Int'l Hedged Bond Funds

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Runalong
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Int'l Hedged Bond Funds

Post by Runalong » Wed Mar 25, 2015 11:52 am

I very well may not go this route at all but it bugs me that I don't understand it at all.

I have a pretty good handle on stock funds but bond funds are like giant black boxes to me.

Case in point: PFODX vs VTIBX

Both are hedged international bond funds.

PFODX: Yield 7.4%, expense ratio 0.90%
VTIBX: Yield 1.5%, expense ratio 0.23%

I understand the significance of expense ratio, but what in the world are these guys doing to achieve such disparate yields? One seems surprisingly high and the other seems surprisingly low. Which, if either, would be more endangered by rising interest rates and why?

Can someone explain what goes in inside these black boxes?

Thanks!

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ObliviousInvestor
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Re: Int'l Hedged Bond Funds

Post by ObliviousInvestor » Wed Mar 25, 2015 11:59 am

I would suggest looking at the SEC yields instead of TTM yields. PFODX has an SEC yield of 0.83%, according to Morningstar, while VTIBX has an SEC yield of 0.81%.

For a prior discussion of TTM vs. SEC yields, see here:
http://www.bogleheads.org/forum/viewtop ... 0&t=130085
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Runalong
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Re: Int'l Hedged Bond Funds

Post by Runalong » Wed Mar 25, 2015 12:21 pm

That's helpful to the degree I understand.

It sounds like the TTM yield on a bond fund is virtually useless information for a prospective investor, SEC yield is the more accurate predictor?

Yahoo finance only shows TTM, though they just identify it as "yield".

If I understand correctly, I should expect similar returns from PFODX and VTIBX except that I'd be giving back my entire yield (SEC 0.83%) and then some to PFODX for expenses (0.90%).

Right, wrong, close?

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Re: Int'l Hedged Bond Funds

Post by ObliviousInvestor » Wed Mar 25, 2015 12:31 pm

Runalong wrote:That's helpful to the degree I understand.

It sounds like the TTM yield on a bond fund is virtually useless information for a prospective investor, SEC yield is the more accurate predictor?

Yahoo finance only shows TTM, though they just identify it as "yield".

If I understand correctly, I should expect similar returns from PFODX and VTIBX except that I'd be giving back my entire yield (SEC 0.83%) and then some to PFODX for expenses (0.90%).

Right, wrong, close?
Close. :)

I agree with SEC yield being much more useful for a prospective investor.

SEC yields, however, are already net of expense ratio. (You can see this by comparing the SEC yields of admiral and investor shares of any given Vanguard bond fund. The admiral fund always has slightly higher SEC yield, by approximately the amount of the difference in expense ratio.)

Also, I would add a qualifier to your statement about similar returns: "If interest rates don't change, I should expect similar returns from PFODX and VTIBX." The yield is a predictor of the return you would get if interest rates don't change. When rates do change, then you have price movements playing a role as well.
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ogd
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Re: Int'l Hedged Bond Funds

Post by ogd » Wed Mar 25, 2015 12:45 pm

ObliviousInvestor wrote: SEC yields, however, are already net of expense ratio. (You can see this by comparing the SEC yields of admiral and investor shares of any given Vanguard bond fund. The admiral fund always has slightly higher SEC yield, by approximately the amount of the difference in expense ratio.)
Still, that doesn't mean PIMCO gets a free pass. If you add the expenses back into the yield to understand what the "raw" yield is for the instruments that PIMCO invests in, you get about 1.7%, whereas for Vanguard you get about 1%. You have to assume that PIMCO is investing in instruments with much higher risk to get that kind of yield and afford the expenses. While there's nothing inherently wrong with taking higher risk for higher return, if the higher return stays with PIMCO while the higher risk is yours to "enjoy", that should very much count against this fund. 0.9% expenses are quite unacceptable at these yield levels.

Personally, I wouldn't invest in either. Safe international bonds are extremely low yielding vs Treasuries, while the latter are certainly as safe and quite likely safer for a USD investor even with hedging; the diversification you get is IMHO not nearly enough to account for the difference. I know this goes somewhat against what I said above about yield vs risk, but bonds in different currencies can[/] be weird like that.

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Re: Int'l Hedged Bond Funds

Post by pingo » Wed Mar 25, 2015 5:38 pm

I do agree that for a prospective invesor, the SEC yield is most useful, but for OP's benefit, bonds can appreciate from dividend yield and from capital gains, which I presume is why PFODX has outperformed. And Pimco might continue to have magic in it's fund. No one knows the future.

And the future can be a problem. Picking the best performing funds after they have done so? Easy. Picking the ones that will outperform before they have done so? Difficult, if not impossible, especially once the performance chasers look at the past and flood new money into the best past-performers, which then tend to slow it down.

One thing that has not been a good predictor of future returns: past performance. One thing that has been a good predictor: costs. Other important factors to consider: portfolio complexity and risk.

Now, past performance isn't totally worthless, so let's see what there is to see:

Image

In the recent past, PFODX has a higher total return than VTIBX.

However, building a portfolio isn't just about picking the highest performing funds. Just by eyeballing the chart, I can see that PFODX doesn't just have higher returns. Those returns came at a price: higher risk. See how how PFODX and VTIBX often move in-sync? PFODX moves up higher, but then it also experiences steeper drops. Sure, at the end of the day, it won the race, but so can other riskier assets. If you're like many here who need to know what part of the portfolio is "safe" and what part is "risky", then your bonds may need to exhibit greater stability. By more-or-less isolating your risky assets on the stock-side of the portfolio, it's easier to specify the level of risk an stomach.

Isolating one's risky/volatile assets to the stock side of the portfolio helps many of us to stay the course. Also, it can help a portfolio be simpler. In other words, rather than adding a higher risk bond fund which increases portfolio complexity, one might merely increase exposure to stocks by a fraction of the amount intended for the international bond fund.

(Disclaimer: In general, I am neither for nor against having hedged international bonds in one's portfolio. There is more than one way to skin a cat.)

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Runalong
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Re: Int'l Hedged Bond Funds

Post by Runalong » Wed Mar 25, 2015 6:39 pm

Yes, I assumed that PFODX was the riskier.

I assume that the higher rates come from riskier and/or longer-duration bonds.
Also, with a 175% turnover vs 16% for VTIBX, I'm guessing that they have been making money by buying and selling bonds much as one would trade equities. Not an easy thing to do but PIMCO (under Bill Gross) was apparently pretty good at it.

If so, I would also expect PFODX to be more closely correlated with equities than VTIBX is.

But these are all just semi-educated guesses on my part about what is under the hood.

Is there a case to be made that the bond market might be less efficient than the stock market and that active managers might have a better chance of outperforming an index than is the case with equities?

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Re: Int'l Hedged Bond Funds

Post by lack_ey » Wed Mar 25, 2015 7:09 pm

Runalong wrote:If so, I would also expect PFODX to be more closely correlated with equities than VTIBX is.
Why? No matter how the underlying securities are traded, if a fund is net long in bonds, it should move up and down with bonds. Okay, if PFODX is taking some more credit risk that may result in higher correlations with equities, but I don't really think it is to a huge extent.

This isn't much data, and you might check monthly correlations as well, but see here:
https://www.portfoliovisualizer.com/ass ... TIAX+VTSAX
Runalong wrote:Is there a case to be made that the bond market might be less efficient than the stock market and that active managers might have a better chance of outperforming an index than is the case with equities?
If you look at the percentage of active bond funds underperforming on a risk-adjusted basis to the relevant index (or just based on returns to the closest relevant benchmark) on a year-to-year basis, those numbers aren't very pretty.

On the other hand, I don't know if there are the same kind of results on fund persistence as there are for equity funds. If the data exists, I just haven't seen it. If some minority of funds persistently statistically significantly beat the index on a risk-adjusted basis before fees, that would be some evidence of inefficiency even if most funds aren't winning.

There are more bond issues than stocks and perhaps less liquidity, so there seem like there might be more opportunities to outplay the market. That said, bond returns and volatility trail stock returns and volatility, so a given expense ratio would be a higher percentage of returns and a bigger hurdle to overcome. These days, with yields as they are, I would be concerned about active bond funds trying to take on too much risk to make up the fees being charged. (Some funds as part of a package may not really care. I swear I saw an international bond fund on Morningstar with about 7 years duration and under 0.10% SEC yield that was in someone's 401k.) Sometimes risk doesn't show up as volatility or losses until something goes wrong and the stuff hits the fan, so you can't just extrapolate based on previous returns.

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Re: Int'l Hedged Bond Funds

Post by ps56k » Thu Apr 09, 2015 5:27 pm

grok87 wrote: If I were to summarize this data from an US investors perspective in terms of risk/reward
it would be as follows:
-> Canada, Israel: Similar real yields to the US but with currency risk. NO THANKS.
-> Brazil, Chile, Mexico, S. Africa: Higher real yields are tempting.
But which one of these will be the next Argentina and cook their inflation data. NO THANKS.
-> France, Germany, UK, Sweden: Negative real rates. YUCK
-> Spain, Italy: Peripheral Europe Bonds. YUCK
-> That leaves... Australia!!!
Could be interesting, question is, does the higher real yield compensate you enough for the currency risk ?
SO - this does not seem to paint a pretty picture for International Bonds Index - like Vanguard VTIBX -
Do we stay with VIPSX, move to the SPDR version TIPX, or just put more into good old VBMFX -

I think I'm going to get away from my Vanguard VIPSX and my Permanent Portfolio PRPFX,
and just stick with VBMFX and maybe add some Intl Bond VTIBX to make it interesting to watch...

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Re: Int'l Hedged Bond Funds

Post by abuss368 » Thu Apr 09, 2015 11:21 pm

I am still learning about international bonds as Vanguard is really marketing this asset class.

Are TIPS paying anything?
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Re: Int'l Hedged Bond Funds

Post by watchnerd » Sun May 31, 2015 8:28 am

The Vanguard white paper advocating the very minor diversification benefits of international hedged bonds fails to address the elephant in the room, namely:

The fundamentals of VTIBX are garbage:

--Relatively long 7.3 duration (as of 5/29/15), but with an SEC yield of only .95 (as of 5/29/15). You get better risk/reward from CDs.

--ER = .23, which is pretty dang high for a yield of .95

--22% in Japanese government bonds, which pay practically nothing. Unless making a currency play (which you can't here because it's hedged), I don't see any reason why any non-Japanese would buy Japanese government bonds.

--9.8% German bunds, which have negative short term yields and barely positive in the long term

I'm a big advocate of indexing, but in this case Vanguard's desire to create a hedged index fund that models the market for international bond market seems like an academic exercise, that ignored the question: why would anyone invest in this?
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