What is the portfolio role of a leveraged bond fund like PONDX?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Topic Author
GaryA505
Posts: 760
Joined: Wed Feb 08, 2017 2:59 pm
Location: New Mexico

What is the portfolio role of a leveraged bond fund like PONDX?

Post by GaryA505 »

There's a lot of money flowing into PIMCO's leveraged bond fund PONDX.

But what is the role of a leveraged bond fund like PONDX in a portfolio? I mean sure you get great returns (for now) but it has some equity-like risk so it's no free lunch.

I understand the basics of asset allocation. Certainly this type of fund does not fill the roll of a total bond fund due to the additional risk, but there must be some place for it. I don't see this type of fund in any target date, target risk, or balanced funds, but people are buying it so where does it fit in?
Wagnerjb
Posts: 7203
Joined: Mon Feb 19, 2007 8:44 pm
Location: Houston, Texas

Re: What is the portfolio role of a leveraged bond fund like PONDX?

Post by Wagnerjb »

There is lots of crap out there that doesn't belong in a disciplined investors portfolio. Those investments are sold to people who are gullible or who have psychological issues causing them to want something unusual. Just say no.

With an expense ratio of 0.79%, this fund serves to remove assets from your portfolio and deposit them with PIMCO.
Andy
User avatar
dwickenh
Posts: 2051
Joined: Sun Jan 04, 2015 9:45 pm
Location: Illinois

Re: What is the portfolio role of a leveraged bond fund like PONDX?

Post by dwickenh »

I would not buy a leveraged Stock fund, and I would never buy a leveraged Bond fund. I am conservative by nature. Some people may feel compelled to buy some of both. I say Good Luck to you. I understand leverage makes the fund move both directions quickly. I am more concerned with long term investing.

Dan
The market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people to patient people.” | — Warren Buffett
retiredjg
Posts: 42801
Joined: Thu Jan 10, 2008 12:56 pm

Re: What is the portfolio role of a leveraged bond fund like PONDX?

Post by retiredjg »

GaryA505 wrote:But what is the role of a leveraged bond fund like PONDX in a portfolio?
I would not use this fund in my portfolio unless it was the only bond fund (or stable value fund) available to me in my work plan and I simply had to have some bonds there. To me, it has no role in my portfolio unless my other choice is not having enough in bonds.
alex_686
Posts: 7515
Joined: Mon Feb 09, 2015 2:39 pm

Re: What is the portfolio role of a leveraged bond fund like PONDX?

Post by alex_686 »

I am a bit calmer when it comes to leveraged bond funds. They are doing a carry trade. They are shorting short term low yield bonds and buying longer term higher yield bonds. As long as the yield curve slops upwards, that is as long as long term rates are higher than short term rates, you generate extra return. There is nothing exotic about this and it is a valid active management strategy.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Avo
Posts: 1099
Joined: Wed Jun 11, 2008 2:21 am
Location: California

Re: What is the portfolio role of a leveraged bond fund like PONDX?

Post by Avo »

Wagnerjb wrote:With an expense ratio of 0.79%, this fund serves to remove assets from your portfolio and deposit them with PIMCO.
Well not exactly:

Image

That's PONDX in blue (since inception), compared to Wellesley in orange, and Vangaurd Target Retirement Income in green.

Sure, we don't know when/if PONDX will make a big mistake, but so far it is vastly outperforming what would be recommended here as moderately safe portfolios.

Disclaimer: I don't own PONDX and don't plan to buy any.
acanthurus
Posts: 400
Joined: Sun Aug 04, 2013 8:02 am

Re: What is the portfolio role of a leveraged bond fund like PONDX?

Post by acanthurus »

Removed
Last edited by acanthurus on Tue Oct 31, 2017 6:15 pm, edited 1 time in total.
Iliketoridemybike
Posts: 572
Joined: Wed Jun 28, 2017 11:03 am

Re: What is the portfolio role of a leveraged bond fund like PONDX?

Post by Iliketoridemybike »

Let's hate something we don't understand. There is a lot of that in the world these days. Here is something you might be able to wrap your head around: a Sharp Ratio 2.07. That is pretty high meaning it delivers a lot of return for the risk.
alex_686
Posts: 7515
Joined: Mon Feb 09, 2015 2:39 pm

Re: What is the portfolio role of a leveraged bond fund like PONDX?

Post by alex_686 »

acanthurus wrote:If you want to understand why someone would lever up on bonds, look into Risk Parity portfolios. Leveraging up on an asset class like bonds usually accompanies decreasing your stock exposure. The total risk-adjusted return of the portfolio over long periods of time can be higher.
Can you provide a link for this? My understanding that leveraging bond was more akin to increasing one's bond duration.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Iliketoridemybike
Posts: 572
Joined: Wed Jun 28, 2017 11:03 am

Re: What is the portfolio role of a leveraged bond fund like PONDX?

Post by Iliketoridemybike »

alex_686 wrote:
acanthurus wrote:If you want to understand why someone would lever up on bonds, look into Risk Parity portfolios. Leveraging up on an asset class like bonds usually accompanies decreasing your stock exposure. The total risk-adjusted return of the portfolio over long periods of time can be higher.
Can you provide a link for this? My understanding that leveraging bond was more akin to increasing one's bond duration.
If that is the case why is PONDX only at 2.84 for duration?
Uniballer
Posts: 318
Joined: Thu Apr 20, 2017 9:55 am

Re: What is the portfolio role of a leveraged bond fund like PONDX?

Post by Uniballer »

Iliketoridemybike wrote: If that is the case why is PONDX only at 2.84 for duration?
PIMCO site is listing duration at 2.13 today (I have some PIMIX, same as PONDX but lower expense ratio).
stimulacra
Posts: 868
Joined: Wed Dec 21, 2016 3:50 pm
Location: Houston

Re: What is the portfolio role of a leveraged bond fund like PONDX?

Post by stimulacra »

Seems like you could use it to try to emulate Ray Dalio's Risk Parity (or All Weather) portfolio.

If I understand correctly, all weather portfolios try to equalize risk by underweighting equities (Say 30 or 35% allocation). Bonds are somewhere in the neighborhood of 40-50%.

To help juice up returns on the bond side, you leverage to add volatility. I'm guessing for a hedge fund they have in-house ways to add leverage. Didn't think there was a retail method of achieving the same results.

Just for fun I used the Tony Robbin's version of the All Weather Portfolio and substituted PONDX for the long term bonds portion.

PONDX 40%
VTI 30%
BIV (Intermediate bonds) 15%
GLD (Gold ETF) 7.5%
DBC (Commodities ETF) 7.5%

It performed reasonably well against other lazy portfolios.
alex_686
Posts: 7515
Joined: Mon Feb 09, 2015 2:39 pm

Re: What is the portfolio role of a leveraged bond fund like PONDX?

Post by alex_686 »

Iliketoridemybike wrote:If that is the case why is PONDX only at 2.84 for duration?
That is a good question. I need to think about this one. Off hand I would guess it would be due to their -104% derivative exposure to interest rate swaps. This implies they are not just doing the carry trade on the yield curve but also the carry trade between foreign bonds. Still, I am not seeing any equity like exposure - it seems like it is all bonds to me.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
acanthurus
Posts: 400
Joined: Sun Aug 04, 2013 8:02 am

Re: What is the portfolio role of a leveraged bond fund like PONDX?

Post by acanthurus »

Removed
Last edited by acanthurus on Tue Oct 31, 2017 6:15 pm, edited 1 time in total.
acanthurus
Posts: 400
Joined: Sun Aug 04, 2013 8:02 am

Re: What is the portfolio role of a leveraged bond fund like PONDX?

Post by acanthurus »

Removed
Last edited by acanthurus on Tue Oct 31, 2017 6:15 pm, edited 1 time in total.
abner kravitz
Posts: 565
Joined: Tue May 05, 2015 7:42 am
Location: Beaufort County, SC

Re: What is the portfolio role of a leveraged bond fund like PONDX?

Post by abner kravitz »

Wagnerjb wrote:There is lots of crap out there that doesn't belong in a disciplined investors portfolio. Those investments are sold to people who are gullible or who have psychological issues causing them to want something unusual. Just say no.

With an expense ratio of 0.79%, this fund serves to remove assets from your portfolio and deposit them with PIMCO.
I own this fund, not a huge amount. While I may indeed have psychological issues, this fund nonetheless has VERY good long-term performance. Sometimes, especially in fixed income, you get what you pay for. I wouldn't recommend it as a core holding, but owning some is not necessarily a bad idea.
Iliketoridemybike
Posts: 572
Joined: Wed Jun 28, 2017 11:03 am

Re: What is the portfolio role of a leveraged bond fund like PONDX?

Post by Iliketoridemybike »

acanthurus wrote:
Iliketoridemybike wrote:Let's hate something we don't understand. There is a lot of that in the world these days. Here is something you might be able to wrap your head around: a Sharp Ratio 2.07. That is pretty high meaning it delivers a lot of return for the risk.
I very much agree with you about the negative comments regarding the fund, but looking at Sharpe ratios can be misleading. The tail risk of investments need to be considered, and those don't always show up in short time periods. I could see a portfolio of total stock and PONDX getting crushed if global interest rates unexpectedly rose for instance. That's why active risk parity managers throw a lot of uncorrelated or negatively correlated asset classes in for whatever risks they see on the horizon.
As would lots and lots of things. :D
Iliketoridemybike
Posts: 572
Joined: Wed Jun 28, 2017 11:03 am

Re: What is the portfolio role of a leveraged bond fund like PONDX?

Post by Iliketoridemybike »

In 2008 the fund lost 5%. That is pretty good shock test right there.
alex_686
Posts: 7515
Joined: Mon Feb 09, 2015 2:39 pm

Re: What is the portfolio role of a leveraged bond fund like PONDX?

Post by alex_686 »

acanthurus wrote:Risk parity portfolios usually include more asset classes than stocks or bonds. I have no opinion on if it's better than a three fund portfolio. I just like learning about different investing strategies. Ray Dalio is a good person to listen to/read about if you're interested in this stuff.
I have never heard of that exact term before but I am very familiar with the concept. This is not it.

The fund is doing the carry trade. A little bit with foreign bonds but mostly with domestic. The -104% duration that I quoted earlier is almost all from Pay Float, Received Fixed.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
alex_686
Posts: 7515
Joined: Mon Feb 09, 2015 2:39 pm

Re: What is the portfolio role of a leveraged bond fund like PONDX?

Post by alex_686 »

Iliketoridemybike wrote:In 2008 the fund lost 5%. That is pretty good shock test right there.
In 2008 the yield curve flatten, which is very bad for long duration bonds and thus leveraged bond funds. I think this lends credence that the fund is taking on duration risk, not equity risk.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
TBillT
Posts: 859
Joined: Sat Sep 17, 2011 1:43 pm

Re: What is the portfolio role of a leveraged bond fund like PONDX?

Post by TBillT »

I use PONDX in Fidelity...the chart looks a lot like Wellelsley VWINX which I use in Vanguard.
The concern with PONDX is nice growth of inflows, more or less benefiting from PTRAX's downfall, but somehow it still performs well.
It is nice to grab these funds before everyone gets the idea, which tends to reduce the returns.
acanthurus
Posts: 400
Joined: Sun Aug 04, 2013 8:02 am

Re: What is the portfolio role of a leveraged bond fund like PONDX?

Post by acanthurus »

Removed
Last edited by acanthurus on Tue Oct 31, 2017 6:16 pm, edited 1 time in total.
Iliketoridemybike
Posts: 572
Joined: Wed Jun 28, 2017 11:03 am

Re: What is the portfolio role of a leveraged bond fund like PONDX?

Post by Iliketoridemybike »

A lot of research firms like it. The negative seems to be it is now too popular and has huge inflows.
Topic Author
GaryA505
Posts: 760
Joined: Wed Feb 08, 2017 2:59 pm
Location: New Mexico

Re: What is the portfolio role of a leveraged bond fund like PONDX?

Post by GaryA505 »

M* shows it as about 150% bonds and -50% cash, so I think that means it's leveraged.
alex_686
Posts: 7515
Joined: Mon Feb 09, 2015 2:39 pm

Re: What is the portfolio role of a leveraged bond fund like PONDX?

Post by alex_686 »

acanthurus wrote:I was trying to address the use of leveraged bond funds in a portfolio. The OP's question presupposed that PONDX was a leveraged bond fund. If that is not the case then I apologize.
I think we are talking past each other.

What I am getting from the wiki Risk Parity article is about the management of equity verse bond risk. This is a type of leverage. I am probing the fund and I can't see where any equity risks pops up. However there are different types of leverage out there.

The carry trade exploits the difference between 2 different interest rates. Borrow at 0% in Germany, invest at 1% in the US. Borrow cheap short term money, lend out on high yields, the profit is the spread. Banks do this all of the time - borrow from short term depositors, lend out 30 year mortgages or credit card debt.

When banks do this it is called banking. When bond funds do this it is called leveraged bond funds. What has to be managed is the short verse long duration risk.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
alex_686
Posts: 7515
Joined: Mon Feb 09, 2015 2:39 pm

Re: What is the portfolio role of a leveraged bond fund like PONDX?

Post by alex_686 »

GaryA505 wrote:M* shows it as about 150% bonds and -50% cash, so I think that means it's leveraged.
The negative 50% cash are short term repo agreements. This is a cheap way to borrow short term money. It is then invested in higher yielding long term bonds. See my earlier post on the carry trade.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Topic Author
GaryA505
Posts: 760
Joined: Wed Feb 08, 2017 2:59 pm
Location: New Mexico

Re: What is the portfolio role of a leveraged bond fund like PONDX?

Post by GaryA505 »

About the risk. In another thread, someone mentioned that PONDX had equity-like risk, as it was -5% in 2008 when stocks tanked. Since Total Bond was +5% for 2008, then I guess you could call -5% for the year "equity-like" risk, meaning more like stocks than bonds.

Isn't the risk in this kind of fund related to interest rate changes? Would it be falling or rising rates, or that the ratio of US to foreign rates changes unexpectedly?
User avatar
njboater74
Posts: 633
Joined: Mon Apr 25, 2016 8:21 pm

Re: What is the portfolio role of a leveraged bond fund like PONDX?

Post by njboater74 »

PONDX is the coolest!
When the mob and the press and the whole world tell you to move, your job is to plant yourself like a tree beside the river of truth and tell the whole world - 'No, YOU move'--Captain America, Boglehead
Iliketoridemybike
Posts: 572
Joined: Wed Jun 28, 2017 11:03 am

Re: What is the portfolio role of a leveraged bond fund like PONDX?

Post by Iliketoridemybike »

alex_686 wrote:
acanthurus wrote:I was trying to address the use of leveraged bond funds in a portfolio. The OP's question presupposed that PONDX was a leveraged bond fund. If that is not the case then I apologize.
I think we are talking past each other.

What I am getting from the wiki Risk Parity article is about the management of equity verse bond risk. This is a type of leverage. I am probing the fund and I can't see where any equity risks pops up. However there are different types of leverage out there.

The carry trade exploits the difference between 2 different interest rates. Borrow at 0% in Germany, invest at 1% in the US. Borrow cheap short term money, lend out on high yields, the profit is the spread. Banks do this all of the time - borrow from short term depositors, lend out 30 year mortgages or credit card debt.

When banks do this it is called banking. When bond funds do this it is called leveraged bond funds. What has to be managed is the short verse long duration risk.
Hear, hear!
alex_686
Posts: 7515
Joined: Mon Feb 09, 2015 2:39 pm

Re: What is the portfolio role of a leveraged bond fund like PONDX?

Post by alex_686 »

If any of this gets to technical let me know and I can slow down and explain. I eat and breath this stuff.
GaryA505 wrote:About the risk. In another thread, someone mentioned that PONDX had equity-like risk, as it was -5% in 2008 when stocks tanked. Since Total Bond was +5% for 2008, then I guess you could call -5% for the year "equity-like" risk, meaning more like stocks than bonds.


In 2008 crash, bond yields collapsed, causing prices to soar. The longer the duration of the fund, the more it went up. One would think that a bond fund would increase, like Total Bond. However, that is not how PONDX works. It generates its return from the spread, or difference between rates. Not only did yields fall, but the long duration bonds yield fell faster than the short term yields. That squeeze, I bet, caused the losses.

This might be why I can't wrap my head around the equity and risk parity thing everybody else is saying. Equities crashed because the economy crashed. PONDX crashed because the yield curve flatten. There was a casual link in 2008 between these events. There may not be a causal link during the next crisis.
GaryA505 wrote:Isn't the risk in this kind of fund related to interest rate changes? Would it be falling or rising rates, or that the ratio of US to foreign rates changes unexpectedly?


It does not matter if the rates go up or down, it is the spread that is important. Hence, "short verse long duration risk". In 2008, Parts of the market that facilitated the carry trade froze up, like repos and swaps. Some of the bank collapses where triggered by the banks not handling this duration mismatch risk as they should. A quick glance at PONDX holdings makes me think most of the risk is concatenated in the US yield curve. There is some foreign stuff but it is a secondary issue.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
lack_ey
Posts: 6701
Joined: Wed Nov 19, 2014 11:55 pm

Re: What is the portfolio role of a leveraged bond fund like PONDX?

Post by lack_ey »

GaryA505 wrote:About the risk. In another thread, someone mentioned that PONDX had equity-like risk, as it was -5% in 2008 when stocks tanked. Since Total Bond was +5% for 2008, then I guess you could call -5% for the year "equity-like" risk, meaning more like stocks than bonds.

Isn't the risk in this kind of fund related to interest rate changes? Would it be falling or rising rates, or that the ratio of US to foreign rates changes unexpectedly?
It's not as straightforward as having more interest rate risk in the way people usually think about (Treasury rates across the yield curve).

It's keeping duration low now, though this changes over time. Past behavior has generally shown lower interest rate risk than the broad market index, the total bond market-type funds. The net effect doesn't look like a fund that's just borrowing short to invest long, or doing carry trade by borrowing in lower-yielding currencies. There's more going on than that. I'd need to check exactly how it's doing that (perhaps by hedging out some term risk via futures, or just by the nature of the kinds of fixed income it targets... I think some of both.)

Check PIMCO's website for more details of strategy and holdings, as Morningstar has difficulty parsing the contents and accurate representing these kinds of funds, and PIMCO's docs are pretty good. I don't think it's as leveraged as 50%, for example.

There is and has been a higher relationship with equities than safer bond funds exhibit, but this varies over time based on their market timing. Currently there's a large investment in emerging markets bonds, 26% as of the end of June, with 5% high yield credit. But this is still far from the kind of pseudo-kinda-limited equity-like exposure you'd find in a pure EM or HY bond fund. I don't want to overstate this part. Just keep in mind that the asset exposures change over time, and behavior you saw in 2008-2009 may not be what you'll see at other times.

Since the financial crisis, it has had a substantial investment in non-government-related mortgage-backed securities, which in hindsight has been the place to go in bonds. Others investing heavily in this area, like new "bond king" Gundlach from DoubleLine, have also had stellar results over this period.

Overall, this fund has been an outlier, and you should probably not expect outlier performance going forward. Whatever the potential downsides are, we've yet to observe them as they just haven't happened yet. The risks and strategies can look a lot worse under other circumstances. Excess return comes from tilting or investing in securities or areas that happened to outperform and can readily swing negative.

However, there are some things to like here in the sense that it is doing things and taking risks and absolute plus relative asset exposures that you can't get in cheap index funds, for better or worse. You can't really replicate its strategy or exposures on your own. The leverage all else equal I think is a plus, as most people have portfolios that take so much more equity risk than any other kind of risk anyway. But as with any heavily actively managed fund, you're relying on the manager to make calls, invest in the right places, etc. to outperform. There are many other multisector bond funds and others in more wide-ranging or total bond categories that have done a whole lot worse, many run by managers that would have been described as great and may have had good track records 5 or 10 years ago but have since failed to deliver.

If you can stomach the 0.79% expense ratio and are generally drawn to active management in bonds, you could consider getting some fixed income exposure here, but you probably want to limit the position size based on the manager risk. Also, avoid pairing with other actively managed bond funds investing in similar sectors, lest you get too concentrated in these narrower areas.
Tier1Capital
Posts: 119
Joined: Sun Apr 03, 2011 5:27 pm

Re: What is the portfolio role of a leveraged bond fund like PONDX?

Post by Tier1Capital »

This is largely a synthetic portfolio, with credit exposure gained via selling CDS and CDX. CDS/CDX have have spread duration but no interest rate duration. The published interest rate duration of 2ish years refers to 100bp change in interest rates, but will not explain how this portfolio will react to a 100bp change in credit spreads.
Topic Author
GaryA505
Posts: 760
Joined: Wed Feb 08, 2017 2:59 pm
Location: New Mexico

Re: What is the portfolio role of a leveraged bond fund like PONDX?

Post by GaryA505 »

So do mutual funds like this belong in portfolio "play money" or with non-core investments like high-yield bond funds, commodities, and REITs?
Do you think it adds any diversification to a 3-fund portfolio?
ThrustVectoring
Posts: 771
Joined: Wed Jul 12, 2017 2:51 pm

Re: What is the portfolio role of a leveraged bond fund like PONDX?

Post by ThrustVectoring »

Wagnerjb wrote: With an expense ratio of 0.79%, this fund serves to remove assets from your portfolio and deposit them with PIMCO.
Do expense ratios in general count the cost to borrow money to lever up?

Like, suppose there was a 2x 2-year treasury ETF that tried to match the performance of buying $2 of 2-year treasury notes for every $1 invested in it. Getting that leverage costs, say, 50 basis points, and the folks running the fund pull another 5 for their fee. Is the expense ratio 0.55 or 0.05?
Current portfolio: 60% VTI / 40% VXUS
Topic Author
GaryA505
Posts: 760
Joined: Wed Feb 08, 2017 2:59 pm
Location: New Mexico

Re: What is the portfolio role of a leveraged bond fund like PONDX?

Post by GaryA505 »

I think part of the problem here mat be that there isn't a clear definition of funds like PONDX, and it doesn't fit in any of the traditional asset categories. I see people out there investing in this as if it was just another traditional bond fund, and I see others saying they wouldn't touch it because it's too risky. Which is it?
Dave55
Posts: 880
Joined: Tue Sep 03, 2013 2:51 pm

Re: What is the portfolio role of a leveraged bond fund like PONDX?

Post by Dave55 »

GaryA505 wrote:I think part of the problem here mat be that there isn't a clear definition of funds like PONDX, and it doesn't fit in any of the traditional asset categories. I see people out there investing in this as if it was just another traditional bond fund, and I see others saying they wouldn't touch it because it's too risky. Which is it?

PONDX/PIMIX is a multi-sector bond fund - it can go anywhere in the fixed income space, it can use leverage which it does, and it can make big bets in one or more type of bond sector securities, and it uses credit swaps and derivatives. Many advisors (I am not an advisor, but have had several earlier in life) do look at and use multi sector bonds as part of an asset allocation. It is not a traditional bond fund. It is technically riskier than a core bond fund. The managers of this fund do use credit swaps, swap options and other derivatives to control risk and boost returns. Based on their performance, they have done an excellent job. For some, it is too risky. For others, it is not overly risky.

Dave
alex_686
Posts: 7515
Joined: Mon Feb 09, 2015 2:39 pm

Re: What is the portfolio role of a leveraged bond fund like PONDX?

Post by alex_686 »

GaryA505 wrote:I think part of the problem here mat be that there isn't a clear definition of funds like PONDX, and it doesn't fit in any of the traditional asset categories. I see people out there investing in this as if it was just another traditional bond fund, and I see others saying they wouldn't touch it because it's too risky. Which is it?
First, don't invest in anything you don't understand. Second, PONDX is a bond fund.

Imagine that a fund is like a car, and cars exist along a continuum from 4 door sedans to F1 racing cars A index fund would be a plain 4 door sedan. This is closer to a F1 racing car.

PONDX is a knowable fund but it has many moving parts. I think lack_ey wrote a very informative post on those moving parts. If you are confused about any of those parts or how they work let us know. This was my day job and I find myself having to sit down and think through what PONDX is doing.

As a side note, this thread has me thinking about investing in this fund. My gut is telling me that the risk for this fund is about average for a bond fund with this duration. However that risk is very complex to understand. So I am still thinking about this.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Da5id
Posts: 2286
Joined: Fri Feb 26, 2016 8:20 am

Re: What is the portfolio role of a leveraged bond fund like PONDX?

Post by Da5id »

TBillT wrote: The concern with PONDX is nice growth of inflows, more or less benefiting from PTRAX's downfall, but somehow it still performs well.
I wonder how much of this rate of inflow is just investors desperation for yield. I wonder if they fully appreciating the risks as this is not a normal bond fund.
lack_ey
Posts: 6701
Joined: Wed Nov 19, 2014 11:55 pm

Re: What is the portfolio role of a leveraged bond fund like PONDX?

Post by lack_ey »

ThrustVectoring wrote:Do expense ratios in general count the cost to borrow money to lever up?
Not with the methods typically used by leveraged ETFs as in your example, and not with the PIMCO fund (the 0.79% quoted before is 0.54% management fees and 0.25% 12b-1). If the leverage is via short sales then sometimes the cost of borrowing and dividends paid on the short sales are counted. Morningstar generally doesn't include those costs, and I don't think it really makes sense to. FWIW Vanguard quotes the higher figure when this applies.
GaryA505 wrote:So do mutual funds like this belong in portfolio "play money" or with non-core investments like high-yield bond funds, commodities, and REITs?
Do you think it adds any diversification to a 3-fund portfolio?
I don't think much of the popular formulation of core vs. non-core (satellite) holdings, or "play money." It's drawing arbitrary lines that don't facilitate much greater understanding of how pieces fit together. What I would want to know is what you have invested in these different categories and why. Is there an overall plan or are you collecting funds for the pile?

The fund significantly invests at times and currently in strategies and fixed income sectors that are mostly outside the total bond index fund that is in the 3-fund portfolio. These don't really correspond to any of the equities in the 3-fund portfolio either. To the extent that you get risk exposures and assets outside of what is offered in the 3-fund portfolio, it's diversifying to an extent. Too much and you could also say you're too concentrated in certain narrower areas and active bets at the discretion of the managers.
GaryA505 wrote:I think part of the problem here mat be that there isn't a clear definition of funds like PONDX, and it doesn't fit in any of the traditional asset categories. I see people out there investing in this as if it was just another traditional bond fund, and I see others saying they wouldn't touch it because it's too risky. Which is it?
The problem is the paradigm. Does it matter nutritionally if you consider something a dessert or part of a meal, or how much/when/etc. you're eating of that and everything else?

The whole point of the fund is to pay the managers a substantial amount of money to make active bets within fixed income, to evaluate and take different kinds of risks, some of which can't be cheaply taken with passive products. How much to invest depends on how much you believe in the process and future results (with the understanding that past relative returns in of themselves are not very predictive of future relative returns in the category, and that the category has been relatively poor with many other "good" managers not doing well) relative to other costs and other funds you could be investing in. For a lot of people that will be 0.
Iliketoridemybike
Posts: 572
Joined: Wed Jun 28, 2017 11:03 am

Re: What is the portfolio role of a leveraged bond fund like PONDX?

Post by Iliketoridemybike »

9 years of pretty consistent results is nothing to sneeze at. Almost a little Bernie like. :D
Topic Author
GaryA505
Posts: 760
Joined: Wed Feb 08, 2017 2:59 pm
Location: New Mexico

Re: What is the portfolio role of a leveraged bond fund like PONDX?

Post by GaryA505 »

alex_686 wrote:
GaryA505 wrote:I think part of the problem here mat be that there isn't a clear definition of funds like PONDX, and it doesn't fit in any of the traditional asset categories. I see people out there investing in this as if it was just another traditional bond fund, and I see others saying they wouldn't touch it because it's too risky. Which is it?
First, don't invest in anything you don't understand. Second, PONDX is a bond fund.
Yes, that's why I'm here. I did buy some of this over the last few years. I didn't understand it, but then again I didn't really understand much of anything I was buying. Ok, so I made money on it. Now that I'm re-allocating most of my assets into a more Bogle-like portfolio, I have to decide whether to buy more, just keep it, or dump it. It's not Bogle-ish.
alex_686 wrote: Imagine that a fund is like a car, and cars exist along a continuum from 4 door sedans to F1 racing cars A index fund would be a plain 4 door sedan. This is closer to a F1 racing car.

PONDX is a knowable fund but it has many moving parts. I think lack_ey wrote a very informative post on those moving parts. If you are confused about any of those parts or how they work let us know. This was my day job and I find myself having to sit down and think through what PONDX is doing.
Now I don't feel so bad, not understanding it.
User avatar
midareff
Posts: 7326
Joined: Mon Nov 29, 2010 10:43 am
Location: Biscayne Bay, South Florida

Re: What is the portfolio role of a leveraged bond fund like PONDX?

Post by midareff »

GaryA505 wrote:So do mutual funds like this belong in portfolio "play money" or with non-core investments like high-yield bond funds, commodities, and REITs?
Do you think it adds any diversification to a 3-fund portfolio?

AFAIC... purely play money @ 5% or so of total. I've used my FIDO Roth as a play account for a long time dabbling with Fido Select Sector Funds. I can't say I fully understand the mechanics of what they do although the track record is excellent for a bond fund of any flavor. For me, I'd rather play in the IT and Health space which I understand and both have a better record than PONDX.
Topic Author
GaryA505
Posts: 760
Joined: Wed Feb 08, 2017 2:59 pm
Location: New Mexico

Re: What is the portfolio role of a leveraged bond fund like PONDX?

Post by GaryA505 »

lack-ey - excellent info. I read it 3 times, and probably will come back later and read it again.
Crisium
Posts: 206
Joined: Thu Dec 22, 2016 9:52 am

Re: What is the portfolio role of a leveraged bond fund like PONDX?

Post by Crisium »

What could happen to the principle price if the star manager left?
alex_686
Posts: 7515
Joined: Mon Feb 09, 2015 2:39 pm

Re: What is the portfolio role of a leveraged bond fund like PONDX?

Post by alex_686 »

Crisium wrote:What could happen to the principle price if the star manager left?
I don't think too much. FYI, I am working off of the top of my head. I will let somebody else do the research and confirm. I believe it has already lost 2 star managers, Bill Gross and Mohamed A. El-Erian. It is managed by team of 2, so they should be able to losses one in the short term. PIMCO is known for their depth of research, so I suspect they have a pretty deep backbench.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
justbpatient
Posts: 49
Joined: Mon May 08, 2017 4:06 pm

Re: What is the portfolio role of a leveraged bond fund like PONDX?

Post by justbpatient »

I'm trying to decide if I should invest a small amount in PONDX...

I'm currently at a fairly conservative 70/30 allocation in my early 30s, I was at 80/20 but I think my risk tolerance is better at 70/30.

Currently, my tax-advantaged space is all total bond market (VBTIX/AGG) and I have some tax exempt intermediate (VWITX) in my taxable.

Even though I know something like PONDX isn't tax efficient, I don't trust it enough to use up my limited and valuable tax-advantaged space so I'd buy it in taxable account.

I'm considering using PONDX for about 1/3 of my taxable bond space, perhaps splitting the rest between VWITX and short term corporate (VSCSX). What that means for me is that PONDX would account for less than 1/3 of my overall bond space and around 5-7% of my portfolio overall.

My thoughts after reading every PONDX thread I can find:
- PONDX is certainly seems riskier than a typical short term bond fund or a total bond fund
- Additionally, I can't pretend I understand everything going on in this fund, and I've heard it said to not invest in things I don't understand
- On the other hand, it seems to have closer to significantly better returns over it's ~10 year life than a total bond market fund, while having less downside potential in the 2008 bear market compared to the SP500.
- Finally, I guess I could argue that if I'm going to devote such a small percentage of my overall portfolio to this potentially risky bond fund, then what's the point and why even bother?

PIMCO is a big name in bond funds I've read, so what's the chance that this fund is going to perform significantly worse than the overall bond market in the coming years? It's a rhetorical question as I know nobody really knows this.
alex_686
Posts: 7515
Joined: Mon Feb 09, 2015 2:39 pm

Re: What is the portfolio role of a leveraged bond fund like PONDX?

Post by alex_686 »

justbpatient wrote: Wed Aug 23, 2017 4:21 pmPONDX is certainly seems riskier than a typical short term bond fund or a total bond fund ...so what's the chance that this fund is going to perform significantly worse than the overall bond market in the coming years?
It is almost impossible to tell but not for the reason that you have. The portfolio manager of PONDX has broad discretion on where to find value. It might act like a GINMA one month, a corporate bond fund the next, and a emerging market fund the month after that. So you have 2 questions to ask. First, can the manager pick the right strategy and second if the portfolio manager can execute that strategy.

Would you measure the performance of this fund against the S&P 500? No, wrong measuring stick. In the same vein measuring this fund against Vanguard's Total Bond fund would also be wrong. This fund is trying to do something different than a total bond fund. Alas this also means it is very hard to find a good measuring stick.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Topic Author
GaryA505
Posts: 760
Joined: Wed Feb 08, 2017 2:59 pm
Location: New Mexico

Re: What is the portfolio role of a leveraged bond fund like PONDX?

Post by GaryA505 »

justbpatient wrote: Wed Aug 23, 2017 4:21 pm I'm trying to decide if I should invest a small amount in PONDX...

I'm currently at a fairly conservative 70/30 allocation in my early 30s, I was at 80/20 but I think my risk tolerance is better at 70/30.

Currently, my tax-advantaged space is all total bond market (VBTIX/AGG) and I have some tax exempt intermediate (VWITX) in my taxable.

Even though I know something like PONDX isn't tax efficient, I don't trust it enough to use up my limited and valuable tax-advantaged space so I'd buy it in taxable account.

I'm considering using PONDX for about 1/3 of my taxable bond space, perhaps splitting the rest between VWITX and short term corporate (VSCSX). What that means for me is that PONDX would account for less than 1/3 of my overall bond space and around 5-7% of my portfolio overall.

My thoughts after reading every PONDX thread I can find:
- PONDX is certainly seems riskier than a typical short term bond fund or a total bond fund
- Additionally, I can't pretend I understand everything going on in this fund, and I've heard it said to not invest in things I don't understand
- On the other hand, it seems to have closer to significantly better returns over it's ~10 year life than a total bond market fund, while having less downside potential in the 2008 bear market compared to the SP500.
- Finally, I guess I could argue that if I'm going to devote such a small percentage of my overall portfolio to this potentially risky bond fund, then what's the point and why even bother?

PIMCO is a big name in bond funds I've read, so what's the chance that this fund is going to perform significantly worse than the overall bond market in the coming years? It's a rhetorical question as I know nobody really knows this.
It is riskier than a typical short term bond fund or a total bond fund, so I don't use it in place of either of those. So, what I have done is include it in neither my equity or bond allocations. Instead, I consider it as "other" since I don't know what it is. It makes money on it's own, so you could call it whatever you like. :D

I am a very cautious investor, and usually avoid things I don't understand. However, I made an exception in this case because of what I see as a very good risk/reward balance here. As you noted, it has a much better record of returns over it's life than a total bond market fund, while having less downside potential in the 2008 bear market compared to the SP500. However as we all know, "there is no free lunch", and "if it seems too good to be true it probably is", so I'm keeping a close eye on it.

Full disclosure: PONDX is 20% of my total assets.
retiredjg
Posts: 42801
Joined: Thu Jan 10, 2008 12:56 pm

Re: What is the portfolio role of a leveraged bond fund like PONDX?

Post by retiredjg »

I would not use PONDX at all. I particularly would not use it in a taxable account.

The goal of PONDX is to give high returns, not stabilize a portfolio. I want my bonds to act like bonds during the bad times. PONDX likely will not. It didn't last time.

It's interesting that you want a more conservative portfolio but you are considering a bond fund like this. Doesn't make sense to me.
User avatar
WoodSpinner
Posts: 1870
Joined: Mon Feb 27, 2017 1:15 pm

Re: What is the portfolio role of a leveraged bond fund like PONDX?

Post by WoodSpinner »

abner kravitz wrote: Wed Jul 26, 2017 3:11 pm
Wagnerjb wrote:There is lots of crap out there that doesn't belong in a disciplined investors portfolio. Those investments are sold to people who are gullible or who have psychological issues causing them to want something unusual. Just say no.

With an expense ratio of 0.79%, this fund serves to remove assets from your portfolio and deposit them with PIMCO.
I own this fund, not a huge amount. While I may indeed have psychological issues, this fund nonetheless has VERY good long-term performance. Sometimes, especially in fixed income, you get what you pay for. I wouldn't recommend it as a core holding, but owning some is not necessarily a bad idea.
+1 from me ....

I also own some of this fund and frankly believe that the bond area is where Active Management makes the most sense. Its about 5% of my portfolio and 10% of my Fixed Income investments.

So far its been working well .... :beer
Post Reply