Actively Managed Bond Funds

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Binx
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Actively Managed Bond Funds

Post by Binx » Tue Nov 06, 2018 11:27 am

Fidelity has been promoting the active management of Bond Funds/ETF's.
Their position is that that investors can find alpha by taking advantage of
the expert analysis of active managers. It is interesting to me that by doing
this Fidelity is essentially admitting that active management has NOT returned
alpha in the Equities side. Does anyone here believe that active management
can make a sustainable difference in Bond investing. Thanks~

blackcat allie
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Re: Actively Managed Bond Funds

Post by blackcat allie » Tue Nov 06, 2018 12:50 pm

Curious for replies...

My 401k sadly only has actively managed Bond funds, no options for index bonds.

Admiral
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Re: Actively Managed Bond Funds

Post by Admiral » Tue Nov 06, 2018 12:53 pm

Binx wrote:
Tue Nov 06, 2018 11:27 am
Does anyone here believe that active management
can make a sustainable difference in Bond investing. Thanks~
No. Plus bond returns are generally modest anyway, so why would you want to give a larger percentage of your return to some so-called expert?

Nor do I believe it can make a sustainable difference in investing, period.

You realize this is the Bogleheads forum, right? :wink:

ChinchillaWhiplash
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Re: Actively Managed Bond Funds

Post by ChinchillaWhiplash » Tue Nov 06, 2018 1:03 pm

There are some actively managed bond funds that have outperformed TBM over a long period of time in total returns. Some have decent ER too. An example: USAIX income fund (intermediate bonds) ER = 0.49 vs. VBMFX. https://www.portfoliovisualizer.com/bac ... sisResults
Plug them into link as it did not save the results for some reason. The improved performance came at a cost of a little more risk, larger max drawdown, and higher correlation to US equities.

alex_686
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Re: Actively Managed Bond Funds

Post by alex_686 » Tue Nov 06, 2018 1:13 pm

There is modest evidence that a semi-active bond portfolios beat out passive indexing after fees by 10 to 30 bps.

The trick is that bond indexes only cover about 10% of the actively traded market and ignores the 70% where trading is low to non-existential. A semi-active manager can replicate the factors of the passive index (duration, credit rating, industry, etc) by buying the cheaper illiquid counterparts.

The studies that I have read are centered around pension funds, which have a longer history of semi-active management and do not have the liquidity concerns of public funds.

Or you can be like PIMCO and just go all out active.

UpperNwGuy
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Re: Actively Managed Bond Funds

Post by UpperNwGuy » Tue Nov 06, 2018 1:32 pm

Vanguard's five national municipal bond funds (short, limited, intermediate, long, and high yield) are all active funds and seem to do well. I think I remember Jack Bogle saying that they set these up as active funds because they couldn't figure out how to make them work as index funds.

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Doc
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Re: Actively Managed Bond Funds

Post by Doc » Tue Nov 06, 2018 2:11 pm

alex_686 wrote:
Tue Nov 06, 2018 1:13 pm
There is modest evidence that a semi-active bond portfolios beat out passive indexing after fees by 10 to 30 bps.

The trick is that bond indexes only cover about 10% of the actively traded market and ignores the 70% where trading is low to non-existential. A semi-active manager can replicate the factors of the passive index (duration, credit rating, industry, etc) by buying the cheaper illiquid counterparts.

The studies that I have read are centered around pension funds, which have a longer history of semi-active management and do not have the liquidity concerns of public funds.

Or you can be like PIMCO and just go all out active.
Yep, even PIMCO Total Return most of the time. Vanguard's actively managed bond funds may also be "better" than their active funds.

Three year rolling return chart over the last ten years:

Image
http://quotes.morningstar.com/chart/fun ... 22%3A36%7D

(The "bad" period around 2013 was associated with Gross leaving and everybody bailed out of the fund.)

Vanguard's lead manager for their corporate funds also quit unexpectedly a few months ago . Time will tell.
Morningstar wrote:This fund is still a Medalist despite its manager change, but has been downgraded to Bronze.
http://analysisreport.morningstar.com/f ... ture=en_US (Premium content.)
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.

azanon
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Re: Actively Managed Bond Funds

Post by azanon » Tue Nov 06, 2018 2:36 pm

Binx wrote:
Tue Nov 06, 2018 11:27 am
Fidelity has been promoting the active management of Bond Funds/ETF's.
Their position is that that investors can find alpha by taking advantage of
the expert analysis of active managers. It is interesting to me that by doing
this Fidelity is essentially admitting that active management has NOT returned
alpha in the Equities side. Does anyone here believe that active management
can make a sustainable difference in Bond investing. Thanks~
I believe (though I can't prove per se) that it can make a sustainable difference because I've killed a lot of time comparing the performance of Vanguard Wellesley to comparable (and cheaper) indexes over very long periods, and Wellesley just absolutely crushes them (so vs. an index proxy mix of what Wellesley holds). Since it's roughly 2/3rds bonds, I assume at least some, if not most of that, is being done on the bond side. I'm not talking 5 or 10 years here, because someone can get lucky even that long. I'm talking since the founding of the fund in 1970 (so 48 years ago). Luck doesn't last that long.

If someone questions that, I'd just suggest find the thread Willthrill81, I believe, started not too long ago on Vanguard Wellesley and fire that conversation up in that thread instead of here.
Last edited by azanon on Tue Nov 06, 2018 2:38 pm, edited 1 time in total.

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Taylor Larimore
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Re: Actively Managed Bond Funds

Post by Taylor Larimore » Tue Nov 06, 2018 2:37 pm

ChinchillaWhiplash wrote:
Tue Nov 06, 2018 1:03 pm
There are some actively managed bond funds that have outperformed TBM over a long period of time in total returns. Some have decent ER too. An example: USAIX income fund (intermediate bonds) ER = 0.49 vs. VBMFX. https://www.portfoliovisualizer.com/bac ... sisResults
Plug them into link as it did not save the results for some reason. The improved performance came at a cost of a little more risk, larger max drawdown, and higher correlation to US equities.
ChinchillaWhiplast:

Bonds are for safety. Stocks are for higher return.

In the 2008 bear market USAA Income Fund (USAIX) fell -5.04%. Vanguard Total Bond Market Index Fund (VBTLX) gained +5.15% (a 10.19% difference).

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

azanon
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Re: Actively Managed Bond Funds

Post by azanon » Tue Nov 06, 2018 2:41 pm

I have to disagree with the above poster. The only bonds I would refer to as being designed for safety almost exclusively are Short-term US treasury bills. Pretty much all other types (basically most of them) also have return as a reason for their purchase to varying, increasing degrees (return expectations being higher as duration is increased or quality is decreased).

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Doc
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Re: Actively Managed Bond Funds

Post by Doc » Tue Nov 06, 2018 2:47 pm

Taylor Larimore wrote:
Tue Nov 06, 2018 2:37 pm
ChinchillaWhiplash wrote:
Tue Nov 06, 2018 1:03 pm
There are some actively managed bond funds that have outperformed TBM over a long period of time in total returns. Some have decent ER too. An example: USAIX income fund (intermediate bonds) ER = 0.49 vs. VBMFX. https://www.portfoliovisualizer.com/bac ... sisResults
Plug them into link as it did not save the results for some reason. The improved performance came at a cost of a little more risk, larger max drawdown, and higher correlation to US equities.
ChinchillaWhiplast:

Bonds are for safety. Stocks are for higher return.

In the 2008 bear market USAA Income Fund (USAIX) fell -5.04%. Vanguard Total Bond Market Index Fund (VBTLX) gained +5.15% (a 10.19% difference).

Best wishes.
Taylor
And in 2008 a $10,000 investment in Vanguard Total Bond Market Index Fund (VBTLX) outperformed Pimco Total Return PTTRX by a whopping $33.
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.

Admiral
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Re: Actively Managed Bond Funds

Post by Admiral » Tue Nov 06, 2018 3:12 pm

azanon wrote:
Tue Nov 06, 2018 2:41 pm
I have to disagree with the above poster. The only bonds I would refer to as being designed for safety almost exclusively are Short-term US treasury bills. Pretty much all other types (basically most of them) also have return as a reason for their purchase to varying, increasing degrees (return expectations being higher as duration is increased or quality is decreased).
I think you're missing Taylor's point. If you want to chase returns by taking on more risk, the place to do so is equities, not bonds. Nobody buys bonds with the intent of losing money. The issue is at what risk (and added cost) higher return?

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Doc
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Re: Actively Managed Bond Funds

Post by Doc » Tue Nov 06, 2018 5:13 pm

Admiral wrote:
Tue Nov 06, 2018 3:12 pm
I think you're missing Taylor's point. If you want to chase returns by taking on more risk, the place to do so is equities, not bonds. Nobody buys bonds with the intent of losing money. The issue is at what risk (and added cost) higher return?
If the intent is to never, ever lose money the fund of choice would be a short term Treasury. Taylor negates his own "bonds are for safety" mantra by choosing an intermediate term bond fund with only a AA credit rating.

That is not to say that one should choose a bond fund primarily based on its return. Risk and return are a trade off. Choosing a TBM fund is an example of that trade-off.

If one wants to answer the active/index question one needs to establish what risk level is appropriate for the individual and then compare only funds with similar risk profiles. I think that idea is what alex_686 was describing.
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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Taylor Larimore
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Re: Actively Managed Bond Funds

Post by Taylor Larimore » Tue Nov 06, 2018 7:18 pm

Doc wrote: And in 2008 a $10,000 investment in Vanguard Total Bond Market Index Fund (VBTLX) outperformed Pimco Total Return PTTRX by a whopping $33.
PTTRX has been a great fund. However it requires a one-million dollar minimum investment.

In my opinion, ANY good quality safe investment (cash, CDs, Treasuries, short- or intermediate-term bond fund, is suitable for the fixed-income portion of a portfolio. I chose Total Bond Market for The Three-Fund Portfolio primarily for its broad diversification (the only "free-lunch" in investing).

Others, much smarter than I, seem to agree because Vanguard Total Bond Market Index Fund is now the largest bond fund in the world.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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alec
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Re: Actively Managed Bond Funds

Post by alec » Tue Nov 06, 2018 7:38 pm

Binx wrote:
Tue Nov 06, 2018 11:27 am
Fidelity has been promoting the active management of Bond Funds/ETF's.
Their position is that that investors can find alpha by taking advantage of
the expert analysis of active managers. It is interesting to me that by doing
this Fidelity is essentially admitting that active management has NOT returned
alpha in the Equities side. Does anyone here believe that active management
can make a sustainable difference in Bond investing. Thanks~
"Bogle on Mutual Funds" and several of his speeches with charts convinced me that it's all about costs. The more a bond fund charges in fees, the more risk it has to take to compensate to make up those fees through buying higher yielding bonds. I'd be more than happy to use an actively managed bond fund if it's cheap - like Vanguard's muni funds. When my 401(k) only offered PTTRX and some other higher cost bond funds, I used PTTRX. But now that we have Vanguard's TBM institutional fund for 0.04%, I switched rather than paying 0.55% for PTTRX.
"It is difficult to get a man to understand something, when his salary depends upon his not understanding it!" - Upton Sinclair

KJVanguard
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Re: Actively Managed Bond Funds

Post by KJVanguard » Tue Nov 06, 2018 7:59 pm

I invest all my bond money in an active Vanguard bond fund, though they have fees that are very index-fund-like. It all boils down to cost.

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alec
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Re: Actively Managed Bond Funds

Post by alec » Tue Nov 06, 2018 8:05 pm

Here are Bogle's speeches. The one on bonds I was thinking of is:

Bond Funds: Treadmill to Oblivion?
"It is difficult to get a man to understand something, when his salary depends upon his not understanding it!" - Upton Sinclair

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Taylor Larimore
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Bogle's Brilliance

Post by Taylor Larimore » Tue Nov 06, 2018 8:54 pm

alec wrote:
Tue Nov 06, 2018 8:05 pm
Here are Bogle's speeches. The one on bonds I was thinking of is:

Bond Funds: Treadmill to Oblivion?
alec:

In my opinion, Mr. Bogle's speech, "Bond Funds: Treadmill to Oblivion" demonstrates the depth and brilliance of Jack's mind more than any other.

Thank you and best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

azanon
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Re: Actively Managed Bond Funds

Post by azanon » Wed Nov 07, 2018 8:38 am

Admiral wrote:
Tue Nov 06, 2018 3:12 pm
azanon wrote:
Tue Nov 06, 2018 2:41 pm
I have to disagree with the above poster. The only bonds I would refer to as being designed for safety almost exclusively are Short-term US treasury bills. Pretty much all other types (basically most of them) also have return as a reason for their purchase to varying, increasing degrees (return expectations being higher as duration is increased or quality is decreased).
I think you're missing Taylor's point. If you want to chase returns by taking on more risk, the place to do so is equities, not bonds. Nobody buys bonds with the intent of losing money. The issue is at what risk (and added cost) higher return?
Well, the statement is just wrong (anything other than T-bills aren't just for safety), so if that's what he intended to imply he should clarify it. And then after doing so, at least also clarify that that's his opinion because millions of investors buy riskier bonds for return, and are of the opinion that it's wise to do so.

Vanguard Total Bond Market Index Fund is rated risk level 2 by Vanguard, implying, according to them, higher risk but potential higher reward than risk level 1 funds. If Taylor believes bonds really are for safety only, there are several risk level 1 bond funds to choose from. There have been years where such a fund lost money, though not in 2008. Well respected Bogleheads (such as W. Bernstein) suggest using safer bonds than Vanguard Total Bond Market. And also there are other highly regarded Bogleheads (e.g. R Ferri) who advocate including a portion of risky bonds for the portfolio.

Always passive
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Re: Actively Managed Bond Funds

Post by Always passive » Wed Nov 07, 2018 8:46 am

I own all my short term bonds through Pimco Enhanced Short Term Bond (LDUR) and I have been very happy with it. Some may say that Pimco takes more risk, but the statistics (Morningstar) do not confirm that.

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Taylor Larimore
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Re: Actively Managed Bond Funds

Post by Taylor Larimore » Wed Nov 07, 2018 9:55 am

Azinon:

I wrote:
Bonds are for safety. Stocks are for higher returns.
You wrote:
Well, the statement is just wrong (anything other than T-bills aren't just for safety), so if that's what he intended to imply he should clarify it.
This earlier post should clarify it.
Taylor wrote:In my opinion, ANY good quality safe investment (cash, CDs, Treasuries, short- or intermediate-term bond fund, is suitable for the fixed-income portion of a portfolio. I chose Total Bond Market for The Three-Fund Portfolio primarily for its broad diversification (the only "free-lunch" in investing).

Others, much smarter than I, seem to agree because Vanguard Total Bond Market Index Fund is now the largest bond fund in the world.
Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

Dave55
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Re: Actively Managed Bond Funds

Post by Dave55 » Wed Nov 07, 2018 10:01 am

Binx wrote:
Tue Nov 06, 2018 11:27 am
Fidelity has been promoting the active management of Bond Funds/ETF's.
Their position is that that investors can find alpha by taking advantage of
the expert analysis of active managers. It is interesting to me that by doing
this Fidelity is essentially admitting that active management has NOT returned
alpha in the Equities side. Does anyone here believe that active management
can make a sustainable difference in Bond investing. Thanks~
Yes, there is alpha in active bond funds. Dodge and Cox Income DODIX fund has beaten the AGG for the past 1, 3, 5, 10 and 15 year periods. Doubleline Total Bond DBLTX has beaten the AGG for past 1, 3, and 5 year periods. Fidelity Total Bond FTBFX fund has beaten the AGG for the past 1, 3, 5, 10 and 15 year periods. There are other funds too that have beaten the AGG. These funds do take "risks" and make "sub sector bets" to do so, which is where the passive bond folks would say that by taking those extra risks the funds could get hurt. Many or most folks here are passive index investors and do not use active managed funds.

Disclaimer: I own Vanguard total bond, Vanguard Investment Grade and Vanguard Tax Free.

Dave

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Doc
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Re: Actively Managed Bond Funds

Post by Doc » Wed Nov 07, 2018 10:25 am

Taylor Larimore wrote:
Wed Nov 07, 2018 9:55 am
This earlier post should clarify it.
Taylor wrote:
In my opinion, ANY good quality safe investment (cash, CDs, Treasuries, short- or intermediate-term bond fund, is suitable for the fixed-income portion of a portfolio. I chose Total Bond Market for The Three-Fund Portfolio primarily for its broad diversification (the only "free-lunch" in investing).

Others, much smarter than I, seem to agree because Vanguard Total Bond Market Index Fund is now the largest bond fund in the world.
Taylor it doesn't clarify it. It muddies the water even more. You say "bonds are for safety" and you also say "ANY good good quality safe investment" and include intermediate bond funds and TBM in the list. Both of these have a risk rating of 2 according to Vangaurd as was pointed out by Azinpon.

Saving "bonds are for safety" and then including not so safe bond funds in your list is misleading to the less experienced investors who frequent this board.

"Bonds are for safety" also begs the question safety for what? Safe for the bonds portion only or safe for the entire portfolio.

A three fund portfolio is fine but using TBM as the fixed income leg of a high equity portfolio is probably not the best choice.
Swensen's well-diversified, equity-oriented portfolio includes the following asset classes. The percentages are the recommended policy targets:

Domestic Equities (30%)
Foreign developed equities (15%)
Emerging market equities (5%)
Real estate (20%)
U.S. Treasury bonds (15%)
U.S. Treasury Inflation-Protected Securities (15%)
https://seekingalpha.com/article/531591 ... -portfolio
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Artful Dodger
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Re: Actively Managed Bond Funds

Post by Artful Dodger » Wed Nov 07, 2018 5:43 pm

I chose some time ago to use Fidelity's Total Bond Fund (FTBFX) instead of a bond index fund. For what it's worth, I just compared the performance to the Vanguard BND fund. BND has a .05% expense ratio. FTBFX is at .45%. Average annual returns for BND 1 yr -2.12%, 3 yrs .96%, 5 yrs 1.76%, 10 yrs 3.8%. FTBFX 1 yr -2.18%, 3 yrs 2.17%, 5 yrs 2.46%, 10 yrs 5.56%. Looks to have been a good decision. I also mix in some Artisan High Income and Vanguard Corp High Income. I am about half invested in actual bonds and CDS for my fixed income portion of portfolio.

I'm a true believer when it comes to equities. Almost all is in index funds. I think having some active management on the bond side provides enough value to offset the higher expense ratio.

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Re: Actively Managed Bond Funds

Post by welderwannabe » Wed Nov 07, 2018 6:18 pm

Im for cheap funds. I am less of a purist on active vs indexed as long as they are fairly prices.

As one of the above poster mentioned, a lot of the Vanguard bond funds loved on here (like VWITX) are actively managed.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

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