TSR wrote: ↑
Thu Oct 24, 2019 2:53 pm
What a fascinating thread representing the best of what Bogleheads has to offer. I'm chiming in to say that when my girlfriend was starting her academic job several years ago, she could choose between TIAA and Fidelity, and she was advised by all of her older colleagues to go with TIAA traditional rather than the Fidelity option. They gave her a "just trust me, it's been good to us" kind of explanation. She and I had been steeping ourselves in Bogleheads advice and so I argued that "TIAA can't possibly be that much better than what bond funds can usually offer, so if you can stay the course on bond funds then why not just go with the less opaque investment vehicle?"
My takeaway from this article is that I was right; also, her colleagues were right. That is, this is the rare case where the two options are both pretty good and it's hard to make a strong argument either way. My other takeaway is that there are probably a lot of senior-level professors out there saying the same thing to more junior ones, and there ought to be some better advice than "just trust me." Perhaps that advice is something like, "If you don't want to spend a lot of time thinking about your investments, stick with TIAA for your fixed income. But if you know what you're doing or already have a portfolio with a fixed-income component, you might want to stick with one of Fidelity's low-cost bond funds."
Thanks for the very interesting discussion.
Thank you for your interesting overview.
Since you mentioned Fidelity's low-cost bond funds, I was wondering how to construct a "duration- and quality-mimicking" portfolio, as in the paper's Figure 1, using low-cost Fidelity funds. [Most readers have never wondered this and won't be interested in the rest of this post.]
It'd be straightforward enough to match duration using Fidelity's Intermediate Treasury Bond Index Fund and Fidelity's Long-Term Treasury Bond Index Fund, but I was not able to find a less-than-BBB-quality Fidelity fund to blend with those in order to match the General Account's quality while restricting the expense ratio to below 0.4. Also, Fidelity's GNMA fund has an expense ratio of 0.45, so matching "bond types" would not be possible with less-than-0.4-expense-ratio Fidelity funds. (The Fidelity Mortgage Securities Fund has the same 0.45% expense ratio as the Fidelity GNMA Fund.)
If one relaxes my "0.4 expense ratio" constraint then there is more than one Fidelity portfolio that mimics the General Account. Given that both of the Fidelity Treasury Bond Index funds I mentioned above have very low expense ratios (0.03%), while the Vanguard GNMA fund the paper uses charges 0.21% (Admiral share class 0.11%), the Vanguard High-Yield Corporate charges 0.23% (Admiral share class 0.13%), and the Vanguard Long-term Investment-Grade Fund charges 0.22% (Admiral share class 0.12%), it's natural to ask whether one can find a mimicking Fidelity portfolio whose overall expense ratio is less than that of some of the paper's mimicking Vanguard portfolios. The answer is yes, there is at least one: 78% Fidelity Intermediate Treasury Index, 13% Fidelity Long Treasury Index, and 9% Fidelity High Income Fund. This mimics the General Account and has a weighted expense ratio of 0.09%. (I used durations of 6.38, 18.30, and 2.63, and a "1 minus loss ratio" of 0.8594 for Fidelity High Income.) However, its bond types are 91% government, 0% mortgage, and 9% other, giving a "bond type dist." (as in row 9 of the paper's Table 3) of 62%, which is much higher than the Vanguard alternatives of Tables 3 and 4 because they have more high-quality corporate bonds (and several have more mortgages).
Another Fidelity duration- and quality-mimicking portfolio, Fidelity GNMA 58%, Fidelity Long Treasury Index 33%, and Fidelity High Income 9%, has a better, but still not good, "bond type dist." of 51%, and a weighted expense ratio of 0.33%, which is higher than Vanguard's. (I used a duration of 2.32 for Fidelity GNMA.)
It is hard to construct a duration- and quality-mimicking portfolio using Fidelity funds which has a good "bond type dist." because Fidelity only has one long-term taxable bond fund and it only contains Treasuries. Together with trying to match the General Account's 34% holdings of mortgages, it is hard to get a sufficiently long duration and get close to the General Account's holdings of 50% corporate bonds. The best I could come up with in the limited amount of time I spent thinking about it is a four-fund portfolio using 47% Fidelity Corporate Bond Fund (expense ratio 0.45%), Fidelity GNMA 29%, Fidelity Long Treasury Index 18%, and Fidelity High Income 6%. This gives a "bond type dist." of 9%, which is better than the Vanguard 2- and 3-fund portfolios but not nearly as good as the Vanguard 4-fund portfolios, and has a weighted expense ratio of 0.39%. For the Fidelity Corporate Bond Fund I used a duration of 7.37 and a "1 minus loss ratio" of 0.9910.
A one-fund portfolio of the Fidelity Corporate Bond Fund comes close to mimicking the General Account's 7.59 duration and "1 minus loss ratio" of 0.9874, but again, there is that 0.45% expense ratio, and it only has one type of bond.