Duration (8+) of Wellesley & Wellington Bonds - any concerns for 2021?

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RetireBy55
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Duration (8+) of Wellesley & Wellington Bonds - any concerns for 2021?

Post by RetireBy55 »

Anyone else have concerns about the current Duration (8+) of both Wellesley and Wellington given the strong possibility of inflation increases that we'll likely face in 2021?

Reading the recent Vanguard forecast, they do predict (as do many other economists and research experts) inflation to increase - perhaps by as much as 1% this year.

If that were to happen, both funds would (obviously) incur a "Duration %" (in this case, 8+%) downside hit on the fixed income portion of the fund's portfolio.

With Wellesley holding nearly 60% bonds currently, that'd be roughly a negative 5% impact to total return. Wellington, holding less fixed income as a percentage of the overall portfolio, would obviously be hit less but still could be fairly significantly impacted by an increase in inflation.

Curious if anyone else is concerned by this. We hold a pretty large state in VWIAX and a smaller one in Wellington. I've always liked the consistency of Wellesley and realize it HAS weathered other periods of increasing inflation, but as I have a shorter time horizon than others may have being in early retirement with not as many years to recover, my original reason for holding Wellesley (low volatility, consistent 5-6%+ returns) may come under fire this year if inflation does increase as many are expecting/predicting.

Thanks for any and all feedback and thoughts..
secondopinion
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Re: Duration (8+) of Wellesley & Wellington Bonds - any concerns for 2021?

Post by secondopinion »

RetireBy55 wrote: Fri Feb 05, 2021 1:05 pm Anyone else have concerns about the current Duration (8+) of both Wellesley and Wellington given the strong possibility of inflation increases that we'll likely face in 2021?

Reading the recent Vanguard forecast, they do predict (as do many other economists and research experts) inflation to increase - perhaps by as much as 1% this year.

If that were to happen, both funds would (obviously) incur a "Duration %" (in this case, 8+%) downside hit on the fixed income portion of the fund's portfolio.

With Wellesley holding nearly 60% bonds currently, that'd be roughly a negative 5% impact to total return. Wellington, holding less fixed income as a percentage of the overall portfolio, would obviously be hit less but still could be fairly significantly impacted by an increase in inflation.

Curious if anyone else is concerned by this. We hold a pretty large state in VWIAX and a smaller one in Wellington. I've always liked the consistency of Wellesley and realize it HAS weathered other periods of increasing inflation, but as I have a shorter time horizon than others may have being in early retirement with not as many years to recover, my original reason for holding Wellesley (low volatility, consistent 5-6%+ returns) may come under fire this year if inflation does increase as many are expecting/predicting.

Thanks for any and all feedback and thoughts..
If you hold for 8+ years and will accept the bond yields as-is nominally, then it is not a problem. The longer the holding, the less likely it will be a problem.

I hold my HSA in Wellesley since I am not certain when I might touch it (1 to 30 years) and I have some tolerance of risk; I am not worried about it.
Passive investing: not about making big bucks but making profits. Active investing: not about beating the market but meeting goals. Speculation: not about timing the market but taking profitable risks.
KlangFool
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Re: Duration (8+) of Wellesley & Wellington Bonds - any concerns for 2021?

Post by KlangFool »

OP,

It is very simple.

The only reason for you to hold the W&W fund is you believe in their ACTIVE MANAGEMENT of the stock and the bond. If you cannot trust the ACTIVE MANAGEMENT of their bond holding and you could do better, you should sell your W&W fund.


KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
Topic Author
RetireBy55
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Re: Duration (8+) of Wellesley & Wellington Bonds - any concerns for 2021?

Post by RetireBy55 »

KlangFool wrote: Fri Feb 05, 2021 1:25 pm OP,

It is very simple.

The only reason for you to hold the W&W fund is you believe in their ACTIVE MANAGEMENT of the stock and the bond. If you cannot trust the ACTIVE MANAGEMENT of their bond holding and you could do better, you should sell your W&W fund.


KlangFool
Of course I trust the active management of the fund. That's a big part of why I hold it, over a 35/65 combination equity/fixed income passive portfolio.

The big issue I see, however, is duration. Curious if anyone else that holds either fund in retirement with the shorter potential recovery timeframes available to all of us in retirement - unless you're also investing for heirs or charity, post death. (Note, I have similar concerns for 2021 with VBTLX at 6.6 duration even though it's an Index fund, and for all 5+ duration fixed income funds currently in my portfolio). I expect inflation to increase - by as much as 1% this year. Whether that will indeed happen or not is anyone's guess..but as I do personally expect there's a high likelihood of that happening am currently re-assessing ALL of my fixed income holdings - active and passive, accordingly.
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Re: Duration (8+) of Wellesley & Wellington Bonds - any concerns for 2021?

Post by KlangFool »

RetireBy55 wrote: Fri Feb 05, 2021 1:37 pm
KlangFool wrote: Fri Feb 05, 2021 1:25 pm OP,

It is very simple.

The only reason for you to hold the W&W fund is you believe in their ACTIVE MANAGEMENT of the stock and the bond. If you cannot trust the ACTIVE MANAGEMENT of their bond holding and you could do better, you should sell your W&W fund.


KlangFool
Of course I trust the active management of the fund. That's a big part of why I hold it, over a 35/65 combination equity/fixed income passive portfolio.

The big issue I see, however, is duration. Curious if anyone else that holds either fund in retirement with the shorter potential recovery timeframes available to all of us in retirement - unless you're also investing for heirs or charity, post death. (Note, I have similar concerns for 2021 with VBTLX at 6.6 duration even though it's an Index fund, and for all 5+ duration fixed income funds currently in my portfolio). I expect inflation to increase - by as much as 1% this year. Whether that will indeed happen or not is anyone's guess..but as I do personally expect there's a high likelihood of that happening am currently re-assessing ALL of my fixed income holdings - active and passive, accordingly.
RetireBy55,

<<The big issue I see, however, is duration. >>


Why? The Wellington Management's goal is to beat the Bond Benchmark. It has nothing to do with the investor's need for the duration.

<<(Note, I have similar concerns for 2021 with VBTLX at 6.6 duration even though it's an Index fund, and for all 5+ duration fixed income funds currently in my portfolio). I expect inflation to increase - by as much as 1% this year. >>


1) And, why do you think that you are smart enough to predict inflation? If you do, then, why invest in the bond index fund or W&W fund?

2) If you know this, why do you think that bond issuers do not know this and price this inflation expectation into their new bond issues.

You have a choice:


A) Really know your stuff and manage your own bond holding.


B) Buying bond index fund and/or W&W fund.

I know that I know nothing. Hence, I do not invest based on my ability to predict the future.


KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
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RetireBy55
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Re: Duration (8+) of Wellesley & Wellington Bonds - any concerns for 2021?

Post by RetireBy55 »

Thanks for the reply..I of course don't "know" that inflation will indeed increase in 2021. What I do, however, is a LOT of research and planning, constantly reading and listening to the opinions of people far smarter than I pretend to be. And by and large, quite a few of them (including the Vanguard forecast) expect inflation to increase in 2021. Will that "absolutely" happen? Of course not. But it very well could. And there are a lot of reasons it's more likely to do so including the continued stimulus spending that now appears almost certain to happen. It's not a huge jump to conclude that an additional nearly $2 trillion into an economy that's already coming back to life after getting hit hard last year is going to lead to an increase in money supply. And as we all know, an increase in money supply will lead to inflation UNLESS people take that additional money and hang onto it vs spending it.

So, while we can't be 100% assured that 2021 will indeed bring higher inflation, the odds APPEAR to be pretty solid that it's entirely possible and in many people's opinions, quite likely.

Given all that, it's prudent, IMHO, to take a look at one's risk exposure in a potentially rising rate environment and act accordingly. For that reason, I'm personally a little bit nervous holding as much Wellesley as I do with a Duration of 8+ (vs, say, PIMIX at a duration of 2'ish or DODIX with a Duration of 4.9) and am considering dialing it back a bit - perhaps moving some of what I have in VWIAX to one of my other, shorter term duration fixed income funds. So, the purpose of my original post was to ask if others are feeling the same..

All this said, I do realize that there are others with longer term horizons OR a higher degree of comfort that I personally have in being able to ride the roller coaster down and eventually (hopefully) back up. But being in retirement and investing for our own financial purposes vs. heirs, constant evaluation of risk for all aspects of our portfolio vs a completely "set and forget" approach is something that I believe to be worthwhile.
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Re: Duration (8+) of Wellesley & Wellington Bonds - any concerns for 2021?

Post by MishkaWorries »

RetireBy55 wrote: Fri Feb 05, 2021 1:05 pm Anyone else have concerns about the current Duration (8+) of both Wellesley and Wellington given the strong possibility of inflation increases that we'll likely face in 2021?

Reading the recent Vanguard forecast, they do predict (as do many other economists and research experts) inflation to increase - perhaps by as much as 1% this year.

If that were to happen, both funds would (obviously) incur a "Duration %" (in this case, 8+%) downside hit on the fixed income portion of the fund's portfolio.

With Wellesley holding nearly 60% bonds currently, that'd be roughly a negative 5% impact to total return. Wellington, holding less fixed income as a percentage of the overall portfolio, would obviously be hit less but still could be fairly significantly impacted by an increase in inflation.

Curious if anyone else is concerned by this. We hold a pretty large state in VWIAX and a smaller one in Wellington. I've always liked the consistency of Wellesley and realize it HAS weathered other periods of increasing inflation, but as I have a shorter time horizon than others may have being in early retirement with not as many years to recover, my original reason for holding Wellesley (low volatility, consistent 5-6%+ returns) may come under fire this year if inflation does increase as many are expecting/predicting.

Thanks for any and all feedback and thoughts..
We hold a good chunk of Wellesley too. It's the only equities my wife allows in her accounts (extremely risk adverse). She loves that fund because it just chugs away and provides great returns.

I'm more cautious because the duration and the amount of bonds it holds. Sure it did a great job but there has been a 40 year long bond bull market at it's back.

This year we opened a new account where Wellesley isn't available. So I decided to do a home brew Wellesley. I decided on 40% VIG (Vanguard's dividend growth fund) and VGIT (Vanguard's intermediate treasury fund). I picked this because shorter duration and higher quality bonds. I wanted to alleviate some of my concerns about Wellesley.
We plan. G-d laughs.
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Re: Duration (8+) of Wellesley & Wellington Bonds - any concerns for 2021?

Post by KlangFool »

RetireBy55 wrote: Fri Feb 05, 2021 2:05 pm
Thanks for the reply..I of course don't "know" that inflation will indeed increase in 2021. What I do, however, is a LOT of research and planning, constantly reading and listening to the opinions of people far smarter than I pretend to be.
RetireBy55,

My family member worked on Wall Street. He earned 7 figures in annual salary and bonuses. He lost 10 million in Telecom Bust.

Do you agree he did a lot more research and planning? And, he had the full resource of Wall Street. But, he failed in investing his own money. So, why do you think you are smarter than him?


If it is obvious to you, it should be obvious to the professionals too. And, the bond issuers are paid millions to underwrite billions of bonds every year. Why do you think it is not priced into the new bonds?

I know that I know nothing.

KlangFool
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Re: Duration (8+) of Wellesley & Wellington Bonds - any concerns for 2021?

Post by tibbitts »

RetireBy55 wrote: Fri Feb 05, 2021 2:05 pm So, while we can't be 100% assured that 2021 will indeed bring higher inflation, the odds APPEAR to be pretty solid that it's entirely possible and in many people's opinions, quite likely.
In how many years of the previous decade did your research indicate that higher inflation was just as likely in the following year at it is now? Is it safe to say that you have no confidence in the management at Wellington to recognize this obvious risk of inflation and take steps to mitigate it?
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RetireBy55
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Re: Duration (8+) of Wellesley & Wellington Bonds - any concerns for 2021?

Post by RetireBy55 »

tibbitts wrote: Fri Feb 05, 2021 2:32 pm
In how many years of the previous decade did your research indicate that higher inflation was just as likely in the following year at it is now? Is it safe to say that you have no confidence in the management at Wellington to recognize this obvious risk of inflation and take steps to mitigate it?
And what would the Wellington management do to mitigate inflation risk if they (like I) believe it's coming in 2021?

Aside from selling longer bonds and buyer shorter and lower yielding bonds (which in turn would lower Duration), what if any options do they have?

ETA - re: previous decade expectations..let's just say I personally believe things are MUCH different now than they were in prior years, for reasons that I can't comment on given board policies. But I do believe they are, and will increasingly get, radically different to points we have not experienced previously. That's my opinion and I'm not encouraging anyone (other than me) to act on it. But FWIW as you asked..
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Re: Duration (8+) of Wellesley & Wellington Bonds - any concerns for 2021?

Post by dwickenh »

RetireBy55 wrote: Fri Feb 05, 2021 1:37 pm
KlangFool wrote: Fri Feb 05, 2021 1:25 pm OP,

It is very simple.

The only reason for you to hold the W&W fund is you believe in their ACTIVE MANAGEMENT of the stock and the bond. If you cannot trust the ACTIVE MANAGEMENT of their bond holding and you could do better, you should sell your W&W fund.


KlangFool
Of course I trust the active management of the fund. That's a big part of why I hold it, over a 35/65 combination equity/fixed income passive portfolio.

The big issue I see, however, is duration. Curious if anyone else that holds either fund in retirement with the shorter potential recovery timeframes available to all of us in retirement - unless you're also investing for heirs or charity, post death. (Note, I have similar concerns for 2021 with VBTLX at 6.6 duration even though it's an Index fund, and for all 5+ duration fixed income funds currently in my portfolio). I expect inflation to increase - by as much as 1% this year. Whether that will indeed happen or not is anyone's guess..but as I do personally expect there's a high likelihood of that happening am currently re-assessing ALL of my fixed income holdings - active and passive, accordingly.
The same concerns were being discussed last year concerning interest rates and bond duration. Look up the returns for VBTLX last year.
I never try to time interest rates with bond funds, other that the timeline for when I need the money. If I need it in 3 years, I match the
duration to that need. Wellesley and Wellington are held by many retirees.

Best to you,

Dan
The market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people to patient people.” | — Warren Buffett
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Re: Duration (8+) of Wellesley & Wellington Bonds - any concerns for 2021?

Post by bluewater23t »

RetireBy55 wrote: Fri Feb 05, 2021 1:05 pm Anyone else have concerns about the current Duration (8+) of both Wellesley and Wellington given the strong possibility of inflation increases that we'll likely face in 2021?

Inflation may increase, but Fed may not raise interest rates until it gets to 2-3% (so they say, hahaha)...and who knows when that will happen.
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Re: Duration (8+) of Wellesley & Wellington Bonds - any concerns for 2021?

Post by 000 »

OP, don't worry about the naysayers: duration and inflation risks are real.

Holding bonds with a longer duration than is appropriate for you is a speculation.

Holding nominal bonds to match a real (non-nominal) liability is a speculation.
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Re: Duration (8+) of Wellesley & Wellington Bonds - any concerns for 2021?

Post by SuperXmas »

We’re unlikely to see 70s style inflation, but it would only take a couple percent to see double digit negative bond returns given the duration. Don’t think most investors are conditioned to think about those sort of negative returns from their bond portfolios, particularly given stocks would likely be higher over that period.
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Re: Duration (8+) of Wellesley & Wellington Bonds - any concerns for 2021?

Post by tibbitts »

RetireBy55 wrote: Fri Feb 05, 2021 3:44 pm
tibbitts wrote: Fri Feb 05, 2021 2:32 pm
In how many years of the previous decade did your research indicate that higher inflation was just as likely in the following year at it is now? Is it safe to say that you have no confidence in the management at Wellington to recognize this obvious risk of inflation and take steps to mitigate it?
And what would the Wellington management do to mitigate inflation risk if they (like I) believe it's coming in 2021?

Aside from selling longer bonds and buyer shorter and lower yielding bonds (which in turn would lower Duration), what if any options do they have?

ETA - re: previous decade expectations..let's just say I personally believe things are MUCH different now than they were in prior years, for reasons that I can't comment on given board policies. But I do believe they are, and will increasingly get, radically different to points we have not experienced previously. That's my opinion and I'm not encouraging anyone (other than me) to act on it. But FWIW as you asked..
Well, I guess the question is what are you going to do to mitigate the risk? It's okay to take money out of W&W, but what will you do with it? In other words, what are you going to do that Wellington management couldn't, or is the issue that you don't believe they appreciate how dire the situation is? In any case it seems like you've lost confidence in Wellington, so why pay even a modest amount for active management when you feel it's not doing as good a job as you could do yourself?
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Re: Duration (8+) of Wellesley & Wellington Bonds - any concerns for 2021?

Post by RetireBy55 »

SuperXmas wrote: Fri Feb 05, 2021 5:44 pm We’re unlikely to see 70s style inflation, but it would only take a couple percent to see double digit negative bond returns given the duration. Don’t think most investors are conditioned to think about those sort of negative returns from their bond portfolios, particularly given stocks would likely be higher over that period.
THANK YOU!! That's my point, exactly. Most of us don't expect - and have never expected - double digit negative bond returns due to long durations.

We all (or at least most of us) know this. Yet, I do think there's a tendency for "recency bias" - ie: to look at 1, 3, 5, and even 10-15 year returns for something like Wellesley, and come away with a conclusion that it's impervious to normal market forces and can do no wrong.

There's a very real risk that Wellesley could get hit 8 - 16% on it's bond portfolio. At 65% of assets, that's a big drop. We should not lose sight of that risk, as it is very, very real IMHO. And I personally believe 2021 and the next several years will increase that risk substantially over what we all experienced over the past several decades. Will that come to be? If not, I'll be the first to say I was wrong..but I'm pretty confident that the risk profile has changed dramatically.
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Re: Duration (8+) of Wellesley & Wellington Bonds - any concerns for 2021?

Post by jdb »

Your concerns about inflation and duration are valid. However you can’t expect one fund to cover all bases. I think Wellesley is a wonderful fund, it comprises 40 percent of my IRA. But another 30 percent is a TIPS ladder to cover inflation. And I intend to hold the Wellesley allocation for a longer period than the duration of 8 years, will be taking RMD from the remaining 30 percent equity index fund allocation. Good luck.
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Re: Duration (8+) of Wellesley & Wellington Bonds - any concerns for 2021?

Post by tibbitts »

RetireBy55 wrote: Fri Feb 05, 2021 6:24 pm
SuperXmas wrote: Fri Feb 05, 2021 5:44 pm We’re unlikely to see 70s style inflation, but it would only take a couple percent to see double digit negative bond returns given the duration. Don’t think most investors are conditioned to think about those sort of negative returns from their bond portfolios, particularly given stocks would likely be higher over that period.
THANK YOU!! That's my point, exactly. Most of us don't expect - and have never expected - double digit negative bond returns due to long durations.

We all (or at least most of us) know this. Yet, I do think there's a tendency for "recency bias" - ie: to look at 1, 3, 5, and even 10-15 year returns for something like Wellesley, and come away with a conclusion that it's impervious to normal market forces and can do no wrong.

There's a very real risk that Wellesley could get hit 8 - 16% on it's bond portfolio. At 65% of assets, that's a big drop. We should not lose sight of that risk, as it is very, very real IMHO. And I personally believe 2021 and the next several years will increase that risk substantially over what we all experienced over the past several decades. Will that come to be? If not, I'll be the first to say I was wrong..but I'm pretty confident that the risk profile has changed dramatically.
You still haven't said what alternative investment you want to pursue, or what you think Wellington should be doing about this situation. Historically, rising rates have often been accompanied by falling equity prices, so I assume(?) you're not considering equities. TIPS? Maybe a conventional bond ladder? A floating rate fund? High yield bonds?
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Re: Duration (8+) of Wellesley & Wellington Bonds - any concerns for 2021?

Post by Grt2bOutdoors »

RetireBy55 wrote: Fri Feb 05, 2021 1:37 pm
KlangFool wrote: Fri Feb 05, 2021 1:25 pm OP,

It is very simple.

The only reason for you to hold the W&W fund is you believe in their ACTIVE MANAGEMENT of the stock and the bond. If you cannot trust the ACTIVE MANAGEMENT of their bond holding and you could do better, you should sell your W&W fund.


KlangFool
Of course I trust the active management of the fund. That's a big part of why I hold it, over a 35/65 combination equity/fixed income passive portfolio.

The big issue I see, however, is duration. Curious if anyone else that holds either fund in retirement with the shorter potential recovery timeframes available to all of us in retirement - unless you're also investing for heirs or charity, post death. (Note, I have similar concerns for 2021 with VBTLX at 6.6 duration even though it's an Index fund, and for all 5+ duration fixed income funds currently in my portfolio). I expect inflation to increase - by as much as 1% this year. Whether that will indeed happen or not is anyone's guess..but as I do personally expect there's a high likelihood of that happening am currently re-assessing ALL of my fixed income holdings - active and passive, accordingly.
Are you withdrawing all of your money over the next 8 years? If the answer is no, then there is no problem. If you need ALL of your money in 5 years or less than you should not have it invested in anything that is volatile and that includes fixed income with a duration longer than the period in which you need the money.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
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Re: Duration (8+) of Wellesley & Wellington Bonds - any concerns for 2021?

Post by SuperXmas »

tibbitts wrote: Fri Feb 05, 2021 9:07 pm
RetireBy55 wrote: Fri Feb 05, 2021 6:24 pm
SuperXmas wrote: Fri Feb 05, 2021 5:44 pm We’re unlikely to see 70s style inflation, but it would only take a couple percent to see double digit negative bond returns given the duration. Don’t think most investors are conditioned to think about those sort of negative returns from their bond portfolios, particularly given stocks would likely be higher over that period.
THANK YOU!! That's my point, exactly. Most of us don't expect - and have never expected - double digit negative bond returns due to long durations.

We all (or at least most of us) know this. Yet, I do think there's a tendency for "recency bias" - ie: to look at 1, 3, 5, and even 10-15 year returns for something like Wellesley, and come away with a conclusion that it's impervious to normal market forces and can do no wrong.

There's a very real risk that Wellesley could get hit 8 - 16% on it's bond portfolio. At 65% of assets, that's a big drop. We should not lose sight of that risk, as it is very, very real IMHO. And I personally believe 2021 and the next several years will increase that risk substantially over what we all experienced over the past several decades. Will that come to be? If not, I'll be the first to say I was wrong..but I'm pretty confident that the risk profile has changed dramatically.
You still haven't said what alternative investment you want to pursue, or what you think Wellington should be doing about this situation. Historically, rising rates have often been accompanied by falling equity prices, so I assume(?) you're not considering equities. TIPS? Maybe a conventional bond ladder? A floating rate fund? High yield bonds?
Not necessarily. Equities should be a better inflation hedged than fixed income.
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Re: Duration (8+) of Wellesley & Wellington Bonds - any concerns for 2021?

Post by tibbitts »

SuperXmas wrote: Fri Feb 05, 2021 10:47 pm
tibbitts wrote: Fri Feb 05, 2021 9:07 pm
RetireBy55 wrote: Fri Feb 05, 2021 6:24 pm
SuperXmas wrote: Fri Feb 05, 2021 5:44 pm We’re unlikely to see 70s style inflation, but it would only take a couple percent to see double digit negative bond returns given the duration. Don’t think most investors are conditioned to think about those sort of negative returns from their bond portfolios, particularly given stocks would likely be higher over that period.
THANK YOU!! That's my point, exactly. Most of us don't expect - and have never expected - double digit negative bond returns due to long durations.

We all (or at least most of us) know this. Yet, I do think there's a tendency for "recency bias" - ie: to look at 1, 3, 5, and even 10-15 year returns for something like Wellesley, and come away with a conclusion that it's impervious to normal market forces and can do no wrong.

There's a very real risk that Wellesley could get hit 8 - 16% on it's bond portfolio. At 65% of assets, that's a big drop. We should not lose sight of that risk, as it is very, very real IMHO. And I personally believe 2021 and the next several years will increase that risk substantially over what we all experienced over the past several decades. Will that come to be? If not, I'll be the first to say I was wrong..but I'm pretty confident that the risk profile has changed dramatically.
You still haven't said what alternative investment you want to pursue, or what you think Wellington should be doing about this situation. Historically, rising rates have often been accompanied by falling equity prices, so I assume(?) you're not considering equities. TIPS? Maybe a conventional bond ladder? A floating rate fund? High yield bonds?
Not necessarily. Equities should be a better inflation hedged than fixed income.
But throughout the '70s until the early '80s equities took a hit for at least roughly the duration (or longer) of W&W bonds. So changing to an asset class that's now generally agreed (since the OP seems to put some weight behind a consensus) to be highly valued and underperformed during that entire period would seem equally likely to be counterproductive.
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Re: Duration (8+) of Wellesley & Wellington Bonds - any concerns for 2021?

Post by Kevin K »

Two of Wellington's managers of the Wellesley fund are interviewed in this excellent Morningstar podcast (note that you can download the transcript as well):

https://www.morningstar.com/podcasts/the-long-view/75

I think the podcast, which includes some insights into how these managers dealt with last year's pandemic market meltdown in real time, is pretty reassuring about Wellington's agility in monitoring and responding to macroeconomic conditions. And of course the robustness of the fund during market crises over the past 50 years speaks for itself.

My take is that if you're an indexer at heart but are willing to make an exception for either (or both) of Wellington's legendary "W"'s what you've done is to hire a rather large team of "financial advisors" to manage your investment for a fraction of the price of a normal FA. Personally I'm happy to pay .16% a year for VWIAX but I limit it to about a third of my portfolio with the rest being in broadly-diversified index funds with plenty of shorter-duration Treasuries and total market equity index funds to offset Wellesley's concentrated holdings.
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Re: Duration (8+) of Wellesley & Wellington Bonds - any concerns for 2021?

Post by DB2 »

tibbitts wrote: Sat Feb 06, 2021 9:31 am
SuperXmas wrote: Fri Feb 05, 2021 10:47 pm
tibbitts wrote: Fri Feb 05, 2021 9:07 pm
RetireBy55 wrote: Fri Feb 05, 2021 6:24 pm
SuperXmas wrote: Fri Feb 05, 2021 5:44 pm We’re unlikely to see 70s style inflation, but it would only take a couple percent to see double digit negative bond returns given the duration. Don’t think most investors are conditioned to think about those sort of negative returns from their bond portfolios, particularly given stocks would likely be higher over that period.
THANK YOU!! That's my point, exactly. Most of us don't expect - and have never expected - double digit negative bond returns due to long durations.

We all (or at least most of us) know this. Yet, I do think there's a tendency for "recency bias" - ie: to look at 1, 3, 5, and even 10-15 year returns for something like Wellesley, and come away with a conclusion that it's impervious to normal market forces and can do no wrong.

There's a very real risk that Wellesley could get hit 8 - 16% on it's bond portfolio. At 65% of assets, that's a big drop. We should not lose sight of that risk, as it is very, very real IMHO. And I personally believe 2021 and the next several years will increase that risk substantially over what we all experienced over the past several decades. Will that come to be? If not, I'll be the first to say I was wrong..but I'm pretty confident that the risk profile has changed dramatically.
You still haven't said what alternative investment you want to pursue, or what you think Wellington should be doing about this situation. Historically, rising rates have often been accompanied by falling equity prices, so I assume(?) you're not considering equities. TIPS? Maybe a conventional bond ladder? A floating rate fund? High yield bonds?
Not necessarily. Equities should be a better inflation hedged than fixed income.
But throughout the '70s until the early '80s equities took a hit for at least roughly the duration (or longer) of W&W bonds. So changing to an asset class that's now generally agreed (since the OP seems to put some weight behind a consensus) to be highly valued and underperformed during that entire period would seem equally likely to be counterproductive.
But the 70s wasn't just inflation, but also consisted of a recession which is often better for bonds. We actually had a double dip recession in early 80s, so that is even worse for stocks. We also moved off the gold standard in 1971. So that was a decade or 10-12 yr period (early 70s to early 80s) of a different animal really with a lot of things in play.
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Re: Duration (8+) of Wellesley & Wellington Bonds - any concerns for 2021?

Post by SuperXmas »

tibbitts wrote: Sat Feb 06, 2021 9:31 am
SuperXmas wrote: Fri Feb 05, 2021 10:47 pm
tibbitts wrote: Fri Feb 05, 2021 9:07 pm
RetireBy55 wrote: Fri Feb 05, 2021 6:24 pm
SuperXmas wrote: Fri Feb 05, 2021 5:44 pm We’re unlikely to see 70s style inflation, but it would only take a couple percent to see double digit negative bond returns given the duration. Don’t think most investors are conditioned to think about those sort of negative returns from their bond portfolios, particularly given stocks would likely be higher over that period.
THANK YOU!! That's my point, exactly. Most of us don't expect - and have never expected - double digit negative bond returns due to long durations.

We all (or at least most of us) know this. Yet, I do think there's a tendency for "recency bias" - ie: to look at 1, 3, 5, and even 10-15 year returns for something like Wellesley, and come away with a conclusion that it's impervious to normal market forces and can do no wrong.

There's a very real risk that Wellesley could get hit 8 - 16% on it's bond portfolio. At 65% of assets, that's a big drop. We should not lose sight of that risk, as it is very, very real IMHO. And I personally believe 2021 and the next several years will increase that risk substantially over what we all experienced over the past several decades. Will that come to be? If not, I'll be the first to say I was wrong..but I'm pretty confident that the risk profile has changed dramatically.
You still haven't said what alternative investment you want to pursue, or what you think Wellington should be doing about this situation. Historically, rising rates have often been accompanied by falling equity prices, so I assume(?) you're not considering equities. TIPS? Maybe a conventional bond ladder? A floating rate fund? High yield bonds?
Not necessarily. Equities should be a better inflation hedged than fixed income.
But throughout the '70s until the early '80s equities took a hit for at least roughly the duration (or longer) of W&W bonds. So changing to an asset class that's now generally agreed (since the OP seems to put some weight behind a consensus) to be highly valued and underperformed during that entire period would seem equally likely to be counterproductive.
But that’s what not what poster asked. The question was if one should be concerned about bond duration if we see a jump in inflation. Duration is long, rates are low and money supply is robust. Given how much fixed income yields have compressed there is limited cushion from an unexpected bounce in inflation. The kind of inflation the poster is referring to is “good” inflation where we are seeing stronger growth. Eventually the Fed would have to raise rates, but would think that given they are likely on hold for the next several years you’d see strong equity returns over that time period.
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Re: Duration (8+) of Wellesley & Wellington Bonds - any concerns for 2021?

Post by KlangFool »

SuperXmas wrote: Sat Feb 06, 2021 3:26 pm
tibbitts wrote: Sat Feb 06, 2021 9:31 am
SuperXmas wrote: Fri Feb 05, 2021 10:47 pm
tibbitts wrote: Fri Feb 05, 2021 9:07 pm
RetireBy55 wrote: Fri Feb 05, 2021 6:24 pm

THANK YOU!! That's my point, exactly. Most of us don't expect - and have never expected - double digit negative bond returns due to long durations.

We all (or at least most of us) know this. Yet, I do think there's a tendency for "recency bias" - ie: to look at 1, 3, 5, and even 10-15 year returns for something like Wellesley, and come away with a conclusion that it's impervious to normal market forces and can do no wrong.

There's a very real risk that Wellesley could get hit 8 - 16% on it's bond portfolio. At 65% of assets, that's a big drop. We should not lose sight of that risk, as it is very, very real IMHO. And I personally believe 2021 and the next several years will increase that risk substantially over what we all experienced over the past several decades. Will that come to be? If not, I'll be the first to say I was wrong..but I'm pretty confident that the risk profile has changed dramatically.
You still haven't said what alternative investment you want to pursue, or what you think Wellington should be doing about this situation. Historically, rising rates have often been accompanied by falling equity prices, so I assume(?) you're not considering equities. TIPS? Maybe a conventional bond ladder? A floating rate fund? High yield bonds?
Not necessarily. Equities should be a better inflation hedged than fixed income.
But throughout the '70s until the early '80s equities took a hit for at least roughly the duration (or longer) of W&W bonds. So changing to an asset class that's now generally agreed (since the OP seems to put some weight behind a consensus) to be highly valued and underperformed during that entire period would seem equally likely to be counterproductive.
But that’s what not what poster asked. The question was if one should be concerned about bond duration if we see a jump in inflation. Duration is long, rates are low and money supply is robust. Given how much fixed income yields have compressed there is limited cushion from an unexpected bounce in inflation. The kind of inflation the poster is referring to is “good” inflation where we are seeing stronger growth. Eventually the Fed would have to raise rates, but would think that given they are likely on hold for the next several years you’d see strong equity returns over that time period.
SuperXmas,

And, the question to OP was if he can think of this, why does he think that the Wellington management does not take this into account?

Obviously, they did.

As per this morningstar interview of Wellington management,

https://www.morningstar.com/podcasts/the-long-view/75

<<Reckmeyer: Well, one of the challenges the fund faces, it is the prospects of higher interest rates. So, over the next couple of few years, the Federal Reserve has talked about trying to keep rates pegged to around a zero bond to help pay for deficits and help to stimulate the economy. But longer term, rising deficits as well as prospects of inflationary pressures, it would be a clear headwind to the fixed-income portfolios. So, in talking to my counterparts in the fixed-income side, well from the fixed-income portfolio, Mike Stack and Loren Moran, they're actively looking at that. And when they determine that the risks are starting to increase for higher rates, they will look to shorten the duration of the fixed-income sleeve. So, this would help to mitigate, but it would not completely neutralize the impact of rising rates. It will still be a headwind.>>


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Re: Duration (8+) of Wellesley & Wellington Bonds - any concerns for 2021?

Post by vineviz »

SuperXmas wrote: Fri Feb 05, 2021 5:44 pm We’re unlikely to see 70s style inflation, but it would only take a couple percent to see double digit negative bond returns given the duration. Don’t think most investors are conditioned to think about those sort of negative returns from their bond portfolios, particularly given stocks would likely be higher over that period.
Inflation “a couple percent” higher than current levels would not trigger double digit price declines in intermediate bonds, and possibly not even long term bonds.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Duration (8+) of Wellesley & Wellington Bonds - any concerns for 2021?

Post by SuperXmas »

vineviz wrote: Sat Feb 06, 2021 4:03 pm
SuperXmas wrote: Fri Feb 05, 2021 5:44 pm We’re unlikely to see 70s style inflation, but it would only take a couple percent to see double digit negative bond returns given the duration. Don’t think most investors are conditioned to think about those sort of negative returns from their bond portfolios, particularly given stocks would likely be higher over that period.
Inflation “a couple percent” higher than current levels would not trigger double digit price declines in intermediate bonds, and possibly not even long term bonds.
The current duration is 8 years and current yield is 1.5%. If current core CPI is 1.5% and goes to 3.5% and that drives up interest rates up by a similar 2% you are looking at a -14.5% total return all else equal.

Again, I’m not saying this is the base case and that PMs wouldn’t make adjustments on the fly (although I suspect that’s easier said than done given a jump in inflation would inherently catch investors off guard, hence the 8yr duration to begin with) but it was OPs question.
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Re: Duration (8+) of Wellesley & Wellington Bonds - any concerns for 2021?

Post by 000 »

KlangFool wrote: Sat Feb 06, 2021 3:34 pm SuperXmas,

And, the question to OP was if he can think of this, why does he think that the Wellington management does not take this into account?

Obviously, they did.

As per this morningstar interview of Wellington management,

https://www.morningstar.com/podcasts/the-long-view/75

<<Reckmeyer: Well, one of the challenges the fund faces, it is the prospects of higher interest rates. So, over the next couple of few years, the Federal Reserve has talked about trying to keep rates pegged to around a zero bond to help pay for deficits and help to stimulate the economy. But longer term, rising deficits as well as prospects of inflationary pressures, it would be a clear headwind to the fixed-income portfolios. So, in talking to my counterparts in the fixed-income side, well from the fixed-income portfolio, Mike Stack and Loren Moran, they're actively looking at that. And when they determine that the risks are starting to increase for higher rates, they will look to shorten the duration of the fixed-income sleeve. So, this would help to mitigate, but it would not completely neutralize the impact of rising rates. It will still be a headwind.>>


KlangFool
So now you're OK with market timing interest rates if Wellington does it?

Even though you've criticized posters here for warning about rising rates?
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Re: Duration (8+) of Wellesley & Wellington Bonds - any concerns for 2021?

Post by vineviz »

SuperXmas wrote: Sat Feb 06, 2021 4:19 pm The current duration is 8 years and current yield is 1.5%. If current core CPI is 1.5% and goes to 3.5% and that drives up interest rates up by a similar 2% you are looking at a -14.5% total return all else equal.
This requires an additional assumption that the change in rates is instantaneous, which is theoretically possible but implausible.

Since 1974 , the worst one year return of a portfolio blending Fidelity Investment Grade Bond (FBNDX) and Vanguard Long-Term Investment-Grade Inv (VWESX) to produce a 8 year duration was less than -10%. It took double digit inflation surprises to create that impact.

It’s also important to remember that duration is merely a first-order approximation of price changes, and one that assumes a a parallel shift in the yield curve. With instantaneous increases from very low rates, convexity is also a crucial factor as is the fact that inflation rarely produces parallel yield curve shifts.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Duration (8+) of Wellesley & Wellington Bonds - any concerns for 2021?

Post by tibbitts »

SuperXmas wrote: Sat Feb 06, 2021 3:26 pm
tibbitts wrote: Sat Feb 06, 2021 9:31 am
SuperXmas wrote: Fri Feb 05, 2021 10:47 pm
tibbitts wrote: Fri Feb 05, 2021 9:07 pm
RetireBy55 wrote: Fri Feb 05, 2021 6:24 pm

THANK YOU!! That's my point, exactly. Most of us don't expect - and have never expected - double digit negative bond returns due to long durations.

We all (or at least most of us) know this. Yet, I do think there's a tendency for "recency bias" - ie: to look at 1, 3, 5, and even 10-15 year returns for something like Wellesley, and come away with a conclusion that it's impervious to normal market forces and can do no wrong.

There's a very real risk that Wellesley could get hit 8 - 16% on it's bond portfolio. At 65% of assets, that's a big drop. We should not lose sight of that risk, as it is very, very real IMHO. And I personally believe 2021 and the next several years will increase that risk substantially over what we all experienced over the past several decades. Will that come to be? If not, I'll be the first to say I was wrong..but I'm pretty confident that the risk profile has changed dramatically.
You still haven't said what alternative investment you want to pursue, or what you think Wellington should be doing about this situation. Historically, rising rates have often been accompanied by falling equity prices, so I assume(?) you're not considering equities. TIPS? Maybe a conventional bond ladder? A floating rate fund? High yield bonds?
Not necessarily. Equities should be a better inflation hedged than fixed income.
But throughout the '70s until the early '80s equities took a hit for at least roughly the duration (or longer) of W&W bonds. So changing to an asset class that's now generally agreed (since the OP seems to put some weight behind a consensus) to be highly valued and underperformed during that entire period would seem equally likely to be counterproductive.
But that’s what not what poster asked. The question was if one should be concerned about bond duration if we see a jump in inflation. Duration is long, rates are low and money supply is robust. Given how much fixed income yields have compressed there is limited cushion from an unexpected bounce in inflation. The kind of inflation the poster is referring to is “good” inflation where we are seeing stronger growth. Eventually the Fed would have to raise rates, but would think that given they are likely on hold for the next several years you’d see strong equity returns over that time period.
I would conclude exactly the opposite, based on the OP's comments that he believes "things are MUCH different now" vs. previous years. We had decent, by modern standards, economic activity for a few years pre-Covid, so by being different I'm assuming the OP is more in the stagflation camp. But probably the OP doesn't want to elaborate due to forum policies on political commentary, so ... we're left to speculate.

However I don't understand why the OP says he's going "to act on" what he believes will happen, but isn't explaining exactly what those actions will be or when he's going to take them.
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Re: Duration (8+) of Wellesley & Wellington Bonds - any concerns for 2021?

Post by SuperXmas »

vineviz wrote: Sat Feb 06, 2021 5:34 pm
SuperXmas wrote: Sat Feb 06, 2021 4:19 pm The current duration is 8 years and current yield is 1.5%. If current core CPI is 1.5% and goes to 3.5% and that drives up interest rates up by a similar 2% you are looking at a -14.5% total return all else equal.
This requires an additional assumption that the change in rates is instantaneous, which is theoretically possible but implausible.

Since 1974 , the worst one year return of a portfolio blending Fidelity Investment Grade Bond (FBNDX) and Vanguard Long-Term Investment-Grade Inv (VWESX) to produce a 8 year duration was less than -10%. It took double digit inflation surprises to create that impact.

It’s also important to remember that duration is merely a first-order approximation of price changes, and one that assumes a a parallel shift in the yield curve. With instantaneous increases from very low rates, convexity is also a crucial factor as is the fact that inflation rarely produces parallel yield curve shifts.
It’s not comparable. Yields were materially higher during those historical periods.
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Re: Duration (8+) of Wellesley & Wellington Bonds - any concerns for 2021?

Post by KlangFool »

000 wrote: Sat Feb 06, 2021 5:13 pm
KlangFool wrote: Sat Feb 06, 2021 3:34 pm SuperXmas,

And, the question to OP was if he can think of this, why does he think that the Wellington management does not take this into account?

Obviously, they did.

As per this morningstar interview of Wellington management,

https://www.morningstar.com/podcasts/the-long-view/75

<<Reckmeyer: Well, one of the challenges the fund faces, it is the prospects of higher interest rates. So, over the next couple of few years, the Federal Reserve has talked about trying to keep rates pegged to around a zero bond to help pay for deficits and help to stimulate the economy. But longer term, rising deficits as well as prospects of inflationary pressures, it would be a clear headwind to the fixed-income portfolios. So, in talking to my counterparts in the fixed-income side, well from the fixed-income portfolio, Mike Stack and Loren Moran, they're actively looking at that. And when they determine that the risks are starting to increase for higher rates, they will look to shorten the duration of the fixed-income sleeve. So, this would help to mitigate, but it would not completely neutralize the impact of rising rates. It will still be a headwind.>>


KlangFool
So now you're OK with market timing interest rates if Wellington does it?

Even though you've criticized posters here for warning about rising rates?
000,

Are you claiming that you are smarter than the Wellington management? I know that I am not. Hence, I paid 0.17% for the Wellington Fund.


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Re: Duration (8+) of Wellesley & Wellington Bonds - any concerns for 2021?

Post by vineviz »

SuperXmas wrote: Sat Feb 06, 2021 5:45 pm
vineviz wrote: Sat Feb 06, 2021 5:34 pm
SuperXmas wrote: Sat Feb 06, 2021 4:19 pm The current duration is 8 years and current yield is 1.5%. If current core CPI is 1.5% and goes to 3.5% and that drives up interest rates up by a similar 2% you are looking at a -14.5% total return all else equal.
This requires an additional assumption that the change in rates is instantaneous, which is theoretically possible but implausible.

Since 1974 , the worst one year return of a portfolio blending Fidelity Investment Grade Bond (FBNDX) and Vanguard Long-Term Investment-Grade Inv (VWESX) to produce a 8 year duration was less than -10%. It took double digit inflation surprises to create that impact.

It’s also important to remember that duration is merely a first-order approximation of price changes, and one that assumes a a parallel shift in the yield curve. With instantaneous increases from very low rates, convexity is also a crucial factor as is the fact that inflation rarely produces parallel yield curve shifts.
It’s not comparable. Yields were materially higher during those historical periods.
True, but that doesn’t necessarily result in a bigger impact now.

My point is really that the “duration x change” model contains a lot of simplifying assumptions which become increasingly problematic when we are talking about changes in yields that are large.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Duration (8+) of Wellesley & Wellington Bonds - any concerns for 2021?

Post by 000 »

KlangFool wrote: Sat Feb 06, 2021 5:52 pm
000 wrote: Sat Feb 06, 2021 5:13 pm
KlangFool wrote: Sat Feb 06, 2021 3:34 pm SuperXmas,

And, the question to OP was if he can think of this, why does he think that the Wellington management does not take this into account?

Obviously, they did.

As per this morningstar interview of Wellington management,

https://www.morningstar.com/podcasts/the-long-view/75

<<Reckmeyer: Well, one of the challenges the fund faces, it is the prospects of higher interest rates. So, over the next couple of few years, the Federal Reserve has talked about trying to keep rates pegged to around a zero bond to help pay for deficits and help to stimulate the economy. But longer term, rising deficits as well as prospects of inflationary pressures, it would be a clear headwind to the fixed-income portfolios. So, in talking to my counterparts in the fixed-income side, well from the fixed-income portfolio, Mike Stack and Loren Moran, they're actively looking at that. And when they determine that the risks are starting to increase for higher rates, they will look to shorten the duration of the fixed-income sleeve. So, this would help to mitigate, but it would not completely neutralize the impact of rising rates. It will still be a headwind.>>


KlangFool
So now you're OK with market timing interest rates if Wellington does it?

Even though you've criticized posters here for warning about rising rates?
000,

Are you claiming that you are smarter than the Wellington management? I know that I am not. Hence, I paid 0.17% for the Wellington Fund.


KlangFool
And that's what we call deflection, folks!

How I think about myself isn't relevant to the idea that Wellington will be able to market time rates in a meaningful way, which you are telling us you believe -- despite making many posts about how we don't know when interest rates will go up, people have been wrong about rates for years, and total bond is still giving you a good return, etc.
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Re: Duration (8+) of Wellesley & Wellington Bonds - any concerns for 2021?

Post by KlangFool »

000 wrote: Sat Feb 06, 2021 5:57 pm
KlangFool wrote: Sat Feb 06, 2021 5:52 pm
000 wrote: Sat Feb 06, 2021 5:13 pm
KlangFool wrote: Sat Feb 06, 2021 3:34 pm SuperXmas,

And, the question to OP was if he can think of this, why does he think that the Wellington management does not take this into account?

Obviously, they did.

As per this morningstar interview of Wellington management,

https://www.morningstar.com/podcasts/the-long-view/75

<<Reckmeyer: Well, one of the challenges the fund faces, it is the prospects of higher interest rates. So, over the next couple of few years, the Federal Reserve has talked about trying to keep rates pegged to around a zero bond to help pay for deficits and help to stimulate the economy. But longer term, rising deficits as well as prospects of inflationary pressures, it would be a clear headwind to the fixed-income portfolios. So, in talking to my counterparts in the fixed-income side, well from the fixed-income portfolio, Mike Stack and Loren Moran, they're actively looking at that. And when they determine that the risks are starting to increase for higher rates, they will look to shorten the duration of the fixed-income sleeve. So, this would help to mitigate, but it would not completely neutralize the impact of rising rates. It will still be a headwind.>>


KlangFool
So now you're OK with market timing interest rates if Wellington does it?

Even though you've criticized posters here for warning about rising rates?
000,

Are you claiming that you are smarter than the Wellington management? I know that I am not. Hence, I paid 0.17% for the Wellington Fund.


KlangFool
And that's what we call deflection, folks!

How I think about myself isn't relevant to the idea that Wellington will be able to market time rates in a meaningful way, which you are telling us you believe -- despite making many posts about how we don't know when interest rates will go up, people have been wrong about rates for years, and total bond is still giving you a good return, etc.
000,

I only approve of two active management funds (W&W) and stock (BRK.A & BRK.B).

<<How I think about myself isn't relevant to the idea that Wellington will be able to market time rates in a meaningful way,>>


Since WE are neither, we should not market time.


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Re: Duration (8+) of Wellesley & Wellington Bonds - any concerns for 2021?

Post by SuperXmas »

vineviz wrote: Sat Feb 06, 2021 5:56 pm
SuperXmas wrote: Sat Feb 06, 2021 5:45 pm
vineviz wrote: Sat Feb 06, 2021 5:34 pm
SuperXmas wrote: Sat Feb 06, 2021 4:19 pm The current duration is 8 years and current yield is 1.5%. If current core CPI is 1.5% and goes to 3.5% and that drives up interest rates up by a similar 2% you are looking at a -14.5% total return all else equal.
This requires an additional assumption that the change in rates is instantaneous, which is theoretically possible but implausible.

Since 1974 , the worst one year return of a portfolio blending Fidelity Investment Grade Bond (FBNDX) and Vanguard Long-Term Investment-Grade Inv (VWESX) to produce a 8 year duration was less than -10%. It took double digit inflation surprises to create that impact.

It’s also important to remember that duration is merely a first-order approximation of price changes, and one that assumes a a parallel shift in the yield curve. With instantaneous increases from very low rates, convexity is also a crucial factor as is the fact that inflation rarely produces parallel yield curve shifts.
It’s not comparable. Yields were materially higher during those historical periods.
True, but that doesn’t necessarily result in a bigger impact now.

My point is really that the “duration x change” model contains a lot of simplifying assumptions which become increasingly problematic when we are talking about changes in yields that are large.
That is incorrect. It absolutely causes a bigger impact today bc your carry doesn’t offset the impact from the rate change.
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Re: Duration (8+) of Wellesley & Wellington Bonds - any concerns for 2021?

Post by vineviz »

SuperXmas wrote: Sat Feb 06, 2021 6:07 pm
vineviz wrote: Sat Feb 06, 2021 5:56 pm
SuperXmas wrote: Sat Feb 06, 2021 5:45 pm
vineviz wrote: Sat Feb 06, 2021 5:34 pm
SuperXmas wrote: Sat Feb 06, 2021 4:19 pm The current duration is 8 years and current yield is 1.5%. If current core CPI is 1.5% and goes to 3.5% and that drives up interest rates up by a similar 2% you are looking at a -14.5% total return all else equal.
This requires an additional assumption that the change in rates is instantaneous, which is theoretically possible but implausible.

Since 1974 , the worst one year return of a portfolio blending Fidelity Investment Grade Bond (FBNDX) and Vanguard Long-Term Investment-Grade Inv (VWESX) to produce a 8 year duration was less than -10%. It took double digit inflation surprises to create that impact.

It’s also important to remember that duration is merely a first-order approximation of price changes, and one that assumes a a parallel shift in the yield curve. With instantaneous increases from very low rates, convexity is also a crucial factor as is the fact that inflation rarely produces parallel yield curve shifts.
It’s not comparable. Yields were materially higher during those historical periods.
True, but that doesn’t necessarily result in a bigger impact now.

My point is really that the “duration x change” model contains a lot of simplifying assumptions which become increasingly problematic when we are talking about changes in yields that are large.
That is incorrect. It absolutely causes a bigger impact today bc your carry doesn’t offset the impact from the rate change.
But at lower rates, convexity becomes a much more powerful force. It’s just not simple.

Again, duration generates an approximation which is more accurate in some cases than in others. It pays to keep that in mind.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Duration (8+) of Wellesley & Wellington Bonds - any concerns for 2021?

Post by 000 »

Here's a thread about how well Wellington did during the last major rising rate environment in the US.
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Re: Duration (8+) of Wellesley & Wellington Bonds - any concerns for 2021?

Post by SuperXmas »

000 wrote: Sat Feb 06, 2021 7:02 pm Here's a thread about how well Wellington did during the last major rising rate environment in the US.
I don’t think anyone was questioning whether these two funds would OP or UP. I don’t know the answer either but I also don’t find it to be particularly relevant to look to how it performed in the past. We’re at the end of a multi-decade bull bond market with record low yields, 16 trillion of negative yielding debt, accommodative monetary policy the world over and long durations. As other posters have highlighted, there are a lot of assumptions to be made, but seems to go against Bogleheads to reason that some people will get ahead of inflation - if it happens - and deliver better returns. Think the best you can do is look at the facts today and decide what’s best for your allocation.
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Re: Duration (8+) of Wellesley & Wellington Bonds - any concerns for 2021?

Post by 000 »

SuperXmas wrote: Sat Feb 06, 2021 7:40 pm
000 wrote: Sat Feb 06, 2021 7:02 pm Here's a thread about how well Wellington did during the last major rising rate environment in the US.
I don’t think anyone was questioning whether these two funds would OP or UP. I don’t know the answer either but I also don’t find it to be particularly relevant to look to how it performed in the past. We’re at the end of a multi-decade bull bond market with record low yields, 16 trillion of negative yielding debt, accommodative monetary policy the world over and long durations. As other posters have highlighted, there are a lot of assumptions to be made, but seems to go against Bogleheads to reason that some people will get ahead of inflation - if it happens - and deliver better returns. Think the best you can do is look at the facts today and decide what’s best for your allocation.
I posted that to offer some refutation of the idea above about Wellington's market timing ability.

The 1970s were also the end of a bond bull market and the start of unprecedented monetary policy (abandonment of US gold standard for foreign trade).

Wellington didn't just underperform, it broke the 4% rule.
iamthewalrus
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Re: Duration (8+) of Wellesley & Wellington Bonds - any concerns for 2021?

Post by iamthewalrus »

There's two points I would make:

First off, multiple comments in this thread are conflating inflation with interest rates. Bond funds respond to changes in interest rates, when new bonds are issued with higher yields than those held by a fund the market value of the bonds in the fund decrease (because you can obtain higher yields from the new issues) and so the value of the fund decreases.

Interest rates and inflation are linked, but they do not move as one. Right now interest rates on US Treasuries are running below inflation, if you hold them to maturity you're likely to see a real loss. Inflation forecasts see it rising (and this is the stated goal of the fed, which recently changed its policy from a 2% target to an average of 2% target, so that they're now willing to let inflation exceed 2% for a while if it has been running under 2%, which it has). The assumption right now though is that the fed is going to hold interest rates down, it's not expected that they're going to rise in the near future.

Secondly, the objective of the Wellesley Fund, as stated in their prospectus is:
The Fund seeks to provide long-term growth of income and a high and sustainable level of current income, along with moderate long-term capital appreciation.
Based on this objective the fund managers are not going to be worrying too much about the share price in the short to medium term. They will prioritise holding a bond portfolio that is generating sufficient yields to meet the income objective. If the quoted value of those bonds fluctuates over time it may affect the quoted value of the shares, but so long as it's not impacting the ability of the fund to generate an increasing quarterly dividend then don't expect the fund managers to try to intervene.

From your post it sounds like you are concerned with the capital appreciation in the short to medium term. If this is the case then be aware that this is not an investment objective of the Wellesley Income Fund, and maybe you should reconsider either your expectations or your holdings.
SuperXmas
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Re: Duration (8+) of Wellesley & Wellington Bonds - any concerns for 2021?

Post by SuperXmas »

iamthewalrus wrote: Sat Feb 06, 2021 8:18 pm There's two points I would make:

First off, multiple comments in this thread are conflating inflation with interest rates. Bond funds respond to changes in interest rates, when new bonds are issued with higher yields than those held by a fund the market value of the bonds in the fund decrease (because you can obtain higher yields from the new issues) and so the value of the fund decreases.

Interest rates and inflation are linked, but they do not move as one. Right now interest rates on US Treasuries are running below inflation, if you hold them to maturity you're likely to see a real loss. Inflation forecasts see it rising (and this is the stated goal of the fed, which recently changed its policy from a 2% target to an average of 2% target, so that they're now willing to let inflation exceed 2% for a while if it has been running under 2%, which it has). The assumption right now though is that the fed is going to hold interest rates down, it's not expected that they're going to rise in the near future.

Secondly, the objective of the Wellesley Fund, as stated in their prospectus is:
The Fund seeks to provide long-term growth of income and a high and sustainable level of current income, along with moderate long-term capital appreciation.
Based on this objective the fund managers are not going to be worrying too much about the share price in the short to medium term. They will prioritise holding a bond portfolio that is generating sufficient yields to meet the income objective. If the quoted value of those bonds fluctuates over time it may affect the quoted value of the shares, but so long as it's not impacting the ability of the fund to generate an increasing quarterly dividend then don't expect the fund managers to try to intervene.

From your post it sounds like you are concerned with the capital appreciation in the short to medium term. If this is the case then be aware that this is not an investment objective of the Wellesley Income Fund, and maybe you should reconsider either your expectations or your holdings.
The bond market is not waiting on the fed. The fed only controls the front end. Rates are moving higher already, as a result of higher growth and inflation expectations.
iamthewalrus
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Re: Duration (8+) of Wellesley & Wellington Bonds - any concerns for 2021?

Post by iamthewalrus »

SuperXmas wrote: Sat Feb 06, 2021 8:34 pm The bond market is not waiting on the fed. The fed only controls the front end. Rates are moving higher already, as a result of higher growth and inflation expectations.
There's many factors that influence the yield on bonds. As I stated, inflation (current and future assumed) is one of them. The interest rate that the federal reserve sets is another one. I did not make any statement about where I think bond yields will go in the future. I don't know. The point I was making is that bond prices respond directly to changes in bond yields. Bond yields respond to inflation, among other things.
Dan999
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Re: Duration (8+) of Wellesley & Wellington Bonds - any concerns for 2021?

Post by Dan999 »

Wouldn't this concern also apply to the Target Date Retirement fund with 70% bonds?
This bothers me about all of these one fund programs.
Dan999
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sycamore
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Re: Duration (8+) of Wellesley & Wellington Bonds - any concerns for 2021?

Post by sycamore »

Dan999 wrote: Sat Feb 06, 2021 11:20 pm Wouldn't this concern also apply to the Target Date Retirement fund with 70% bonds?
This bothers me about all of these one fund programs.
Dan999
It would also be a concern even if you kept separate stock and bond funds in your portfolio with similar bond allocation.

Is your concern with an all-in-one fund that you can't modify your bond allocation without selling the fund?
DanLeeRot
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Re: Duration (8+) of Wellesley & Wellington Bonds - any concerns for 2021?

Post by DanLeeRot »

Not to sound the alarm, but so far in 2021, Vanguard Wellesley Income (VWIAX) has not fared well with a YTD return of -0.17% and a percent ranking of 97 in it's category (allocation 30%-50% equity). Stay tuned.
The investor's chief problem-and even his worse enemy-is likely to be himself. Benjamin Graham
sixtyforty
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Re: Duration (8+) of Wellesley & Wellington Bonds - any concerns for 2021?

Post by sixtyforty »

Compared to a simple 60/40 index, Wellington's returns are about even since 2007 (underperform if you include ER). It's underperformed a 60/40 portfolio since 2017.

Compared to a simple 40/60 index, Wellesley's returns are also about even since 2007 (underperform if you include ER). It's also underperformed a 40/60 portfolio since 2018.

Full disclosure: I own Wellesley.
"Simplicity is the ultimate sophistication" - Leonardo Da Vinci
DanLeeRot
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Re: Duration (8+) of Wellesley & Wellington Bonds - any concerns for 2021?

Post by DanLeeRot »

For the record,Vanguard Wellesley Income (VWIAX) current duration of 8.18 years is a whopping 3.45 years higher than the average of 4.73 years for allocation funds in it's category. Full disclosure: I own both Vanguard Wellesley Income (VWIAX) and Vanguard Global Income (VGYAX) in my IRA.
The investor's chief problem-and even his worse enemy-is likely to be himself. Benjamin Graham
Wrench
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Re: Duration (8+) of Wellesley & Wellington Bonds - any concerns for 2021?

Post by Wrench »

DanLeeRot wrote: Sun Feb 07, 2021 6:23 am Not to sound the alarm, but so far in 2021, Vanguard Wellesley Income (VWIAX) has not fared well with a YTD return of -0.17% and a percent ranking of 97 in it's category (allocation 30%-50% equity). Stay tuned.
No alarm for me yet. Through the end of Jan 2021 Vanguard Wellesley YTD returns are slightly worse (-1.28%) but comparable to SPY (-1.02%) according to Visual Portfolio:
Name Annualized Return Annualized Volatility
3 Month YTD 1 year 3 year 5 year 10 year Full 3 year 5 year
100% VWIAX 5.62% -1.28% 5.79% 6.56% 7.77% 7.63% 7.06% 7.81% 6.38%
100% SPY 13.82% -1.02% 17.21% 11.58% 16.05% 13.38% 8.43% 18.52% 14.92%
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