"Stock-picking" bonds?

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CorporateFinGuy
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"Stock-picking" bonds?

Post by CorporateFinGuy »

Hello!

This will be my first post on this forum.

So, fund managers (and everyone else) are unable to successfully stock pick over a long-term time period.

However, are fund managers (and others) able to successfully, over a long-term time period, "pick" bonds?

I am mainly talking about sovereign bonds since I assume corporate bonds still is hard to "pick" considering they involve industry and location risk, which one cannot foresee. On the other hand, corporate bonds will be paid back before equity holders get any money in the case of bankruptcy (I believe?), so I assume it's still easier to "pick" corporate bonds than stocks.

On the other hand, since the market is efficient, all credit ratings must already be priced in?

I have been pondering this for the last few days, but I cant come to a conclusion on my own. I have also been searching for an answer online, but cant find anything relating to whether or not one can successfully "pick" bonds any better than one can pick stocks.

Best regards,

CorporateFinGuy
sycamore
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Re: "Stock-picking" bonds?

Post by sycamore »

Welcome to the forum CorporateFinGuy!

Some questions for you (and anyone thinking about this):
What does it mean to be successful at picking bonds?
Does it mean never buying any bond whose issuer delays an interest payment, or defaults or goes bankrupt?
Does it mean the picked bonds return the same amount as some bogey (which one?) but with less "risk" (usually meaning volatility)?
Does it mean beating the bogey before or after taxes?
Does it mean beating inflation and by how much?
How long/consistent does one have to be? 1 year, 10 years straight, 7 out of 10 years?

And of course, how does a retail investor find the successful bond pickers?

I'm sure there are some good bond pickers out there but I have no reason to believe I can pick them.
alex_686
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Re: "Stock-picking" bonds?

Post by alex_686 »

Welcome!

Picking bonds is easier than stocks. The indexes are less efficient than stock indexes. There is a class of semi-passive funds that regularly beat their indexes by a few bps. This is after fees. This very much includes corporate bonds.

If we are talking about macro funds, where the manager is betting on the directions of global interest rates, then the answer is no. This section of the market is more efficient than the stock market.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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whodidntante
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Re: "Stock-picking" bonds?

Post by whodidntante »

If you take a weighted average of every fund labeled passive and every fund labeled active, active management probably does add value. The problem is, they don't add enough value to cover their expenses. My primary objection to active management is that it is not free. Or, if we believe that active management has to cost something, then it costs too much. There are other problems, but that's the one that makes it a non-starter to me.

If you're going to go active, find a list of the funds that provide exposure to the asset class you want. Sort by net ER. Then buy the cheapest one.
Independent George
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Re: "Stock-picking" bonds?

Post by Independent George »

According to the SPIVA scorecard, investment-grade short & intermediate bond managers as a whole did better than other sectors; over 15 years, active managers outperformed their benchmarks 32% and 27% of the time respectively. The only other category that fared better was Global Income Funds at 39%.

All three are below 50%, but they did well enough that I'd say those sectors are considerably less efficient than the stock market as a whole. I own Welleseley, which invests heavily in intermediate-term bonds, and have been more than pleased with its performance over the last decade.
burritoLover
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Re: "Stock-picking" bonds?

Post by burritoLover »

This has been debunked - it was simply the case of the outperforming managers taking on more credit or term risk than the benchmark.
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CorporateFinGuy
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Re: "Stock-picking" bonds?

Post by CorporateFinGuy »

sycamore wrote: Wed Sep 09, 2020 7:04 pm Welcome to the forum CorporateFinGuy!

Some questions for you (and anyone thinking about this):
What does it mean to be successful at picking bonds?
Does it mean never buying any bond whose issuer delays an interest payment, or defaults or goes bankrupt?
Does it mean the picked bonds return the same amount as some bogey (which one?) but with less "risk" (usually meaning volatility)?
Does it mean beating the bogey before or after taxes?
Does it mean beating inflation and by how much?
How long/consistent does one have to be? 1 year, 10 years straight, 7 out of 10 years?

And of course, how does a retail investor find the successful bond pickers?

I'm sure there are some good bond pickers out there but I have no reason to believe I can pick them.
Thank you sycamore!'

For me, successfully picking bonds means to have a higher return at the same amount of risk after taxes.
I feel like it has to be for a 10+ year time frame since it other ways feels like it may just be luck.

I don't want to try to find the successful bond picker. I am thinking more in the way of if I theoretically could become the successful bond picker myself. But I was doubting if such a thing as a successful bond picker even existed.

Why do you think that you would not be able to successfully pick bonds?
alex_686 wrote: Wed Sep 09, 2020 7:15 pm Welcome!

Picking bonds is easier than stocks. The indexes are less efficient than stock indexes. There is a class of semi-passive funds that regularly beat their indexes by a few bps. This is after fees. This very much includes corporate bonds.

If we are talking about macro funds, where the manager is betting on the directions of global interest rates, then the answer is no. This section of the market is more efficient than the stock market.
Thank you alex_686!

How would one go about picking bonds?
whodidntante wrote: Wed Sep 09, 2020 7:15 pm If you take a weighted average of every fund labeled passive and every fund labeled active, active management probably does add value. The problem is, they don't add enough value to cover their expenses. My primary objection to active management is that it is not free. Or, if we believe that active management has to cost something, then it costs too much. There are other problems, but that's the one that makes it a non-starter to me.

If you're going to go active, find a list of the funds that provide exposure to the asset class you want. Sort by net ER. Then buy the cheapest one.
I see. If active management would be free, would you choose that over passive funds? What other problems do you have with active management other than the fees?
burritoLover wrote: Wed Sep 09, 2020 8:34 pm This has been debunked - it was simply the case of the outperforming managers taking on more credit or term risk than the benchmark.
I see. So you believe that one cannot successfully pick bonds then?
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CorporateFinGuy
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Re: "Stock-picking" bonds?

Post by CorporateFinGuy »

To clarify my goal with this question, the reason I ask this is not since I want to move my own money into actively managed funds.

I am a business student, and have the opportunity to apply to the "Investment Commité" at my school, which actively manages the business school's medium and long-term investments. They have two groups, the stock group and the bond group. Since I believe the stock market is efficient, I don't see the point in trying to beat the index. However, I was exploring the idea of if there was a possibility to successfully bond pick, in which case I would apply to the bond group. I am not interested in working with investments in the future (I want to get into corporate finance), I just see it as an opportunity to get some business related experience onto my CV.

I do however not feel good about applying to the bond group unless I believe there is a theoretical possibility that I actually could beat the index (even if I don't succeed).

That's the reason I am asking this question. The question is basically if it is theoretically possible to stock pick bonds successfully over a long time period (which would remove the chance of luck).
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Re: "Stock-picking" bonds?

Post by Grt2bOutdoors »

You can successfully pick bonds but you need to have a firm understanding of economic conditions which affect interest rates, political regimes, specific issuer, etc. Overweight vs underweight of issuers would help you. It’s credit risk which affects return if you are staying within a specific term. If you are going into Corporate Finance, the bond group will help you more. If you are going into investing-then equity but bonds are dual hatted - corporate finance/funding, acquisition, sales.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
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CorporateFinGuy
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Re: "Stock-picking" bonds?

Post by CorporateFinGuy »

Grt2bOutdoors wrote: Thu Sep 10, 2020 11:03 am You can successfully pick bonds but you need to have a firm understanding of economic conditions which affect interest rates, political regimes, specific issuer, etc. Overweight vs underweight of issuers would help you. It’s credit risk which affects return if you are staying within a specific term. If you are going into Corporate Finance, the bond group will help you more. If you are going into investing-then equity but bonds are dual hatted - corporate finance/funding, acquisition, sales.
Thank you!

Is it theoretically possible to stock pick successfully aswell (non-micro cap stocks)? Or does it only work with bonds?
Explorer
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Re: "Stock-picking" bonds?

Post by Explorer »

whodidntante wrote: Wed Sep 09, 2020 7:15 pm If you take a weighted average of every fund labeled passive and every fund labeled active, active management probably does add value. The problem is, they don't add enough value to cover their expenses. My primary objection to active management is that it is not free. Or, if we believe that active management has to cost something, then it costs too much. There are other problems, but that's the one that makes it a non-starter to me.

If you're going to go active, find a list of the funds that provide exposure to the asset class you want. Sort by net ER. Then buy the cheapest one.
Vanguard has many active funds with very low ER in my view.
hayesfj
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Re: "Stock-picking" bonds?

Post by hayesfj »

CorporateFinGuy,

I spent most of my career in Corporate Finance at a large company, and then later at a small company, both in the Chemical industry. Corporate Finance is a very broad area so your choice might be influenced by which area of finance you find the most interesting. If you are interested in a Treasury role, managing cash, commercial paper, stock issuance, debt structure, etc, then definitely go the Bond Team route and learn how to read a balance sheet. If you are more interested in Financial / Business Analysis with aspects of Volumes and Prices, Cost of Goods Sold, Expenses, Margins, Working Capital Management, and Returns on Investment, then I would recommend the Stock Team.

Best of luck with your education.
alex_686
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Re: "Stock-picking" bonds?

Post by alex_686 »

CorporateFinGuy wrote: Thu Sep 10, 2020 10:18 am
alex_686 wrote: Wed Sep 09, 2020 7:15 pm Welcome!

Picking bonds is easier than stocks. The indexes are less efficient than stock indexes. There is a class of semi-passive funds that regularly beat their indexes by a few bps. This is after fees. This very much includes corporate bonds.

If we are talking about macro funds, where the manager is betting on the directions of global interest rates, then the answer is no. This section of the market is more efficient than the stock market.
Thank you alex_686!

How would one go about picking bonds?
So let us talk about the difference in picking stocks, picking bonds, and indexes.
Grt2bOutdoors wrote: Thu Sep 10, 2020 11:03 am You can successfully pick bonds but you need to have a firm understanding of economic conditions which affect interest rates, political regimes, specific issuer, etc. Overweight vs underweight of issuers would help you. It’s credit risk which affects return if you are staying within a specific term. If you are going into Corporate Finance, the bond group will help you more. If you are going into investing-then equity but bonds are dual hatted - corporate finance/funding, acquisition, sales.
Grt2bOutdoors is halfway wrong. What he is suggesting is a valid path - long, rocky and hard. If you want a good example of how to do this well look at Pimco's Total Return Fund. It is a excellent well managed active fund that is totally bonkers. If you want to see a fund where a manager flips multiple switches to 11 start there.

There is another path. Critically, the point of building a portfolio is not to maximize returns for a given level of risk. It is to meet your goals in terms of return and risk. Focus on that.

With a stock portfolio, the natural neutral path is a market cap index. It is very efficient. It is hard to tailor the risk factors to better match your portfolio's goals. One can tilt towards certain factors. Value, Size, Quality, Low Beta, Momentum are the popular ones. However the effects are modest.

This is easier to do with bonds. The index follows the market. In the past few years the market has shifted in composition. Duration has lengthen, Treasuries have increased, Corporate quality is sliding more towards BBB. Just because the market has shifted, does this mean your portfolio's goals should shift? Or that even your portfolio's goals where ever in alignment with the market?

I would start with figuring out your schools IPS. Or even writing one up. What are their required, desired, and stretch goals. When do they need cash flows. What type of risks are they willing to take. I am assuming that the university is going to be somewhat risk adverse with their bond portfolio, so I would read up on Constant Proportion Portfolio Insurance (CPPI), a rebalancing technique. From here I would deconstruct the requirements into duration and corporate credit risk.

This should lead to a better portfolio than a strictly index portfolio. However, if you have noticed I have not actually left the passive investing sphere yet. I am talking about the factors that one wants to be exposed to. In theory one still find a passive investment that fits.

So, how would one actually start picking bonds? The long answer is to start reading lots of books, start reading lots of articles, start reading lots of bond documents, build Bloomberg spreadsheets, and shop extensively for the bonds that you are looking for.

Seriously, expect to do lots of shopping. You do have have one advantage. Indexes are 'investable', which means that a portfolio manager can dump millions of dollars into the index and not cause any distortions. For stocks this is not a issue. Bonds are different. Indexes cover only about 10% of the most liquid part of the market. That leaves 90% untouched. The Treasury market is one of the most liquid and efficient market out there and yet you can pick up a few bps by buying off-the-run Treasuries verse on-the-run. Most corporate debt has even wider margins.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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CorporateFinGuy
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Re: "Stock-picking" bonds?

Post by CorporateFinGuy »

hayesfj wrote: Thu Sep 10, 2020 11:47 am CorporateFinGuy,

I spent most of my career in Corporate Finance at a large company, and then later at a small company, both in the Chemical industry. Corporate Finance is a very broad area so your choice might be influenced by which area of finance you find the most interesting. If you are interested in a Treasury role, managing cash, commercial paper, stock issuance, debt structure, etc, then definitely go the Bond Team route and learn how to read a balance sheet. If you are more interested in Financial / Business Analysis with aspects of Volumes and Prices, Cost of Goods Sold, Expenses, Margins, Working Capital Management, and Returns on Investment, then I would recommend the Stock Team.

Best of luck with your education.
Thank you!

I am going interested in FP&A, so I guess the Stock Team would be the better fit. But I thought active management did not beat passive management in 95% of the case? Due to that I have mixed feelings of going into active management for my school.. Am I wrong about active management?
alex_686 wrote: Thu Sep 10, 2020 11:59 am
CorporateFinGuy wrote: Thu Sep 10, 2020 10:18 am
alex_686 wrote: Wed Sep 09, 2020 7:15 pm Welcome!

Picking bonds is easier than stocks. The indexes are less efficient than stock indexes. There is a class of semi-passive funds that regularly beat their indexes by a few bps. This is after fees. This very much includes corporate bonds.

If we are talking about macro funds, where the manager is betting on the directions of global interest rates, then the answer is no. This section of the market is more efficient than the stock market.
Thank you alex_686!

How would one go about picking bonds?
So let us talk about the difference in picking stocks, picking bonds, and indexes.
Grt2bOutdoors wrote: Thu Sep 10, 2020 11:03 am You can successfully pick bonds but you need to have a firm understanding of economic conditions which affect interest rates, political regimes, specific issuer, etc. Overweight vs underweight of issuers would help you. It’s credit risk which affects return if you are staying within a specific term. If you are going into Corporate Finance, the bond group will help you more. If you are going into investing-then equity but bonds are dual hatted - corporate finance/funding, acquisition, sales.
Grt2bOutdoors is halfway wrong. What he is suggesting is a valid path - long, rocky and hard. If you want a good example of how to do this well look at Pimco's Total Return Fund. It is a excellent well managed active fund that is totally bonkers. If you want to see a fund where a manager flips multiple switches to 11 start there.

There is another path. Critically, the point of building a portfolio is not to maximize returns for a given level of risk. It is to meet your goals in terms of return and risk. Focus on that.

With a stock portfolio, the natural neutral path is a market cap index. It is very efficient. It is hard to tailor the risk factors to better match your portfolio's goals. One can tilt towards certain factors. Value, Size, Quality, Low Beta, Momentum are the popular ones. However the effects are modest.

This is easier to do with bonds. The index follows the market. In the past few years the market has shifted in composition. Duration has lengthen, Treasuries have increased, Corporate quality is sliding more towards BBB. Just because the market has shifted, does this mean your portfolio's goals should shift? Or that even your portfolio's goals where ever in alignment with the market?

I would start with figuring out your schools IPS. Or even writing one up. What are their required, desired, and stretch goals. When do they need cash flows. What type of risks are they willing to take. I am assuming that the university is going to be somewhat risk adverse with their bond portfolio, so I would read up on Constant Proportion Portfolio Insurance (CPPI), a rebalancing technique. From here I would deconstruct the requirements into duration and corporate credit risk.

This should lead to a better portfolio than a strictly index portfolio. However, if you have noticed I have not actually left the passive investing sphere yet. I am talking about the factors that one wants to be exposed to. In theory one still find a passive investment that fits.

So, how would one actually start picking bonds? The long answer is to start reading lots of books, start reading lots of articles, start reading lots of bond documents, build Bloomberg spreadsheets, and shop extensively for the bonds that you are looking for.

Seriously, expect to do lots of shopping. You do have have one advantage. Indexes are 'investable', which means that a portfolio manager can dump millions of dollars into the index and not cause any distortions. For stocks this is not a issue. Bonds are different. Indexes cover only about 10% of the most liquid part of the market. That leaves 90% untouched. The Treasury market is one of the most liquid and efficient market out there and yet you can pick up a few bps by buying off-the-run Treasuries verse on-the-run. Most corporate debt has even wider margins.
Thank you so much, that was extremely informative! I really appreciate it. I am going to read up on those things and learn as much about them as I can.
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whodidntante
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Re: "Stock-picking" bonds?

Post by whodidntante »

CorporateFinGuy wrote: Thu Sep 10, 2020 10:18 am
whodidntante wrote: Wed Sep 09, 2020 7:15 pm If you take a weighted average of every fund labeled passive and every fund labeled active, active management probably does add value. The problem is, they don't add enough value to cover their expenses. My primary objection to active management is that it is not free. Or, if we believe that active management has to cost something, then it costs too much. There are other problems, but that's the one that makes it a non-starter to me.

If you're going to go active, find a list of the funds that provide exposure to the asset class you want. Sort by net ER. Then buy the cheapest one.
I see. If active management would be free, would you choose that over passive funds? What other problems do you have with active management other than the fees?
I would prefer free active, with a few constraints.
- Inside taxable accounts I insist on ETFs. I do not expect to own a mutual fund in taxable for the remainder of my life.
- In all cases I prefer ETFs because they are structurally more efficient and considerably more portable among brokerages.
- I would not abide certain practices, like excessive turnover, or strategies that I am not OK with. I would also not accept ways of reintroducing cost.
- Absolutely no purchase fees, redemption fees, frequent trading policies, or gates. This would disqualify a lot of mutual funds.
- There can be no detectable signs of incompetent or unethical management.
- It must provide exposure to an asset class that I want to own.
alex_686
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Re: "Stock-picking" bonds?

Post by alex_686 »

CorporateFinGuy wrote: Thu Sep 10, 2020 2:16 pm I am going interested in FP&A, so I guess the Stock Team would be the better fit. But I thought active management did not beat passive management in 95% of the case? Due to that I have mixed feelings of going into active management for my school.. Am I wrong about active management?
There are 2 legs to this.

The average active manager generates a extra 1% of alpha before fees. There is a long and nuanced reason why the average retail investor does not see this. As part of that, remember that the reason why the market is efficient is that lots of highly skilled, and thus highly compensated, people are working in the field. hat being said, not all markets are as efficient as the S&P 500.

The second leg is that even if we assume markets are totally efficient there is a fair amount work to be done from a top down perspective. It takes some skill to figure out how stock analysts are evaluateing your company so you can correctly calibrate dividends, stock buy backs, issuing new bonds, etc. Or what AA is needed to fund a pension or investment trust. etc.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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CorporateFinGuy
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Re: "Stock-picking" bonds?

Post by CorporateFinGuy »

alex_686 wrote: Thu Sep 10, 2020 4:25 pm
CorporateFinGuy wrote: Thu Sep 10, 2020 2:16 pm I am going interested in FP&A, so I guess the Stock Team would be the better fit. But I thought active management did not beat passive management in 95% of the case? Due to that I have mixed feelings of going into active management for my school.. Am I wrong about active management?
There are 2 legs to this.

The average active manager generates a extra 1% of alpha before fees. There is a long and nuanced reason why the average retail investor does not see this. As part of that, remember that the reason why the market is efficient is that lots of highly skilled, and thus highly compensated, people are working in the field. hat being said, not all markets are as efficient as the S&P 500.

The second leg is that even if we assume markets are totally efficient there is a fair amount work to be done from a top down perspective. It takes some skill to figure out how stock analysts are evaluateing your company so you can correctly calibrate dividends, stock buy backs, issuing new bonds, etc. Or what AA is needed to fund a pension or investment trust. etc.
Would the average active manager therefore be better off managing his own investment portfolio, instead of choose index funds? Do we Bogleheads tell people to choose index funds because most people are unable to beat the index, and that we assume that the people we give the advice to are one of those people? If a decent, average active manager came onto the Bogleheads forum and asked if he should choose a index fund vs actively managing his portfolio by himself, would you recommend him to manage it by himself as long as he's fine with putting the work in? Or would an index fund still be the correct advice to give him according to you?
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Re: "Stock-picking" bonds?

Post by whodidntante »

Explorer wrote: Thu Sep 10, 2020 11:21 am
whodidntante wrote: Wed Sep 09, 2020 7:15 pm If you take a weighted average of every fund labeled passive and every fund labeled active, active management probably does add value. The problem is, they don't add enough value to cover their expenses. My primary objection to active management is that it is not free. Or, if we believe that active management has to cost something, then it costs too much. There are other problems, but that's the one that makes it a non-starter to me.

If you're going to go active, find a list of the funds that provide exposure to the asset class you want. Sort by net ER. Then buy the cheapest one.
Vanguard has many active funds with very low ER in my view.
Low-cost active management is Vanguard's last remaining competitive advantage, in my opinion.
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Re: "Stock-picking" bonds?

Post by JBTX »

CorporateFinGuy wrote: Thu Sep 10, 2020 5:55 pm
alex_686 wrote: Thu Sep 10, 2020 4:25 pm
CorporateFinGuy wrote: Thu Sep 10, 2020 2:16 pm I am going interested in FP&A, so I guess the Stock Team would be the better fit. But I thought active management did not beat passive management in 95% of the case? Due to that I have mixed feelings of going into active management for my school.. Am I wrong about active management?
There are 2 legs to this.

The average active manager generates a extra 1% of alpha before fees. There is a long and nuanced reason why the average retail investor does not see this. As part of that, remember that the reason why the market is efficient is that lots of highly skilled, and thus highly compensated, people are working in the field. hat being said, not all markets are as efficient as the S&P 500.

The second leg is that even if we assume markets are totally efficient there is a fair amount work to be done from a top down perspective. It takes some skill to figure out how stock analysts are evaluateing your company so you can correctly calibrate dividends, stock buy backs, issuing new bonds, etc. Or what AA is needed to fund a pension or investment trust. etc.
Would the average active manager therefore be better off managing his own investment portfolio, instead of choose index funds? Do we Bogleheads tell people to choose index funds because most people are unable to beat the index, and that we assume that the people we give the advice to are one of those people? If a decent, average active manager came onto the Bogleheads forum and asked if he should choose a index fund vs actively managing his portfolio by himself, would you recommend him to manage it by himself as long as he's fine with putting the work in? Or would an index fund still be the correct advice to give him according to you?
I have heard it said, anecdotally, that a wall street secret is many money managers invest their own money in index funds. I have no way to evaluate what extent that is true. (Jason Zweig said it on PBS Retirement Gamble)
JASON ZWEIG, Wall St. Journal, "The Intelligent Investor" Column: The verdict is in. It's been in for at least a quarter century. All else being equal, you should buy the cheaper fund. And one of the ultimate dirty secrets of the fund industry is that a lot of people who run other fund companies own index funds in their— in their own accounts and don't talk about it, I mean, unless you put a couple beers in them.
Remember like most places on the Internet, there are a variety of opinions on this site. Unlike what some assert in this thread, the general consensus is passive on average through time always beats indexes, and I don't know of any consistent evidence that active money managers beat index funds, on average, even before fees. Stocks or bonds. At least not materially. Of course you can always find exceptions.
alex_686
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Re: "Stock-picking" bonds?

Post by alex_686 »

CorporateFinGuy wrote: Thu Sep 10, 2020 5:55 pm Would the average active manager therefore be better off managing his own investment portfolio, instead of choose index funds? Do we Bogleheads tell people to choose index funds because most people are unable to beat the index, and that we assume that the people we give the advice to are one of those people? If a decent, average active manager came onto the Bogleheads forum and asked if he should choose a index fund vs actively managing his portfolio by himself, would you recommend him to manage it by himself as long as he's fine with putting the work in? Or would an index fund still be the correct advice to give him according to you?
Working in the field, in a odd little nitch, sitting alongside portfolio managers and traders, I can say that they almost never trade or own individual bonds. Maybe you will find a Treasury ladder or some individual TIPS. It takes a fairly large scale to run a bond portfolio well. Just think of the drag when trying to reinvest coupon income. Extra return in a bond portfolio is measured in bps, or a extra .01%. This is not true with a stock portfolio. With a good idea plus luck and you can get a good return with a single concentrated bet.

However, consider for a second what indexing is, how index investing works, and what is active management.

There are a fair number of Bogleheads who pick a asset class or lean towards a asset class. Those who overweight or only invest in long term Treasuries. Are these active traders? Those who invest and automatically roll 1 year Treasuries? Those who build a liability matching portfolio. Are these active managers? Or are they just lining up credit and duration risk to better match their portfolio goals?
whodidntante wrote: Thu Sep 10, 2020 6:06 pm Low-cost active management is Vanguard's last remaining competitive advantage, in my opinion.
I will modestly take the other side. These are mainly 'semi-active' funds. They are very common and Vanguard funds are not very exceptional. You will notice that most of them are in asset classes where the markets are inefficient and the index quality is low. If there are known exploitable flaws in the index methodology, why slavishly follow the index as a index fund must? Match the index in general and in spirit but not to the letter. Lots of funds are able to crank out a few extra bps this way.

However, are we even at full blow active management yet?
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
reln
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Re: "Stock-picking" bonds?

Post by reln »

CorporateFinGuy wrote: Wed Sep 09, 2020 4:37 pm Hello!

This will be my first post on this forum.

So, fund managers (and everyone else) are unable to successfully stock pick over a long-term time period.

However, are fund managers (and others) able to successfully, over a long-term time period, "pick" bonds?

I am mainly talking about sovereign bonds since I assume corporate bonds still is hard to "pick" considering they involve industry and location risk, which one cannot foresee. On the other hand, corporate bonds will be paid back before equity holders get any money in the case of bankruptcy (I believe?), so I assume it's still easier to "pick" corporate bonds than stocks.

On the other hand, since the market is efficient, all credit ratings must already be priced in?

I have been pondering this for the last few days, but I cant come to a conclusion on my own. I have also been searching for an answer online, but cant find anything relating to whether or not one can successfully "pick" bonds any better than one can pick stocks.

Best regards,

CorporateFinGuy
Vanguard has been able to successfully pick bonds in their active bond funds.
Explorer
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Re: "Stock-picking" bonds?

Post by Explorer »

whodidntante wrote: Thu Sep 10, 2020 6:06 pm
Explorer wrote: Thu Sep 10, 2020 11:21 am
whodidntante wrote: Wed Sep 09, 2020 7:15 pm If you take a weighted average of every fund labeled passive and every fund labeled active, active management probably does add value. The problem is, they don't add enough value to cover their expenses. My primary objection to active management is that it is not free. Or, if we believe that active management has to cost something, then it costs too much. There are other problems, but that's the one that makes it a non-starter to me.

If you're going to go active, find a list of the funds that provide exposure to the asset class you want. Sort by net ER. Then buy the cheapest one.
Vanguard has many active funds with very low ER in my view.
Low-cost active management is Vanguard's last remaining competitive advantage, in my opinion.
I use a lot of VG active funds in my portfolio.
alex_686
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Re: "Stock-picking" bonds?

Post by alex_686 »

So one more thought to the OP on picking stocks and bonds, Bogleheads, and passive investing. There are 2 different ways to build a portfolio.

There is bottom up. This is what you might be thinking about when talking about active investing. Traders shouting out orders. Warren Buffet reading annual reports to find pearls among the dross. This is a valid path.

There is top down. Passive investing is one way. Bogleheads is a simplified version. When I talked about picking bonds I was talking top down, but then again I am a top down as well. Factors is top down. This can be credit and duration risk for bonds, or Value for stocks. Or you can be a active investor. What Grt2bOutdoors was talking about was also top down.

2 points.

If you want to be a successful top down investor, passive or active, you are going to need some of the tools of a bottom up investor. That is, the fundamentals of how to a bond, a equity, and a option. How to read a balance sheet and to think through what might happen in the future.

If you are trying to figure out which path you want to go down, try to hang out with some of the different people. What is their personality and what is your personality. Equity people tend to be optimistic extroverts and risk seekers, bond people tend to be wonkish risk adverse introverts. Don't worry if you don't match the personality type, I have know happy and successful people who go against the grain. Just recognize that these are the type of people you will be working with.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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whodidntante
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Re: "Stock-picking" bonds?

Post by whodidntante »

alex_686 wrote: Thu Sep 10, 2020 7:57 pm
whodidntante wrote: Thu Sep 10, 2020 6:06 pm Low-cost active management is Vanguard's last remaining competitive advantage, in my opinion.
I will modestly take the other side. These are mainly 'semi-active' funds. They are very common and Vanguard funds are not very exceptional. You will notice that most of them are in asset classes where the markets are inefficient and the index quality is low. If there are known exploitable flaws in the index methodology, why slavishly follow the index as a index fund must? Match the index in general and in spirit but not to the letter. Lots of funds are able to crank out a few extra bps this way.
I agree with your comments. It's like the vanilla pudding of active management. Kind of boring but no one is going to regret eating it.
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Re: "Stock-picking" bonds?

Post by Valuethinker »

alex_686 wrote: Thu Sep 10, 2020 7:57 pm
CorporateFinGuy wrote: Thu Sep 10, 2020 5:55 pm Would the average active manager therefore be better off managing his own investment portfolio, instead of choose index funds? Do we Bogleheads tell people to choose index funds because most people are unable to beat the index, and that we assume that the people we give the advice to are one of those people? If a decent, average active manager came onto the Bogleheads forum and asked if he should choose a index fund vs actively managing his portfolio by himself, would you recommend him to manage it by himself as long as he's fine with putting the work in? Or would an index fund still be the correct advice to give him according to you?
Working in the field, in a odd little nitch, sitting alongside portfolio managers and traders, I can say that they almost never trade or own individual bonds. Maybe you will find a Treasury ladder or some individual TIPS. It takes a fairly large scale to run a bond portfolio well. Just think of the drag when trying to reinvest coupon income. Extra return in a bond portfolio is measured in bps, or a extra .01%. This is not true with a stock portfolio. With a good idea plus luck and you can get a good return with a single concentrated bet.
Given Conflicts-of-Interest rules don't most Portfolio Managers either have money invested in the funds they run (often a requirement of, eg, Hedge Fund investors - "How much of your money is at stake?") or entirely 3rd party? If you happen to own a stock that the house owns, or buys, or sells, you are basically frozen in place?
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Re: "Stock-picking" bonds?

Post by Valuethinker »

whodidntante wrote: Fri Sep 11, 2020 9:01 am
alex_686 wrote: Thu Sep 10, 2020 7:57 pm
whodidntante wrote: Thu Sep 10, 2020 6:06 pm Low-cost active management is Vanguard's last remaining competitive advantage, in my opinion.
I will modestly take the other side. These are mainly 'semi-active' funds. They are very common and Vanguard funds are not very exceptional. You will notice that most of them are in asset classes where the markets are inefficient and the index quality is low. If there are known exploitable flaws in the index methodology, why slavishly follow the index as a index fund must? Match the index in general and in spirit but not to the letter. Lots of funds are able to crank out a few extra bps this way.
I agree with your comments. It's like the vanilla pudding of active management. Kind of boring but no one is going to regret eating it.
Agreed. And it's certainly a part of the Dimensional Fund Advisers "secret sauce".
alex_686
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Re: "Stock-picking" bonds?

Post by alex_686 »

Valuethinker wrote: Fri Sep 11, 2020 9:05 am Given Conflicts-of-Interest rules don't most Portfolio Managers either have money invested in the funds they run (often a requirement of, eg, Hedge Fund investors - "How much of your money is at stake?") or entirely 3rd party? If you happen to own a stock that the house owns, or buys, or sells, you are basically frozen in place?
I have found this rarely the case. Managers' bonuses are normally tied to some risk-adjusted returns verse a index. This is true for many hedge funds as well.

How often does a portfolio manager's personal goals match up with the fund they are managing? I knew a great muni bond manager who should not be personally investing in muni funds. She was young, had student loans and a mortgage, etc.

Conflicts of interest are handled differently. The focus is on front running the house. You can invest along side the house, putting your order in at the same time. Or can crank up a position higher or lower than the house. All of that is fine. There are some weird rules when it comes to taking short term loses.

Also, the focus is on equities, not bonds. Equities is where the real abuse happens. Bonds not so much. Partly because of scale. Partly because there is just not that much profit to be had.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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Re: "Stock-picking" bonds?

Post by Grt2bOutdoors »

alex_686 wrote: Fri Sep 11, 2020 8:57 am So one more thought to the OP on picking stocks and bonds, Bogleheads, and passive investing. There are 2 different ways to build a portfolio.

There is bottom up. This is what you might be thinking about when talking about active investing. Traders shouting out orders. Warren Buffet reading annual reports to find pearls among the dross. This is a valid path.

There is top down. Passive investing is one way. Bogleheads is a simplified version. When I talked about picking bonds I was talking top down, but then again I am a top down as well. Factors is top down. This can be credit and duration risk for bonds, or Value for stocks. Or you can be a active investor. What Grt2bOutdoors was talking about was also top down.

2 points.

If you want to be a successful top down investor, passive or active, you are going to need some of the tools of a bottom up investor. That is, the fundamentals of how to a bond, a equity, and a option. How to read a balance sheet and to think through what might happen in the future.

If you are trying to figure out which path you want to go down, try to hang out with some of the different people. What is their personality and what is your personality. Equity people tend to be optimistic extroverts and risk seekers, bond people tend to be wonkish risk adverse introverts. Don't worry if you don't match the personality type, I have know happy and successful people who go against the grain. Just recognize that these are the type of people you will be working with.
An understanding of the balance sheet, yes. I’d also suggest understanding the statement of cash flows. Not sure if they still teach it in accounting but in a class long ago the professors taught how to reconstruct the balance sheet using statement of cash flows and income statement. You have to enjoy investigating the flow of funds. Understand the cash flow statement to gain a strong picture of the financial ability for the borrower to cover its obligations and ongoing business operations. Enjoy reading - you’ll be doing quite a bit of it.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
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