

I respectfully suggest that the #1 issue for most retirees is not to lose money.
I would say my #1 issue is purchasing power - i.e. keeping up with inflation (but I lived through the 70s).
Thursday's child has far to go
User avatar
cfs
Posts: 4154
Joined: Fri Feb 23, 2007 1:22 am
Location: ~ Mi Propio Camino ~

Re: #1 issue for retirees ?

Post by cfs »

Taylor Larimore wrote:I respectfully suggest that the #1 issue for most retirees is not to lose money.
And I totally concur with Taylor. I just retired and I have discussed this before with Larry on separate conversations, and I will repeat it here. In my case capital preservation and loss prevention are paramount--and that's why I am in the process of adjusting my boring SWAN (sleep well at night) portfolio in order to reduce the losses during a bear, with the full understanding that it will too reduce the gains during a bull, there is no free lunch.

Thanks for reading.
~ Member of the Active Retired Force since 2014 ~
User avatar
Taylor Larimore
Advisory Board
Posts: 30174
Joined: Tue Feb 27, 2007 8:09 pm
Location: Miami FL

Retirees: It is foolish to be greedy.

Post by Taylor Larimore »

Bogleheads:

I will try to explain the importance of keeping what we've got (fixed-income helps):

My parents owned "Larimore's Diner" in Foxboro, Massachusetts. In the middle of the 1929 depression, they lost the Diner. We had no income and Dad was forced to move our family to Miami into one of my grandparent's empty estates.

My Grandfather, Christopher F. Coombs, was one of the three principals of The American Founders Group, the largest investment trust (now called "mutual funds") in the roaring 20s. He lost nearly everything (approximately $50M)--including the Miami home we lived in (next door to where I live today).

These figures show what REAL bear markets are like:

BEAR MARKET OF 1929-1937 (Dow plunged 89%)
-1929--1930--1931--1932
(-31%)(-25%)(-43%)(-08%) Large Cap Stocks
(-34%)(-35%)(-47%)(-06%) Mid/Small Cap Stocks
(-47%)(-38%)(-50%)(-05%) Micro Cap Stocks

(+04%)(+07%)(-02%)(+09%) 5-Year Treasury Bonds

BEAR MARKET OF 1973-1976 (S&P fell 43%)
-1973--1974
(-15%)(-26%) Large Caps
(-39%)(-29%) Micro Caps

---(-70%) Coca-Cola
---(-82%) Intel
---(-73%) McDonald's
---(-86%) Merrill Lynch
---(-86%) Walt Disney
---(-71%) Xerox

BEAR MARKET OF 2008--2009 (Vanguard funds cumulative losses)
-68.9% Precious Metals & Mining
-68.3% REIT
-58.5% Total International
-56.1% Small-Cap Value
-50.9% Total Stock Market
-5.8% Total Bond Market

Figures cannot convey the horrifying and debilitating effects of a deep and long bear market. You watch in agony as month after month your life savings evaporate before your eyes. Gloom and doom articles are in the media, radio, (and now TV and internet). Nearly everyone else is selling. You have no idea when, or if, your portfolio will stop losing money.

Your friends and relatives urge you to sell. Nearly all financial experts recommend "sell". You are ridiculed for trying to hold on. You begin to have self-doubt. Despair sets in. Buying stocks is unthinkable.

Lesson learned: When retired, or approaching retirement, it is foolish to be greedy.

Best wishes
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
countdown
Posts: 114
Joined: Thu Jun 27, 2013 2:13 pm

Re: Trying to Understand Corporate Bond Risk in Wellesley

Post by countdown »

Thank you for sharing this amazing history, Taylor. It is impossible to comprehend what this experience must have truly been like. A good reality check of the possible.
tibbitts
Posts: 12528
Joined: Tue Feb 27, 2007 6:50 pm

Re: Trying to Understand Corporate Bond Risk in Wellesley

Post by tibbitts »

dl7848 wrote:
Desert wrote:
But how would the managers accurately determine if they're in a rising rate environment?
They'd read the FOMC statements, read the FOMC minutes, watch the FOMC conferences, pay special attention to the slides that map out by date, the various intended times of rate rises as well as removal of other accommodation. Perhaps they may even talk with the Fed in special sessions for big market participants (I know hedge funds have participated in these gatherings; it's possible the bigger fund management companies attend as well)

Basically, the coming rate rise will be the most telegraphed rate rise in history.
I think the question was whether the fund managers would know whether a telegraphed rate rise turns out to be the start of a multi-decade increase, or whether we end up with a failure-to-launch, of which there be many. No matter what adjustment the managers made, it would still be possible to get it completely wrong, and be stuck with non-optimal securities for many years, no matter how much research they do.
User avatar
ogd
Posts: 4876
Joined: Thu Jun 14, 2012 11:43 pm

Re: Trying to Understand Corporate Bond Risk in Wellesley

Post by ogd »

dl7848 wrote:For me, though, it's enough that Wellesley has a wide array of tools and has a long track record of good performance. I simply wouldn't expect the fund to maintain a 100% fixed income allocation to intermediate-term, high quality corporate bonds in a rising rate environment. If one wanted that, they would be better served by an index fund.
dl7848 makes a good point here: it doesn't seem too useful to dissect Wellesley current and past portfolio when you have active managers at the helm who can and do change it in significant ways.

However, where he sees "tools to navigate", I also see "tools to mess up" and pull the rug from under your portfolio. Whether you want or abhor this is, I think, determined by your overall approach to portfolio construction.

1) If you'd be inclined to make such moves yourself (not uncommon around here to switch durations and credit quality), you're probably better off handing the keys to the Wellesley managers.

2) If Wellesley is the majority of your portfolio and you're essentially letting the managers build a "conservative income portfolio" for you, I also think you're better off not worrying about it; after all, there are quite a few other decisions you're trusting them with.

3) If, on the other hand, you're using Wellesley as a portfolio component, which is where the OP question makes the most sense, then you should be worried about their making moves, which can invalidate the premises of your portfolio. For example, a move to trade term risk for credit risk makes your overall portfolio less safe, which might come at a very bad time. We have the example of the Vanguard Asset Allocation fund, which years after being shut down still tarnishes the record of the LifeStrategy funds that it was a part of and we still have to explain to people that LifeStrategy no longer does such stupid things.

Yes, they have a "track record" perhaps as good as Bill Gross had before he messed up in 2011 in a similar way to the type of moves Wellesley is making today. The reason we're here on this website instead of Morningstar fund family forums is that we don't think track records mean all that much. To me, the best "track record" for a moving piece in my portfolio is not wobbling around, and you can't beat an passive or quasi-passive fund for that. So, if have to ask this this question and you're in situation #3 rather than #2 and #1, I'd recommend using a fund that would make that risk determination stable and meaningful.
pkcrafter
Posts: 14541
Joined: Sun Mar 04, 2007 12:19 pm
Location: CA
Contact:

Re: Retirees: It is foolish to be greedy.

Post by pkcrafter »

Taylor Larimore wrote:Bogleheads:

I will try to explain the importance of keeping what we've got (fixed-income helps):

My parents owned "Larimore's Diner" in Foxboro, Massachusetts. In the middle of the 1929 depression, they lost the Diner. We had no income and Dad was forced to move our family to Miami into one of my grandparent's empty estates.

My Grandfather, Christopher F. Coombs, was one of the three principals of The American Founders Group, the largest investment trust (now called "mutual funds") in the roaring 20s. He lost nearly everything (approximately $50M)--including the Miami home we lived in (next door to where I live today).

These figures show what REAL bear markets are like:

BEAR MARKET OF 1929-1937 (Dow plunged 89%)
-1929--1930--1931--1932
(-31%)(-25%)(-43%)(-08%) Large Cap Stocks
(-34%)(-35%)(-47%)(-06%) Mid/Small Cap Stocks
(-47%)(-38%)(-50%)(-05%) Micro Cap Stocks

(+04%)(+07%)(-02%)(+09%) 5-Year Treasury Bonds

BEAR MARKET OF 1973-1976 (S&P fell 43%)
-1973--1974
(-15%)(-26%) Large Caps
(-39%)(-29%) Micro Caps

---(-70%) Coca-Cola
---(-82%) Intel
---(-73%) McDonald's
---(-86%) Merrill Lynch
---(-86%) Walt Disney
---(-71%) Xerox

BEAR MARKET OF 2008--2009 (Vanguard funds cumulative losses)
-68.9% Precious Metals & Mining
-68.3% REIT
-58.5% Total International
-56.1% Small-Cap Value
-50.9% Total Stock Market
-5.8% Total Bond Market

Figures cannot convey the horrifying and debilitating effects of a deep and long bear market. You watch in agony as month after month your life savings evaporate before your eyes. Gloom and doom articles are in the media, radio, (and now TV and internet). Nearly everyone else is selling. You have no idea when, or if, your portfolio will stop losing money.

Your friends and relatives urge you to sell. Nearly all financial experts recommend "sell". You are ridiculed for trying to hold on. You begin to have self-doubt. Despair sets in. Buying stocks is unthinkable.

Lesson learned: When retired, or approaching retirement, it is foolish to be greedy.

Best wishes
Taylor
Taylor, I've read your story several times and it never loses it's impact. It conveys the message better than anything else I've ever read on a subject that is very difficult to put into words when emotions aren't screaming, get out! Should be required reading for any new investor and any investor nearing retirement. Should be in the Wiki.

thanks,

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
User avatar
Taylor Larimore
Advisory Board
Posts: 30174
Joined: Tue Feb 27, 2007 8:09 pm
Location: Miami FL

A personal experience.

Post by Taylor Larimore »

Paul:

I am pleased that my personal experience is helpful.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
pkcrafter
Posts: 14541
Joined: Sun Mar 04, 2007 12:19 pm
Location: CA
Contact:

Re: Trying to Understand Corporate Bond Risk in Wellesley

Post by pkcrafter »

I have sent a request to LadyGeek to add Taylor's story to the Wiki.


Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
dl7848
Posts: 440
Joined: Tue Mar 25, 2014 12:46 am

Re: Trying to Understand Corporate Bond Risk in Wellesley

Post by dl7848 »

tibbitts wrote:
dl7848 wrote:
Desert wrote:
But how would the managers accurately determine if they're in a rising rate environment?
They'd read the FOMC statements, read the FOMC minutes, watch the FOMC conferences, pay special attention to the slides that map out by date, the various intended times of rate rises as well as removal of other accommodation. Perhaps they may even talk with the Fed in special sessions for big market participants (I know hedge funds have participated in these gatherings; it's possible the bigger fund management companies attend as well)

Basically, the coming rate rise will be the most telegraphed rate rise in history.
I think the question was whether the fund managers would know whether a telegraphed rate rise turns out to be the start of a multi-decade increase, or whether we end up with a failure-to-launch, of which there be many. No matter what adjustment the managers made, it would still be possible to get it completely wrong, and be stuck with non-optimal securities for many years, no matter how much research they do.
Who cares? We're talking bonds here. :D You can go wrong and still do a halfway decent job.

The comments I've heard from former bond traders is that everyone gets it wrong at one time or another. What distinguishes the good bond traders from the bad is the speed with which they admit their mistakes and move on. So far, from what I've seen, Wellesley has done an admirable job under a wide variety of conditions. I concede I haven't put it under a microscope, though, and analyzed its performance under every conceivable market condition.

But I would hope, anyway, that anyone who owns active funds doesn't own just one. Diversification is a virtue even in the active world.
dl7848
Posts: 440
Joined: Tue Mar 25, 2014 12:46 am

Re: Trying to Understand Corporate Bond Risk in Wellesley

Post by dl7848 »

ogd wrote:
However, where he sees "tools to navigate", I also see "tools to mess up" and pull the rug from under your portfolio. Whether you want or abhor this is, I think, determined by your overall approach to portfolio construction.
ogd, I used to think that way, and it took me a long time to change. But after having read numerous comments from credible current or ex-bond traders on how the bond market works and how new regulations have reduced the risks, I've come around to their point of view. (Also, note that even Vanugard index funds use tools like security lending, so "tools" are not just for active funds.) But that doesn't excempt me from my own responsibility for portfolio construction, which includes diversification for market conditions as well as diversification among managers.
Yes, they have a "track record" perhaps as good as Bill Gross had before he messed up in 2011 in a similar way to the type of moves Wellesley is making today.
Gross, like all bond managers has his off periods. But one of his problems is the enormous size of the asset base of his OEFs. The bloated AUM doesn't give him much room to operate. Bloated AUMS in and of themselves can cause portfolio managers to do strange things as they look for corners of the market where there may still be value. During the height of the "bond bubble" during the last couple of years, when investor inflows kept pouring in, several prominent bond managers were forced to add high yield bonds and/or equities to their list of allowable securities. Basically, they could no longer find any value in the "safer" areas of the bond market, so they had to take on equityi-like risk. I think it's extremely important for anyone who invests in actively managed OEFs to pay attention to AUM and avoid funds with asset bloat.
The reason we're here on this website instead of Morningstar fund family forums is that we don't think track records mean all that much.
I believe track record means a lot, but when there are management changes, for example, that can invalidate the premise of owning a fund. Therefore, any active investing I do entails holding a variety of actively managed funds.

I also, in many case, feel I can do much better than a manager, so the actively managed OEFs I hold are basically for areas where I don't want to have to do much thinking and I just hand the reins over to them.
Professor Emeritus
Posts: 2628
Joined: Mon Aug 13, 2012 6:43 am

Re: Retirees: It is foolish to be greedy.

Post by Professor Emeritus »

Taylor Larimore wrote:Bogleheads:

I will try to explain the importance of keeping what we've got (fixed-income helps):
....

Lesson learned: When retired, or approaching retirement, it is foolish to be greedy.

Best wishes
Taylor
I concur with the Philosophy, but I do distinguish between my solid middle class consumption investments (DB pension, fixed income and SS) and my Inflation /uncertain future (Stocks in TSP and Vanguard)
Post Reply