Should I dump PONAX? (junk bonds concern)

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Topic Author
Alex GR
Posts: 139
Joined: Mon Jul 31, 2017 9:17 am

Should I dump PONAX? (junk bonds concern)

Post by Alex GR » Thu Mar 26, 2020 2:28 pm

My portfolio currently looks like this: (approximation)
Stocks: 60%
Bond: BIV 32%; PONAX 8%
Why? Because I had PONAX before I adapted to Boglehead philosophy and I decided to keep it and just add Vanguard ETFs.
As I understand it, there are two different schools of thought on this:

1) This is an expensive fund, expense of 1.45% is ridiculous and it's highly risky, 1/3 of it is in junk bonds and it'll crash along with the stock market. Take your risk on the equities side, don't take risk on the bond side.

2) This is a great fund, 8% annual return historically, 5.24% annual return in the last 5 years. PIMCO managers are doing a great job. Keep it.


So which one is correct? :confused
PONAX is down 10% for the year. I am thinking of dumping it and just sticking to BIV.
BIV is ~50/50 treasury/corporate if I understand correctly.
OTOH, perhaps PIMCO can continue generating above average returns?
Also, rather than swapping for BIV I could use it to rebalance into equities to return to previous allocation (since this crash began, I've chosen the "do nothing" approach rather than continuous rebalancing)
Thanks!

panhead
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Re: Should I dump PONAX? (junk bonds concern)

Post by panhead » Thu Mar 26, 2020 2:35 pm

Alex GR wrote:
Thu Mar 26, 2020 2:28 pm
My portfolio currently looks like this: (approximation)
Stocks: 60%
Bond: BIV 32%; PONAX 8%
Why? Because I had PONAX before I adapted to Boglehead philosophy and I decided to keep it and just add Vanguard ETFs.
As I understand it, there are two different schools of thought on this:

1) This is an expensive fund, expense of 1.45% is ridiculous and it's highly risky, 1/3 of it is in junk bonds and it'll crash along with the stock market. Take your risk on the equities side, don't take risk on the bond side.

2) This is a great fund, 8% annual return historically, 5.24% annual return in the last 5 years. PIMCO managers are doing a great job. Keep it.


So which one is correct? :confused
PONAX is down 10% for the year. I am thinking of dumping it and just sticking to BIV.
BIV is ~50/50 treasury/corporate if I understand correctly.
OTOH, perhaps PIMCO can continue generating above average returns?
Also, rather than swapping for BIV I could use it to rebalance into equities to return to previous allocation (since this crash began, I've chosen the "do nothing" approach rather than continuous rebalancing)
Thanks!
If you want exposer to the sector it might be worth dumping it (will this hurt tax wise?) and moving it to vanguards "junk" bond fund which is decidedly less junky. SEC yield last I looked was about 8%, and a much lower expense ratio. I'm beginning to consider it now that the spreads are down.

Topic Author
Alex GR
Posts: 139
Joined: Mon Jul 31, 2017 9:17 am

Re: Should I dump PONAX? (junk bonds concern)

Post by Alex GR » Thu Mar 26, 2020 3:48 pm

panhead wrote:
Thu Mar 26, 2020 2:35 pm
Alex GR wrote:
Thu Mar 26, 2020 2:28 pm
My portfolio currently looks like this: (approximation)
Stocks: 60%
Bond: BIV 32%; PONAX 8%
Why? Because I had PONAX before I adapted to Boglehead philosophy and I decided to keep it and just add Vanguard ETFs.
As I understand it, there are two different schools of thought on this:

1) This is an expensive fund, expense of 1.45% is ridiculous and it's highly risky, 1/3 of it is in junk bonds and it'll crash along with the stock market. Take your risk on the equities side, don't take risk on the bond side.

2) This is a great fund, 8% annual return historically, 5.24% annual return in the last 5 years. PIMCO managers are doing a great job. Keep it.


So which one is correct? :confused
PONAX is down 10% for the year. I am thinking of dumping it and just sticking to BIV.
BIV is ~50/50 treasury/corporate if I understand correctly.
OTOH, perhaps PIMCO can continue generating above average returns?
Also, rather than swapping for BIV I could use it to rebalance into equities to return to previous allocation (since this crash began, I've chosen the "do nothing" approach rather than continuous rebalancing)
Thanks!
If you want exposer to the sector it might be worth dumping it (will this hurt tax wise?) and moving it to vanguards "junk" bond fund which is decidedly less junky. SEC yield last I looked was about 8%, and a much lower expense ratio. I'm beginning to consider it now that the spreads are down.
Panhead,
Thanks for your reply.
You are referring to VWEAX, right?
Yes, looks like a similar profile to PONAX, ~1% less return historically. BTW, are published returns net of mgmt fee? It makes a huge difference w/ER 1.45%.
One thing that's confusing though is that the Vanguard is down almost 16% while Pimco is down 10,5%. Wouldn't it be the other way if the Vanguard was less junky?

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ruralavalon
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Re: Should I dump PONAX? (junk bonds concern)

Post by ruralavalon » Thu Mar 26, 2020 4:47 pm

Alex GR wrote:
Thu Mar 26, 2020 2:28 pm
. . . I had PONAX before I adapted to Boglehead philosophy and I decided to keep it and just add Vanguard ETFs.

. . . . .

I am thinking of dumping it and just sticking to BIV.
You didn't state any reason for keeping PIMCO Income A (PONAX) when you changed to Boglehead style investing. And 8% is a relatively minor allocation.

In my opinion Vanguard Intermediate-Term Bond ETF (BIV) is a good bond fund to use. We use the regular mutual fund, Vanguard Intermediate-Term Bond Index Fund Admiral Shares (VBILX), for our entire bond allocation.

I think it's okay for you to switch the entire bond allocation to Vanguard Intermediate-Term Bond ETF (BIV).
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

alex_686
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Re: Should I dump PONAX? (junk bonds concern)

Post by alex_686 » Thu Mar 26, 2020 4:50 pm

I am pretty sure its exposure to junk bonds is minimal.

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ruralavalon
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Re: Should I dump PONAX? (junk bonds concern)

Post by ruralavalon » Thu Mar 26, 2020 4:54 pm

alex_686 wrote:
Thu Mar 26, 2020 4:50 pm
I am pretty sure its exposure to junk bonds is minimal.
It looks like about 34% of the fund is junk bonds. Morningstar, PONAX, portfolio tab.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

alex_686
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Re: Should I dump PONAX? (junk bonds concern)

Post by alex_686 » Thu Mar 26, 2020 5:06 pm

ruralavalon wrote:
Thu Mar 26, 2020 4:54 pm
alex_686 wrote:
Thu Mar 26, 2020 4:50 pm
I am pretty sure its exposure to junk bonds is minimal.
It looks like about 34% of the fund is junk bonds. Morningstar, PONAX, portfolio tab.
PONAX is a highly managed fund. When I last checked last year it was stuffed full of shorts and derivatives. Morningstar kind of breaks down when you assets go over 130%. I have not recently torn apart its holding.

IIRC, last year they were buying junk bonds but hedging that CDX HY insurance contracts. So - in theory - no credit risk, earning money off of liquidity spreads and other inefficiencies. Sure, it is just a few bps, but lever that up by a factor of 5 and we start talking about real money.

panhead
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Re: Should I dump PONAX? (junk bonds concern)

Post by panhead » Thu Mar 26, 2020 7:12 pm

alex_686 wrote:
Thu Mar 26, 2020 5:06 pm
ruralavalon wrote:
Thu Mar 26, 2020 4:54 pm
alex_686 wrote:
Thu Mar 26, 2020 4:50 pm
I am pretty sure its exposure to junk bonds is minimal.
It looks like about 34% of the fund is junk bonds. Morningstar, PONAX, portfolio tab.
PONAX is a highly managed fund. When I last checked last year it was stuffed full of shorts and derivatives. Morningstar kind of breaks down when you assets go over 130%. I have not recently torn apart its holding.

IIRC, last year they were buying junk bonds but hedging that CDX HY insurance contracts. So - in theory - no credit risk, earning money off of liquidity spreads and other inefficiencies. Sure, it is just a few bps, but lever that up by a factor of 5 and we start talking about real money.
This is very interesting. Comparing this fund to VWEAX is apparently pointless, they are too different. This isn't a simple junk bond fund. OP, take note. If you want junk bond exposure, I'd lean toward VWEAX (as I am). If you want higher quality bonds, do what the poster upstream suggested. Either way, I'd get out of this fund if you can without serous capital gains. If it's not in taxable (it shouldn't be anyway) then you're good. If it is, maybe you can offset with some TLH?

alex_686
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Re: Should I dump PONAX? (junk bonds concern)

Post by alex_686 » Thu Mar 26, 2020 7:33 pm

panhead wrote:
Thu Mar 26, 2020 7:12 pm
This is very interesting. Comparing this fund to VWEAX is apparently pointless, they are too different. This isn't a simple junk bond fund. OP, take note. If you want junk bond exposure, I'd lean toward VWEAX (as I am). If you want higher quality bonds, do what the poster upstream suggested. Either way, I'd get out of this fund if you can without serous capital gains. If it's not in taxable (it shouldn't be anyway) then you're good. If it is, maybe you can offset with some TLH?
First, I am going to have to walk back some of my earlier comments. I got Pimco Total Return fund mixed up with the income fund. The Total Return funds is absurdity nuts in terms of complexity and what they are trying to do. The Income Fund is the tame half-sibling. Still nuts, however. The holdings of 3-5 year bond is -4%. They have -1 year duration in government bonds and -2 for Non-USD Developed. Yes, negative exposure. It is not going to act like any other bond fund out there. It is a expensive fund but the money is not going towards marketing, it going towards portfolio management.

I have a positive view of this fund. I think active management can bring value, and this is a good example of how it is done. The bond market is relatively inefficient and there often bond funds beat their underlying indexes even after the expense ratio - something you don't find with equity funds. It is the exact opposite of a index fund or a closet index fund. It is not everybody's cup of tea - which is fine. You can't determine its performance by measuring against it peers. You have to look at the management and other historic metrics like the Sharpe ratio.

panhead
Posts: 423
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Re: Should I dump PONAX? (junk bonds concern)

Post by panhead » Thu Mar 26, 2020 7:49 pm

alex_686 wrote:
Thu Mar 26, 2020 7:33 pm
panhead wrote:
Thu Mar 26, 2020 7:12 pm
This is very interesting. Comparing this fund to VWEAX is apparently pointless, they are too different. This isn't a simple junk bond fund. OP, take note. If you want junk bond exposure, I'd lean toward VWEAX (as I am). If you want higher quality bonds, do what the poster upstream suggested. Either way, I'd get out of this fund if you can without serous capital gains. If it's not in taxable (it shouldn't be anyway) then you're good. If it is, maybe you can offset with some TLH?
First, I am going to have to walk back some of my earlier comments. I got Pimco Total Return fund mixed up with the income fund. The Total Return funds is absurdity nuts in terms of complexity and what they are trying to do. The Income Fund is the tame half-sibling. Still nuts, however. The holdings of 3-5 year bond is -4%. They have -1 year duration in government bonds and -2 for Non-USD Developed. Yes, negative exposure. It is not going to act like any other bond fund out there. It is a expensive fund but the money is not going towards marketing, it going towards portfolio management.

I have a positive view of this fund. I think active management can bring value, and this is a good example of how it is done. The bond market is relatively inefficient and there often bond funds beat their underlying indexes even after the expense ratio - something you don't find with equity funds. It is the exact opposite of a index fund or a closet index fund. It is not everybody's cup of tea - which is fine. You can't determine its performance by measuring against it peers. You have to look at the management and other historic metrics like the Sharpe ratio.
Good clarification. I completely agree that bond funds often benefit from active management, unlike most equity funds. I still think the expense ratio is way too high to justify it, and I simply couldn't invest in something that I didn't understand, and man, this I really don't understand! OP, your choice, let us know what you decide!

Topic Author
Alex GR
Posts: 139
Joined: Mon Jul 31, 2017 9:17 am

Re: Should I dump PONAX? (junk bonds concern)

Post by Alex GR » Fri Mar 27, 2020 2:27 am

Thanks for all the responses.
You guys are saying it's a good actively managed fund than can outperform BIV over a long period, right?
Reason I brought up selling it is because this recent crash is giving me an itch to do something and I thought about selling PONAX and using the money to go back to desired AA (so buy more VTI).
If anything is left after the rebalance, that would go towards BIV.

alex_686
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Re: Should I dump PONAX? (junk bonds concern)

Post by alex_686 » Fri Mar 27, 2020 9:30 am

Alex GR wrote:
Fri Mar 27, 2020 2:27 am
Thanks for all the responses.
You guys are saying it's a good actively managed fund than can outperform BIV over a long period, right?
Reason I brought up selling it is because this recent crash is giving me an itch to do something and I thought about selling PONAX and using the money to go back to desired AA (so buy more VTI).
If anything is left after the rebalance, that would go towards BIV.
I am saying it is a good active fund. I am not saying it will outperform BIV. What exactly do you mean by "outperform"? What yardstick are you using? Return over a period? Risk adjusted return? Maximum draw-down during a crisis? PONAX is not trying to outperform BIV. It is like asking if David Beckham is better than the average NFL player on a per dollar. Yeah, technically Beckham is a football player, but he is playing a different game.

I think PIMCO has a great set of managers and that they certainly earn that higher expense ratio. However, I would be hard press to recommend the fund. Assets should fit into a AA to support your goals. Figuring out how PONAX fits in is going to be challenging.

So note, I am deliberately not giving you a answer. That has to be left to you. This is one of the trickier funds to give advice on. Did into the monthly commentaries, fact sheets, etc. Make a list of questions and come back. We can get into the nuance if you like.

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ruralavalon
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Re: Should I dump PONAX? (junk bonds concern)

Post by ruralavalon » Fri Mar 27, 2020 10:22 am

Alex GR wrote:
Fri Mar 27, 2020 2:27 am
. . . . . I thought about selling PONAX and using the money to go back to desired AA (so buy more VTI).
If anything is left after the rebalance, that would go towards BIV.
In my opinion that is a good idea.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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