Core bond fund which lost -40% in 12 months (2008-9) rates five stars today

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Northern Flicker
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Re: Core bond fund which lost -40% in 12 months (2008-9) rates five stars today

Post by Northern Flicker »

000 wrote: Fri Nov 26, 2021 8:33 pm The sad thing is that the illiquid bond space (corporates, etc) is where active management can work the best even without taking more risk.
Liquidity risk is a thing.
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Re: Core bond fund which lost -40% in 12 months (2008-9) rates five stars today

Post by 000 »

Northern Flicker wrote: Fri Nov 26, 2021 10:05 pm
000 wrote: Fri Nov 26, 2021 8:33 pm The sad thing is that the illiquid bond space (corporates, etc) is where active management can work the best even without taking more risk.
Liquidity risk is a thing.
Active corporate bond funds have more liquidity risk than index corporate bond funds? :confused

Don't active funds have more discretion about what to sell during a major redemption event?

I suppose traditional mutual funds have more liquidity risk than ETFs during a major sell-off, but both index and active strategies can be undertaken in both fund structures.
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Re: Core bond fund which lost -40% in 12 months (2008-9) rates five stars today

Post by Northern Flicker »

grok87 wrote: TL/DR skip actively managed bond funds. if you want higher portfolio returns increase your equity allocation.
I don't disagree, and think passive bond index funds are an excellent choice, but there are a couple areas where active management for bonds is sensible: stable value funds and GNMA portfolios. There is sufficient evidence for me to believe that active management adds value in the GNMA space if cost is low, and stable value funds can add value if well managed and costs are low, so that crediting rates are competitive.

I don't think active management adds much value to TIPS portfolios, but as long as costs are low, it does not seem to hurt you in any meaningful way:

https://www.portfoliovisualizer.com/bac ... ion3_3=100
Last edited by Northern Flicker on Sat Nov 27, 2021 1:12 am, edited 1 time in total.
Northern Flicker
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Re: Core bond fund which lost -40% in 12 months (2008-9) rates five stars today

Post by Northern Flicker »

000 wrote: Fri Nov 26, 2021 10:12 pm
Northern Flicker wrote: Fri Nov 26, 2021 10:05 pm
000 wrote: Fri Nov 26, 2021 8:33 pm The sad thing is that the illiquid bond space (corporates, etc) is where active management can work the best even without taking more risk.
Liquidity risk is a thing.
Active corporate bond funds have more liquidity risk than index corporate bond funds? :confused
That was not my comment. I thought it was clear that I was pointing out that the illiquid bond space (however you define that) is not a free lunch. You are taking more liquidity risk with illiquid bonds.

Had the Fed not stepped in to buy corporate credit in 3/2020 I guess we would have learned just how many active bond funds are more liquid than a large total bond market index fund. But generally, short and intermediate treasuries have held up well at times of market turmoil and total bond market index funds have fared ok.

Liquidity management is a major aspect of portfolio management with PIMCO PTTRX Toral Return bond fund.

https://www.pimco.com/en-us/insights/vi ... idity-risk

But it still generally has had steeper drawdowns than a total bond index at times of market stress.
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Re: Core bond fund which lost -40% in 12 months (2008-9) rates five stars today

Post by VaR »

Candor wrote: Thu Nov 25, 2021 10:31 am Any way to find its M* rating prior to 2008? I did a quick search and wasn't able to find anything.
The class A shares were 2 star in 2007 and slipped down to 1 star in 2008. The Y shares were 5 star through the summer of 2007 but slid down to 1 star by the end of 2008.
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Re: Core bond fund which lost -40% in 12 months (2008-9) rates five stars today

Post by dogagility »

I view Morningstar's star rating system as a gimmick. In place because the company had to make some fund evaluation as part of their business and "star" was part of the company name.
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Re: Core bond fund which lost -40% in 12 months (2008-9) rates five stars today

Post by grok87 »

Northern Flicker wrote: Fri Nov 26, 2021 10:21 pm
grok87 wrote: TL/DR skip actively managed bond funds. if you want higher portfolio returns increase your equity allocation.
I don't disagree, and think passive bond index funds are an excellent choice, but there are a couple areas where active management for bonds is sensible: stable value funds and GNMA portfolios. There is sufficient evidence for me to believe that active management adds value in the GNMA space if cost is low, and stable value funds can add value if well managed and costs are low, so that crediting rates are competitive.

I don't think active management adds much value to TIPS portfolios, but as long as costs are low, it does not seem to hurt you in any meaningful way:

https://www.portfoliovisualizer.com/bac ... ion3_3=100
thanks for the charts.
But Actively managed bond funds can take all sorts of risks you wouldn't expect. Take the case of the Fidelity Inflation Bond Fund during the global financial crisis. It underperformed due to subprime exposure. What does subprime have to do with inflation protected bonds or tips? nothing as far as i can tell. but they snuck it in under the 80/20 rule- i.e. mutual funds can invest 20% of their funds that have nothing to do with their name.

hhttps://www.bogleheads.org/forum/viewtopic.php?t=4647

cheers,
grok
RIP Mr. Bogle.
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Re: Core bond fund which lost -40% in 12 months (2008-9) rates five stars today

Post by Candor »

VaR wrote: Sat Nov 27, 2021 2:28 am
Candor wrote: Thu Nov 25, 2021 10:31 am Any way to find its M* rating prior to 2008? I did a quick search and wasn't able to find anything.
The class A shares were 2 star in 2007 and slipped down to 1 star in 2008. The Y shares were 5 star through the summer of 2007 but slid down to 1 star by the end of 2008.
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Re: Core bond fund which lost -40% in 12 months (2008-9) rates five stars today

Post by nisiprius »

VaR wrote: Sat Nov 27, 2021 2:28 am
Candor wrote: Thu Nov 25, 2021 10:31 am Any way to find its M* rating prior to 2008? I did a quick search and wasn't able to find anything.
The class A shares were 2 star in 2007 and slipped down to 1 star in 2008. The Y shares were 5 star through the summer of 2007 but slid down to 1 star by the end of 2008.
Do you get access to that data with a paid Morningstar subscription? If not, how did you find it?
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Re: Core bond fund which lost -40% in 12 months (2008-9) rates five stars today

Post by TN_Boy »

nisiprius wrote: Sat Nov 27, 2021 11:09 am
VaR wrote: Sat Nov 27, 2021 2:28 am
Candor wrote: Thu Nov 25, 2021 10:31 am Any way to find its M* rating prior to 2008? I did a quick search and wasn't able to find anything.
The class A shares were 2 star in 2007 and slipped down to 1 star in 2008. The Y shares were 5 star through the summer of 2007 but slid down to 1 star by the end of 2008.
Do you get access to that data with a paid Morningstar subscription? If not, how did you find it?
Not VaR .. but I used to have a paid morningstar subscription. At one point in time, they had an archived (or somesuch) area where you could find old analyst reports. This was quite useful.

In fact, I believe I used those archives several years ago to look up the fund which is the subject of this post. Like nisprius, I was dazzled, amazed and astounded that a "core" bond fund could crater like this. I also have used it to look up old reports on Hussman's funds -- they used to cover his strategic growth fund until the losses and money outflow left it too small to merit analysis.

These old reports were quite entertaining, as they demonstrate without a doubt -- to me at least -- the lack of Morningstar's ability to see major trouble ahead. That said, I imagine if you looked at the core bond fund's holdings in 07/08 etc it would have been easy to see they were doing high risk stuff.

My takeaway from things like the core bond fund -- and similar debacles -- is that a high risk position works! Until it doesn't! Bummer! And while "something" is working, everybody loves it.
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Re: Core bond fund which lost -40% in 12 months (2008-9) rates five stars today

Post by Northern Flicker »

grok87 wrote: Sat Nov 27, 2021 5:49 am
Northern Flicker wrote: Fri Nov 26, 2021 10:21 pm
grok87 wrote: TL/DR skip actively managed bond funds. if you want higher portfolio returns increase your equity allocation.
I don't disagree, and think passive bond index funds are an excellent choice, but there are a couple areas where active management for bonds is sensible: stable value funds and GNMA portfolios. There is sufficient evidence for me to believe that active management adds value in the GNMA space if cost is low, and stable value funds can add value if well managed and costs are low, so that crediting rates are competitive.

I don't think active management adds much value to TIPS portfolios, but as long as costs are low, it does not seem to hurt you in any meaningful way:

https://www.portfoliovisualizer.com/bac ... ion3_3=100
thanks for the charts.
But Actively managed bond funds can take all sorts of risks you wouldn't expect. Take the case of the Fidelity Inflation Bond Fund during the global financial crisis. It underperformed due to subprime exposure. What does subprime have to do with inflation protected bonds or tips? nothing as far as i can tell. but they snuck it in under the 80/20 rule- i.e. mutual funds can invest 20% of their funds that have nothing to do with their name.

hhttps://www.bogleheads.org/forum/viewtopic.php?t=4647

cheers,
grok
I admit that I trust Vanguard more than for-profit active managers like Fidelity, Oppenheimer, etc. not to play games with their fund offerings, but maybe it is a misplaced view.
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Re: Core bond fund which lost -40% in 12 months (2008-9) rates five stars today

Post by VaR »

nisiprius wrote: Sat Nov 27, 2021 11:09 am Do you get access to that data with a paid Morningstar subscription? If not, how did you find it?
I have access to data like this through work.
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Re: Core bond fund which lost -40% in 12 months (2008-9) rates five stars today

Post by grok87 »

Northern Flicker wrote: Sat Nov 27, 2021 5:11 pm
grok87 wrote: Sat Nov 27, 2021 5:49 am
Northern Flicker wrote: Fri Nov 26, 2021 10:21 pm
grok87 wrote: TL/DR skip actively managed bond funds. if you want higher portfolio returns increase your equity allocation.
I don't disagree, and think passive bond index funds are an excellent choice, but there are a couple areas where active management for bonds is sensible: stable value funds and GNMA portfolios. There is sufficient evidence for me to believe that active management adds value in the GNMA space if cost is low, and stable value funds can add value if well managed and costs are low, so that crediting rates are competitive.

I don't think active management adds much value to TIPS portfolios, but as long as costs are low, it does not seem to hurt you in any meaningful way:

https://www.portfoliovisualizer.com/bac ... ion3_3=100
thanks for the charts.
But Actively managed bond funds can take all sorts of risks you wouldn't expect. Take the case of the Fidelity Inflation Bond Fund during the global financial crisis. It underperformed due to subprime exposure. What does subprime have to do with inflation protected bonds or tips? nothing as far as i can tell. but they snuck it in under the 80/20 rule- i.e. mutual funds can invest 20% of their funds that have nothing to do with their name.

hhttps://www.bogleheads.org/forum/viewtopic.php?t=4647

cheers,
grok
I admit that I trust Vanguard more than for-profit active managers like Fidelity, Oppenheimer, etc. not to play games with their fund offerings, but maybe it is a misplaced view.
I agree- i.e. i would also trust Vanguard more.
RIP Mr. Bogle.
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Re: Core bond fund which lost -40% in 12 months (2008-9) rates five stars today

Post by prioritarian »

nisiprius wrote: Thu Nov 25, 2021 11:13 am
jeffyscott wrote: Thu Nov 25, 2021 11:06 am...That share class (A) gets a neutral rating and the summary section of the analyst review says:
The strategy is now managed through the same structured and consistent process executed successfully across other taxable fixed-income offerings in this team’s purview; the strategy earns an upgrade to its Process Pillar rating from Average to Above Average. This leads to a Morningstar Analyst Rating upgrade on the strategy’s cheaper share classes from Neutral to Bronze, while its more-expensive share classes continue to receive Neutral and Negative ratings....
So the five-star rating is there, but you are saying the "analyst rating" of "neutral," and their discussion of the fund actually do raise concerns. Good.
FWIW, I believe Morningstar emphasizes their bronze, silver, and gold analyst ratings over their star ratings (which are, as you pointed out, fairly short-term).
The Analyst Rating is based on the analyst’s conviction in the fund’s ability to
outperform its peer group and/or relevant benchmark on a risk-adjusted basis over the
long term
Generally, these ratings do appear to reflect long-term risk-adjusted returns and Vanguard funds/etfs tend to get high scores:

Image



https://essentials.morningstar.com/doc/ ... peAsia.pdf
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Re: Core bond fund which lost -40% in 12 months (2008-9) rates five stars today

Post by jeffyscott »

prioritarian wrote: Sun Nov 28, 2021 11:54 pm FWIW, I believe Morningstar emphasizes their bronze, silver, and gold analyst ratings over their star ratings (which are, as you pointed out, fairly short-term).
The Analyst Rating is based on the analyst’s conviction in the fund’s ability to
outperform its peer group and/or relevant benchmark on a risk-adjusted basis over the
long term
The star ratings include 10 years of performance. I think the bigger difference is more that the star rating is backward looking and just ranks the actual results, while the analyst rating (gold, silver, bronze) is supposed to be a forward looking rating of the fund's ability to generate alpha.

They didn't have the gold, silver bronze ratings back when the 40%+ collapse happened, but if you read the archives of the analyst reviews from that period, which I summarized in an earlier post, it seems pretty clear that they would have given the fund a good rating on that scale until after the collapse.
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Re: Core bond fund which lost -40% in 12 months (2008-9) rates five stars today

Post by nisiprius »

The part I remember, but haven't been able find now in a search is that before the collapse, there was an analyst, in a report that at the time you could have found online--but people didn't notice it until after the collapse. There was some strange stuff about how the fund reported its investments. The analyst was using phrasing like "I can't be sure of this, I find it hard to believe, but it really looks to me as if this fund is not only investing in risky thing XYZ but using leverage to do it."

Kind of like the discovery after the Enron collapse that the annual report had a footnote about the special-purpose entities that would indeed have been a red flag if anyone had actually noticed it at the time.
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Re: Core bond fund which lost -40% in 12 months (2008-9) rates five stars today

Post by nisiprius »

jeffyscott wrote: Mon Nov 29, 2021 8:42 am...The star ratings include 10 years of performance...
Not exactly. They don't include any more than 10 years, but they are a "weighted average" of 10, 5, and 3 years. I'm not sure if they tell us what the weightings are. Of course, they publish star ratings for funds with less than ten years of history.
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Re: Core bond fund which lost -40% in 12 months (2008-9) rates five stars today

Post by jeffyscott »

nisiprius wrote: Mon Nov 29, 2021 9:00 am
jeffyscott wrote: Mon Nov 29, 2021 8:42 am...The star ratings include 10 years of performance...
Not exactly. They don't include any more than 10 years, but they are a "weighted average" of 10, 5, and 3 years. I'm not sure if they tell us what the weightings are. Of course, they publish star ratings for funds with less than ten years of history.
Yes, I should have said for this fund it would include 10 years. But even with that, by somehow combining 10, 5, and 3, it is giving extra weight to recent performance since the 10 year includes the 5 years and the 3 years and the 5 year includes the 3 years.

So if it were equal weight (I don't know what the actual weightings are either), then the most recent 3 years would get counted 3 times, years 4 and 5 get counted twice, and the oldest 5 years just once.
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Re: Core bond fund which lost -40% in 12 months (2008-9) rates five stars today

Post by prioritarian »

jeffyscott wrote: Mon Nov 29, 2021 8:42 am
prioritarian wrote: Sun Nov 28, 2021 11:54 pm FWIW, I believe Morningstar emphasizes their bronze, silver, and gold analyst ratings over their star ratings (which are, as you pointed out, fairly short-term).
The Analyst Rating is based on the analyst’s conviction in the fund’s ability to
outperform its peer group and/or relevant benchmark on a risk-adjusted basis over the
long term
The star ratings include 10 years of performance. I think the bigger difference is more that the star rating is backward looking and just ranks the actual results, while the analyst rating (gold, silver, bronze) is supposed to be a forward looking rating of the fund's ability to generate alpha.

They didn't have the gold, silver bronze ratings back when the 40%+ collapse happened, but if you read the archives of the analyst reviews from that period, which I summarized in an earlier post, it seems pretty clear that they would have given the fund a good rating on that scale until after the collapse.
It's a little more complicated than that. There are independent star ratings for 3, 5, and 10 year periods and these are also used to calculate a composite star rating:
Funds are rated for up to three periods—the trailing three, five, and 10 years—and ratings are recalculated each month. Funds with less than three years of performance history are not rated. For funds with only three years of performance history, their three-year star ratings will be the same as their overall star ratings. For funds with five-year records, their five-year histories will count for 60% of their overall rating and their three-year rating will count for 40% of the overall rating. For funds with more than a decade of performance, the overall rating will be weighted as 50% for the 10-year rating, 30% for the five-year rating, and 20% for the three-year rating.
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Re: Core bond fund which lost -40% in 12 months (2008-9) rates five stars today

Post by jeffyscott »

prioritarian wrote: Mon Nov 29, 2021 12:15 pm It's a little more complicated than that. There are independent star ratings for 3, 5, and 10 year periods and these are also used to calculate a composite star rating:
Funds are rated for up to three periods—the trailing three, five, and 10 years—and ratings are recalculated each month. Funds with less than three years of performance history are not rated. For funds with only three years of performance history, their three-year star ratings will be the same as their overall star ratings. For funds with five-year records, their five-year histories will count for 60% of their overall rating and their three-year rating will count for 40% of the overall rating. For funds with more than a decade of performance, the overall rating will be weighted as 50% for the 10-year rating, 30% for the five-year rating, and 20% for the three-year rating.
So in the composite, each of the most recent 3 years ends up counting for about 3.5 times as much as the first 5 years in a 10 year period. Each of the first 5 years gets a 5% weight, the next 2 get 11% each, and the last 3 are 17.7% each (if the fund has a 10 year record).
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Re: Core bond fund which lost -40% in 12 months (2008-9) rates five stars today

Post by abuss368 »

Ferdinand2014 wrote: Thu Nov 25, 2021 8:19 am I just don’t see the point of the star rating. Even M*’s own studies demonstrate it’s not a good predictor of future returns (expenses are the most reliable predictor within any given asset class - according to M*).
Excellent point. I am reading Jack Bogle “Common Sense on Mutual Funds - 10th Anniversary” and Mr. Bogle makes this exact point.

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