Different bond fund duration/maturity measures, fund names

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Tamales
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Joined: Sat Jul 05, 2014 10:47 am

Different bond fund duration/maturity measures, fund names

Post by Tamales » Sun Jul 17, 2016 10:02 am

My first question is about the duration measure. Is there a standardized method of calculating this (similar to SEC yield)? The figure provided for bond funds (or in general any fund that has a meaningful bond allocation) seems to go by several different names (e.g. sometimes just "duration," sometimes "average duration," and sometimes "average effective duration." Are they the same thing, or at least close enough to being the same that you can ignore the differences?

If the calculation is not standardized, is there a reason there isn't some "SEC duration" that is at the very least, updated quarterly? How are investors supposed to be able to use the duration measure as a proxy for interest rate risk if the measure has wide variations in the ways it's calculated? Maybe the presence of active bond funds muddies the water here (e.g. use of derivatives) and standardizing would only be possible for bond index funds?

Relative to municipal bond funds, is there a different way to interpret the duration figure for muni funds versus traditional bond funds? The reason I ask is that my unscientific look at municipal bond funds with the word "long" in the name seem to have much lower durations than general bond funds with "long" in the name. I don't know if this is something fundamental about muni bond funds, or just a fluke observation?

Are there SEC rules on what duration range qualifies for naming a fund as short, intermediate, and long (e.g. a fund company isn't allowed to call a fund an intermediate fund if say its duration is 7 years)? Or are the fund names not really connected to duration and instead represent average maturity? If it represents maturity (which I'm thinking is generally the case), shouldn't that practice change so the naming represents duration instead? Isn't that more significant to investors than average maturity?

For some funds, the duration is only incrementally smaller than the quoted maturity (even for some funds calling themselves long term), and in other cases there can be a factor of two (or more) difference between the quoted maturity and duration. Are there "rules of thumb" for interpreting the difference between maturity and duration (e.g. if the quoted maturity is x and duration is x/2 that means (whatever) about the fund's portfolio, as opposed to those both being roughly the same? Or are the differences in the ways of calculating maturity and duration large and varied enough that you can't make any accurate statements about the difference? (and if so, what's the point of specifying these figures at all?)

Thanks for any portion of the above questions you can shed any light on.

Geologist
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Re: Different bond fund duration/maturity measures, fund names

Post by Geologist » Sun Jul 17, 2016 11:29 am

Whether a bond fund is short, intermediate, or long is based on maturity, not duration. As far as I know, the SEC and regulations don't enter into the divisions: the divisions are set (and perhaps aren't the same) by Lipper and Morningstar. Duration came into use much more recently, while average maturity has been available for many years. Whether you or most investors might prefer to classify funds by duration, you would have to convince Lipper and Morningstar to change their definitions.

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Ever Ready
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Re: Different bond fund duration/maturity measures, fund names

Post by Ever Ready » Sun Jul 17, 2016 11:38 am

The Wiki has a nice section on bonds, which explains duration:
https://www.bogleheads.org/wiki/Bonds:_advanced_topics

lack_ey
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Re: Different bond fund duration/maturity measures, fund names

Post by lack_ey » Sun Jul 17, 2016 11:48 am

You may see reference to Macauley duration, modified duration, and effective duration. They measure different but related things and are all useful in their own ways. These all are different from maturity (and less than or equal to it), which is when the final payment is made.

Macauley duration tells you about weighted cash flows and the point at which you break even from any interest rate movement today. Modified duration measures the sensitivity to a 1% change in interest rates given certain assumptions. Effective duration measures the sensitivity to a 1% change in interest rates making more sophisticated calculations and assumptions about what would happen with changing cash flows and bond options potentially being exercised. There can be disagreements over what to account for here and what those likelihoods are.

You can see for example here:
http://www.treasurer.ca.gov/cdiac/publi ... ration.pdf


The big feature of municipal bond funds you're seeing is that many municipal bonds are callable. Even though the maturity of a given bond may be 15 years away, they may have an option to call the bond and pay you back your principal in 5 years (and if rates have fallen since the bond was initially issued, they're probably going to do just that so they can effectively refinance by issuing a new bond with a lower coupon... though if rates spike back up, they may not and you're on the hook holding something maturing in 15 years). As such, there can be a big difference between the maturity and effective duration of a bond fund packed with such issues.

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