Is there a case for Active in fixed income?

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hdas
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Is there a case for Active in fixed income?

Post by hdas » Sun Oct 21, 2018 12:32 am

Interesting interview of Jeff Gundlach, fund manager of ~120 billion, of course self-serving but informative nonetheless:

Link: https://www.forbes.com/sites/karlkaufma ... dvice/amp/

Selected Quotes:

On Emerging Market Bonds:
Right now, we sort of like emerging market debt. We’re not getting involved with real trouble spots — you might succeed mightily in Argentina or Turkey — but we’re trying to do it in a lower-risk fashion.

Emerging markets have suffered from the dollar having risen earlier this year. We believe the dollar is going to go down. The fact that the dollar is starting to fall again enforces that view. When the dollar goes down, you’re going to be better off in emerging markets.
On the current juncture:
There are two ways for things to go wrong, meaning bond yields go higher. Both of them seem to be at least plausible in the short term, if not the base case. One is U.S. nominal GDP could go up, which is happening and is going to happen again in the third quarter. Nominal GDP is an important factor in the 10-year Treasury. Also, German yields can go higher — they have over the past two years, though not aggressively.

The U.S. 10-year has an uncanny tendency to find itself at the average of U.S. nominal GDP and the German 10-year yield. Right now, U.S. nominal GDP is at 5.4. We think we know it’s going to 5.75 once the data for the third quarter are announced.

So we might be seeing 5.75 nominal and 55 basis points of German 10-years, not even assuming that goes up. Add those two together, you get 6.3. Divide by 2, you get 3.15. Voila, that’s exactly where the 10-year is today.

Those are the two things that we need to be thinking about: nominal GDP of the United States and German 10-years are going to drive rates higher for 10-year treasury yields.
Let’s take a peak at Double Line Performance:
https://www.morningstar.com/funds/xnas/ ... quote.html

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Sandtrap
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Re: Is there a case for Active in fixed income?

Post by Sandtrap » Sun Oct 21, 2018 8:57 am

Wiki: Mortgage Backed Securities
https://www.bogleheads.org/wiki/Mortgag ... d_security

Morningstar
[DoubleLine Total Return Bond has clear strengths, starting with the leadership of Jeffrey Gundlach, one of the mortgage market’s most skilled practitioners. However, DoubleLine has denied repeated requests for access to the firm’s investment personnel and information on its strategy. Given the lack of details regarding the firm’s process that are not available in its public filings and communications, the fund earns a Morningstar Analyst Rating of Neutral.
The mortgage-focused portfolio has evolved significantly, removing some concerns about its risks. Its stake in esoteric mortgage-backed securities, including inverse floaters and inverse interest-only tranches, has fallen sharply. Those securities, which can be volatile and suffer from bouts of illiquidity, peaked at close to 25% in 2010 and have run at 3% to 5% since late 2012. The fund’s 3.7% 12-month yield as of June 2018 was above intermediate-term bond Morningstar Category norms but has come down considerably and is similar to that of funds with comparable mandates. Meanwhile, moderating--but still strong--performance suggests lower risk./quote]

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jeffyscott
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Re: Is there a case for Active in fixed income?

Post by jeffyscott » Sun Oct 21, 2018 10:24 am

Is there a case for owning things that are not in the bond index?
What helps the active manager to outperform the index is that it’s quite possible in bonds to do things very differently from what’s in the traditional bond indexes. The Agg has no foreign bonds, certainly no emerging markets bonds, no below-investment-grade bonds, no bank loans, no structured finance to speak of like ABS or CMBS, all of which are viable asset classes. But the index doesn’t include them.
You could categorize the industry fairly accurately with a broad stroke by saying most firms are perpetually overweight corporate credit, underweight treasuries and they even have some stocks with below-investment-grade ratings.
In part because we have only 40% equities, I do want to own things that are not in the bond index(es) and also want to own less treasuries than the index. So I do use low cost, managed bond funds.
press on, regardless - John C. Bogle

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vineviz
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Re: Is there a case for Active in fixed income?

Post by vineviz » Sun Oct 21, 2018 10:43 am

Unlike US equity funds, where 58% of actively managed stock funds underperformed their index over the past year it's true that only 48% of actively managed intermediate bond funds underperformed their index.

Whether that's a ringing endorsement of actively managed fixed income funds is a matter of degree, I suppose.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

stlutz
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Re: Is there a case for Active in fixed income?

Post by stlutz » Sun Oct 21, 2018 11:23 am

Given that there are about 5 threads going on now promoting various approaches to timing the bond market, the opinion of the forum seems to be "yes". :?

Dandy
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Re: Is there a case for Active in fixed income?

Post by Dandy » Sun Oct 21, 2018 4:55 pm

For many fixed income allocation is for safety and portfolio stability. There are many low cost index/passive or FDIC products that can accomplish that. No need to pay higher fees and perhaps more risk to get stability/safety. Get the return/growth from the equity side.

fennewaldaj
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Re: Is there a case for Active in fixed income?

Post by fennewaldaj » Sun Oct 21, 2018 6:03 pm

I wouldn't be surprised if active management had a benefit in fixed income if it cost the same as indexing esp in certain classes like corporate bonds high yield and emerging market debt. There are some know causes of return leakage from following indexes in these areas. For example BBB bonds downgraded to BB must be sold by an investment grade index fund but the loss from the downgrade is greater than the avg loss from holding the bond. In high yield there seems to be some evidence that the CCC market can be tactically times but the BB, B market are the better long term holdings.

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dm200
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Re: Is there a case for Active in fixed income?

Post by dm200 » Sun Oct 21, 2018 6:17 pm

One aspect of index funds holding equities is very low turnover of holdings.

For bond index funds, however, there is a lot of turnover of holdings (sale before maturity).

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Taylor Larimore
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Re: Is there a case for Active in fixed income?

Post by Taylor Larimore » Sun Oct 21, 2018 6:17 pm

hdas:

The case for active in fixed income is very weak.

According to SPIVA who tracks active funds vs. index funds in 14 bond categories, during the past 15 years, managed bond funds underperformed their index benchmark in ALL 14 bond fund categories.

https://us.spindices.com/documents/spiv ... d-2017.pdf

Best wishes
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Last edited by Taylor Larimore on Tue Oct 23, 2018 10:51 am, edited 2 times in total.
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venkman
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Re: Is there a case for Active in fixed income?

Post by venkman » Sun Oct 21, 2018 9:05 pm

The only way for FI active management to add value is to correctly predict the direction of interest rates. Almost nobody can do that on a consistent basis.

On the other hand, I wouldn't mind paying the 0.20% ER for an actively-managed Vanguard Investment Grade fund, if I were looking for something a bit safer than the corporate bond indexes that skew toward BBB-rated bonds.

stan1
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Re: Is there a case for Active in fixed income?

Post by stan1 » Sun Oct 21, 2018 10:04 pm

venkman wrote:
Sun Oct 21, 2018 9:05 pm
On the other hand, I wouldn't mind paying the 0.20% ER for an actively-managed Vanguard Investment Grade fund, if I were looking for something a bit safer than the corporate bond indexes that skew toward BBB-rated bonds.
I agree this is the only family of actively managed bond funds I'd consider today. Fifteen years ago some of the PIMCO bond funds were considered "low fee" but today with the advent of index bond funds and ETFs I can't say I'd choose to pay PIMCO's higher expense ratios.

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Doc
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Re: Is there a case for Active in fixed income?

Post by Doc » Mon Oct 22, 2018 7:38 am

jeffyscott wrote:
Sun Oct 21, 2018 10:24 am
Is there a case for owning things that are not in the bond index?
What about the other side of the coin. Is there a case for not owning things that are in the index?

Shortening the duration of a Treasury fund to reduce risk is currently where Vg's active fund is. Or choosing not to buy a low liquidity corporate in an index to reduce cost can make sense.

As long as these active funds have low cost and are not pursuing yield chasing I think they should be considered.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

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jeffyscott
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Re: Is there a case for Active in fixed income?

Post by jeffyscott » Mon Oct 22, 2018 8:48 am

Doc wrote:
Mon Oct 22, 2018 7:38 am
jeffyscott wrote:
Sun Oct 21, 2018 10:24 am
Is there a case for owning things that are not in the bond index?
What about the other side of the coin. Is there a case for not owning things that are in the index?

Shortening the duration of a Treasury fund to reduce risk is currently where Vg's active fund is. Or choosing not to buy a low liquidity corporate in an index to reduce cost can make sense.

As long as these active funds have low cost and are not pursuing yield chasing I think they should be considered.
Yes, as I mentioned I like to avoid treasuries in our bond funds (having no taxable accounts to speak of).

Corporate index (eg. VICSX) also has a possible issue of concern in that: "its market-value-weighting approach leads to a heavy exposure to financial-services bonds. Roughly one third of the portfolio is invested in the financials sector, which is a source of risk." (according to M*)

In the case of Vanguard, if you can allocate $50K intermediate investment grade or Treasury only cost 0.10%. If the managers can add value of more than 0.05%, that is all that is needed to beat the cheapest index option.
press on, regardless - John C. Bogle

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Doc
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Re: Is there a case for Active in fixed income?

Post by Doc » Mon Oct 22, 2018 9:39 am

jeffyscott wrote:
Mon Oct 22, 2018 8:48 am
If the managers can add value of more than 0.05%, that is all that is needed to beat the cheapest index option.
Not add value or get cheaper alone but also lower risk.

Another factor I forgot is the ability of increasing yield by "riding the yield curve" if the shape of the curve is attractive. An active fund can buy 3's and sell them with one year left while the index fund has to buy both 2's and 3's and sell at one year left.

As an example of active/index compare Vanguard Short-Term Treasury Fund Admiral Shares VFIRX with Vanguard Short-Term Treasury Idx Admiral VSBSX from 1/1/2010 to date. Index $10,681.13 vs active $10,918.16 growth of $10k. (I'm not making a judgement of which is better.)
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

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jeffyscott
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Re: Is there a case for Active in fixed income?

Post by jeffyscott » Mon Oct 22, 2018 9:56 am

Doc wrote:
Mon Oct 22, 2018 9:39 am
As an example of active/index compare Vanguard Short-Term Treasury Fund Admiral Shares VFIRX with Vanguard Short-Term Treasury Idx Admiral VSBSX from 1/1/2010 to date. Index $10,681.13 vs active $10,918.16 growth of $10k. (I'm not making a judgement of which is better.)
Similarly for the intermediate treasury funds, the managed fund is slightly ahead from Nov. 19, 2009 (inception of VSIGX) to date:
Index (VSIGX): $12,266.50
Managed fund (VFIUX): $12,352.01
press on, regardless - John C. Bogle

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grabiner
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Re: Is there a case for Active in fixed income?

Post by grabiner » Mon Oct 22, 2018 8:39 pm

jeffyscott wrote:
Mon Oct 22, 2018 9:56 am
Doc wrote:
Mon Oct 22, 2018 9:39 am
As an example of active/index compare Vanguard Short-Term Treasury Fund Admiral Shares VFIRX with Vanguard Short-Term Treasury Idx Admiral VSBSX from 1/1/2010 to date. Index $10,681.13 vs active $10,918.16 growth of $10k. (I'm not making a judgement of which is better.)
Similarly for the intermediate treasury funds, the managed fund is slightly ahead from Nov. 19, 2009 (inception of VSIGX) to date:
Index (VSIGX): $12,266.50
Managed fund (VFIUX): $12,352.01
In both cases, the managed fund has a slightly higher duration, and some mortgage-backed bonds, so it is taking a bit more risk to get the higher returns. However, there is no inherent advantage for the index; the expense difference for Admiral shares is just three basis points.
Wiki David Grabiner

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Doc
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Re: Is there a case for Active in fixed income?

Post by Doc » Tue Oct 23, 2018 6:40 am

grabiner wrote:
Mon Oct 22, 2018 8:39 pm
jeffyscott wrote:
Mon Oct 22, 2018 9:56 am
Doc wrote:
Mon Oct 22, 2018 9:39 am
As an example of active/index compare Vanguard Short-Term Treasury Fund Admiral Shares VFIRX with Vanguard Short-Term Treasury Idx Admiral VSBSX from 1/1/2010 to date. Index $10,681.13 vs active $10,918.16 growth of $10k. (I'm not making a judgement of which is better.)
Similarly for the intermediate treasury funds, the managed fund is slightly ahead from Nov. 19, 2009 (inception of VSIGX) to date:
Index (VSIGX): $12,266.50
Managed fund (VFIUX): $12,352.01
In both cases, the managed fund has a slightly higher duration, and some mortgage-backed bonds, so it is taking a bit more risk to get the higher returns. However, there is no inherent advantage for the index; the expense difference for Admiral shares is just three basis points.
The duration difference may be a plus or a minus depending on the shape of the yield curve. Also we don't know the average duration of the active fund over the period.

Until late last year (date from memory) the index fund was Federal not pure Treasury.

I don't think anybody is saying that one of these active/index Vanguard pairs is demonstrative that active is "better" than index. It's just an illustration that a case can be made for active fixed income funds.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

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