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

[Big Dutch]

I held PONDX as the largest component of my tax-deferred bond position for a number of years. The fund was a hold-over from my pre-Boglehead days; I didn't mind the risk and like the returns. But the more I read the more I realized that I didn't understand what it held/how it worked. So, I switched my bond holdings to a mix of TBM in tax-deferred and MUB (muni bond ETF) in taxable.

It was a fair amount of money and I find myself much more relaxed/comfortable with my current "vanilla" bond holdings. I found that not understanding what I was holding (or when/how it might change at the discretion of the active manager) and the high ER were two big negatives. Ultimately, these two concerns made me feel like I wouldn't have the fortitude to buy/hold through a severe correction, exactly the opposite of how I want to feel about my bond holdings. YMMV.

Good luck!
~Big Dutch

[Iliketoridemybike]

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.

I've watched this fund for a long time, I can't think of a more stable, low volatility fund. It barely moves on a daily basis and once a month you get your interest and on it goes. Pull up a chart from 2008 and it performed above its peers, but just below the index and that underperformance was for just a brief time. It then went on to blow them away.

[bigred77]

When you buy PONDX you are essentially saying "Here PIMCO, I'm going to give you some money. I want you to make money for me with whatever active strategy you think will work best but confine yourself to basically fixed income assets and derivatives. Feel free to change strategies whenever you choose. I've looked at you historical performance over the past 10 years and have decided you all are the money managers for me".

This is not a boglehead fund. If you want fixed income for portfolio stability and safety, buy a traditional bond index fund. If you want to bear more risk for potentially higher returns, buy an equity index fund. The fund has only been around 10 years. There have been management changes. That is certainly not a long time.

Past performance is not indicative of future results applies to active managers even more so than asset classes.

[JBTX]

Seems to if you leverage up when bond rates are trending down, you will increase the return, just as if you increase your return on anything that increases. It does appear to be true that there is some security selection that is helping the returns.

I owned PIMCO total return for years. I finally liquidated it and bought a low fee index bond fund instead. Having said that even with the high fees the PIMCO fund was able to keep up with the index fund in recent years, and exceed it in prior years, in spite of the high fees. So it appears in some cases the right active management can make a small difference.

[retiredjg]

Pull up a chart from 2008 and it performed above its peers, but just below the index and that underperformance was for just a brief time. It then went on to blow them away.

I would not say it performed "just below the index" in 2008. The fact that it fared better than other multisector active bond funds is nice but not the point. PONDX took a pretty significant dive. The index did not take a pretty significant dive.

Yes, this bond fund performs well, but that is the result of taking extra risk, not some magic going on in a back room. I don't want my bond funds to be high risk. I use stocks for that.

I'm not saying PONDX is a bad fund. I'm saying it is not my choice for a bond fund. If I wanted a slice of a higher risk bond fund in my portfolio, it might make the list of funds that I would consider.

[Jebediah]

Can anyone speak to outflow/liquidity risk of this kind of fund? We can assume the day will come when all these inflows become outflows.

AFAIK PDI is the closed-end cousin (same strategy, more leverage). Is a smaller amount of a CEF a better choice for this kind of thing (assuming one doesn't drastically overpay above NAV)?

[Mydanyale]

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.

Thank you for explaining what they do

[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.

Thank you for explaining what they do

I need to revise a this post a bit. PONDX is a leveraged bond fund and do what I said, lend short and borrow long. However, since then I have dug a bit more into their reports. They do other, more exotic things - like credit spreads. It is wheels within wheels and things change quarter to quarter. Every strategy that I have seen is valid - just complex. Since then I have also picked up a modest portion of the fund.

[naha66]

By the way PONDX has been merged into PONAX.

[Mydanyale]

Thank you. Apparently, it is still no load in Vanguard

https://www.mutualfundobserver.com/disc ... -shares/p2

[Marketman]

I have owned Pimco Income Fund in the past but I also sold it because I just don't understand what goes on inside the fund. Pimco tends to use A LOT of derivatives and I worry about counter party risk among other things.