Vanguard Junk Bond fund

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e5116
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Re: Vanguard Junk Bond fund

Post by e5116 » Wed May 16, 2018 9:39 am

mikebee wrote:
Wed May 16, 2018 1:51 am
whodidntante wrote:
Tue May 15, 2018 10:13 pm
We Bogleheads prefer to lose our money in Vanguard Total Bond Market.
Why ? Not helpful. Please address OP's first post.
whodidntante's post was tongue in cheek. :P

littlebird
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Re: Vanguard Junk Bond fund

Post by littlebird » Wed May 16, 2018 10:30 am

whodidntante wrote:
Tue May 15, 2018 10:13 pm
We Bogleheads prefer to lose our money in Vanguard Total Bond Market.w
Too true.

mikebee
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Re: Vanguard Junk Bond fund

Post by mikebee » Wed May 16, 2018 12:10 pm

Valuethinker wrote:
Wed May 16, 2018 3:56 am
mikebee wrote:
Tue May 15, 2018 1:31 pm
Valuethinker wrote:
Tue May 15, 2018 11:33 am
mikebee wrote:
Tue May 15, 2018 9:53 am
Less risk than the Vanguard S&P 500 fund, virtually no defaults in the past 10 years, duration of of only 4.4 years, a yield of 5.5%+ and a great active manager with a proven track record who buys conservatively.
Totally anti- Boglehead I know but what's not to like ?
Genuinely puzzled.
The reason there is almost no default is that the fund will sell bonds before they get to default. As a fund investor you have taken most of the pain of default already when the fund sells (the price will reflect the market's expectations of default).

Note the NAV of this fund has been falling over the long run? In effect, you are having your capital paid out as income.

If you look at the performance of this fund in 2008-09, this was not a fun ride. It is less "junk"-ie than many other funds of this type, is conservatively run. But it still took an awful lot of pain. Behaving much more like an equity fund than a bond fund.

In portfolio terms:

- you have cut your benefits from diversification due to higher correlation between your bonds and equities in your portfolio
- it is quite tax inefficient (vs an equity/ high grade bond fund combination) because of the high payouts

10 year numbers are not particularly helpful given the 10 year number is nearing the date of the Lehman Crash. By this time in 2008, Bear Sterns had already been sold for scrap to JP Morgan, we knew we were in considerable trouble, the conservatorship of FNMA and FMAC lay just ahead, and the reef of Lehman Brothers was lying just below the surface of the water, with ship of the world financial system headed straight towards it ....
The share price now is the same as May 2008 so how can you claim that the NAV has declined ?
it is not $10.00 which is presumably where the fund was launched at? Therefore it has declined.

The whole argument really boils down to whether credit is a separate return factor (along with liquidity, term, value, size, momentum etc.) and whether you can get paid to take on that risk as an investor. Rick Ferri argues yes, Larry Swedroe has argued that it's not worth it.
Where is the risk ? It was $10 in 1979, 39 years ago and $6 in 2008. so NAV has not declined in last 10 years. Compared with the excellent dividends paid month after month the NAV since inception is negligible. Please do some homework before you post incorrect statements.

mikebee
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Re: Vanguard Junk Bond fund

Post by mikebee » Wed May 16, 2018 12:14 pm

e5116 wrote:
Wed May 16, 2018 9:39 am
mikebee wrote:
Wed May 16, 2018 1:51 am
whodidntante wrote:
Tue May 15, 2018 10:13 pm
We Bogleheads prefer to lose our money in Vanguard Total Bond Market.
Why ? Not helpful. Please address OP's first post.
whodidntante's post was tongue in cheek. :P
oh really ? Neither humorous or informative.

lack_ey
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Re: Vanguard Junk Bond fund

Post by lack_ey » Wed May 16, 2018 12:44 pm

What's your goal here? To get a different kind of bond? To get a higher yield? To get a diversifying source of return? Or what? What would you be investing in otherwise?

Would you consider junk bonds if selected randomly, or via an index fund, or is this about Wellington's management? How much manager alpha do you expect going forward, relative to what we've gotten so far?

venkman
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Re: Vanguard Junk Bond fund

Post by venkman » Wed May 16, 2018 9:51 pm

mikebee wrote:
Wed May 16, 2018 1:46 am
venkman wrote:
Tue May 15, 2018 10:07 pm
mikebee wrote:
Tue May 15, 2018 10:57 am
alfaspider wrote:
Tue May 15, 2018 10:44 am
But OP just said volatility is not an issue. At least selling equities at a loss has a tax benefit. Interest payments on a bond that has dropped by 50% in value are still fully taxable.
True but would not the income from the bond have risen 50% so mitigating the higher tax rate ?
Assuming no defaults, the income from the bond would remain unchanged. The yield to a new purchaser of the bond would go up, but that would be irrelevant to someone who already owned it.
Just not so. The income would go up but the total return would fall.
Maybe I misunderstood the scenario.

If you bought a bond that paid x dollars per year, and then interest rates went up to a degree that the market value of that bond was cut in half, that bond would still be paying x dollars per year. Your total return would be down for the year, because the market value of your bond dropped. (Though the market value would gradually go back up over the years, as the maturity date got closer.)

The income you were getting from the bond would still be taxable, but the fact that the price of your bond had declined would have no effect on your taxes unless you sold it and took the capital loss.

Valuethinker
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Re: Vanguard Junk Bond fund

Post by Valuethinker » Thu May 17, 2018 5:36 am

mikebee wrote:
Wed May 16, 2018 12:10 pm



Where is the risk ? It was $10 in 1979, 39 years ago and $6 in 2008. so NAV has not declined in last 10 years. Compared with the excellent dividends paid month after month the NAV since inception is negligible. Please do some homework before you post incorrect statements.
Lines like that make me sigh. 30k & something posts in, they still make me sigh.

I asked you a question. It so happens I am factually correct (NAV has been falling over time).

You are suffering from Confirmation Bias. We've not told you anything on this thread which is not true, and we've outlined the differences of opinion here about investing in HY bonds.

If you have decided to do this, why waste time here discussing it? Why not just implement it? It seems clear you are seeking to advocate a position, not debate whether it is true or not?

I sense you don't understand what I wrote below?
The whole argument really boils down to whether credit is a separate return factor (along with liquidity, term, value, size, momentum etc.) and whether you can get paid to take on that risk as an investor. Rick Ferri argues yes, Larry Swedroe has argued that it's not worth it.
The other author I would suggest is Anti Illmanen ("Expected Returns") who nails this in some detail- -but his books are fairly techy (not unreadable to someone well versed in the discussions here). And William Bernstein's piece on Efficient Frontier about when you should buy HY bonds (answer: when the spreads over Investment Grade really blow out and all looks lost).

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Flymore
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Re: Vanguard Junk Bond fund

Post by Flymore » Thu May 17, 2018 7:07 am

Looking at a chart of VWEAX since 2010 when I bought it, it appears the price has gone from 3.20 to 5.76.
So, looks good to me.
What am I missing?

Thanks.

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nisiprius
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Re: Vanguard Junk Bond fund

Post by nisiprius » Thu May 17, 2018 7:20 am

mikebee, what's not to like about it is that you might be crapping up a simple portfolio for no good reason, and kidding yourself that you've accomplished something important when all you've done is the same thing you could have done just tweaking up your stock allocation while staying in investment-grade bonds for the bond allocation.

An awful lot of "different" assets get attention simply because they are different, and it is easy to spin a case that different must be better. In many cases, they are just sort of in-between assets; they are, perhaps, a group of stocks that has lower risk but also lower return than the market as a whole, or, in this case, a group of bonds that has higher risk and higher return than the bond market as a whole. It is fairly easy to pitch these as being "best of both worlds" when they are really not much more than "mix of two worlds."

If adding something to your portfolio raises the return, it is easy to focus on "more return" without paying attention to risk. If adding it lowers risk, it is easy to focus on "less risk" without paying attention to return.

For every little "twist," the question to ask is whether adding it to your portfolio actually is doing something significantly different from just adjusting your basic stock/bond allocation. Very often, most of the apparent differences fade away into the land of "maybe, maybe not" once you do this.

For example, let's consider Portfolio 1, blue, 60% Vanguard Total Stock Market Index Fund, VTSMX, 40% Vanguard Total Bond Market Index Fund, VBMFX.

For Portfolio 2, blue let's replace Total Bond with Vanguard High-Yield Corporate. Oooh, look, more return. And seemingly no more risk to speak of...



Image

...but, for portfolio 1, blue, suppose we had just boosted the stock allocation a bit? In fact, let's hand-adjust it to get exactly the same standard deviation, one measure of one important form of risk. Instead of comparing 60/40 stocks/junk bonds, let's compare it to 74.9% stocks/26.1% investment-grade bonds.

[url=https://www.portfoliovisualizer.com/bac ... tion3_2=40]Source


The main point is that once you equalized risk, the performance of the two portfolios was virtually identical. To the extent that there were any hair-thin differences to obsess over--differences that might go the other way if you picked slightly different endpoints in time--most are in favor of just goosing up the stock allocation, rather than adding junk bonds. The return is a skosh higher, the worst year isn't quite as bad, the max drawdown isn't quite as deep, the Sharpe ratio is identical, the Sortino ratio is a skosh higher. I used all available data, Jan 1993 - Apr 2018, and the limiting period was determined by the availability of the Total Stock fund.

Image

I don't think any of these differences matters, or can even be shown to be more than a chance departure, luck of the draw for the time period. I don't think you can prove that one is better or worse than the other.

I do think, however, that there is some harm in crapping up a simple portfolio with bells and whistles and kidding yourself that you've accomplished something important, when all you've done is the same thing you could have done by tweaking your stock allocation. Not that the expenses matter much either, but why pay Vanguard 0.13% for the High-Yield Bond Fund--0.23% if you don't have the $50,000 minimum for Admiral shares--if you are not sure it is buying anything different from sticking with Total Bond at 0.05% ER and just tuning your allocation to be a bit more aggressive?
Last edited by nisiprius on Thu May 17, 2018 7:28 am, edited 1 time in total.
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Valuethinker
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Re: Vanguard Junk Bond fund

Post by Valuethinker » Thu May 17, 2018 7:25 am

Flymore wrote:
Thu May 17, 2018 7:07 am
Looking at a chart of VWEAX since 2010 when I bought it, it appears the price has gone from 3.20 to 5.76.
So, looks good to me.
What am I missing?

Thanks.
Most funds will have charts like that over that time period.

What we are discussing is whether returns on this fund properly reward the risk. The fund did very poorly 2008-09.

Equity risk shows up in HY bond funds when we are in bear markets. If the bear market happens to be caused by a financial crisis, it really shows up.

Like the Venture Capital market, the structure of the HY debt market really works against outside investors. The investment banks and their clients are adept at issuing debt when volatility is low and thus the Option Adjusted Spread on the debt (the yield premium over investment grade debt) is low.

There's a real Agency Problem here, because companies don't issue debt if the borrowing rate is unattractive, and they know more about the financial and operating conditions of the business than we as investors do.

Also most HY bonds contain the option of the issuer to call the bonds if they are upgraded to investment grade. So it's a "heads the issuer wins, tails the investor loses" type scenario, where the issuer has more information than the investor.

dbr
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Re: Vanguard Junk Bond fund

Post by dbr » Thu May 17, 2018 7:29 am

Flymore wrote:
Thu May 17, 2018 7:07 am
Looking at a chart of VWEAX since 2010 when I bought it, it appears the price has gone from 3.20 to 5.76.
So, looks good to me.
What am I missing?

Thanks.
Maybe that in 2007 the fund was over 6.00 and crashed to 3.9 in 2008. That is not very helpful behavior for a bond fund. Also, I don't see on a chart where that fund was ever as low as 3.2.

What you are missing, as addressed by nisiprius, is that what matters is the behavior of the portfolio and whether or not there is any advantage to allocating some of it to junk bonds. A one time buy at the bottom of a market crash is good on you if you can pull it off, but don't count on doing such things systematically enough to gain much of anything. Besides that you completely missed a glorious opportunity to buy the S&P 500 at that same market bottom and become a rich man today.

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Flymore
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Re: Vanguard Junk Bond fund

Post by Flymore » Thu May 17, 2018 7:35 am

"What we are discussing is whether returns on this fund properly reward the risk. The fund did very poorly 2008-09."
I didn't own this fund during 08-09, acquired it in 2010 after the correction. Just luck :)

Considering the yield plus the price, I think it's done very well.

thanks.

dbr
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Re: Vanguard Junk Bond fund

Post by dbr » Thu May 17, 2018 7:45 am

Flymore wrote:
Thu May 17, 2018 7:35 am
"What we are discussing is whether returns on this fund properly reward the risk. The fund did very poorly 2008-09."
I didn't own this fund during 08-09, acquired it in 2010 after the correction. Just luck :)

Considering the yield plus the price, I think it's done very well.

thanks.
Confusing outcome with strategy is a serious mistake in investing. Lots of assets do very well if purchased just after a market bottom for that asset. Market timing as a strategy does not work out very well. It is still true you should have bought stocks, not bonds, then.

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nisiprius
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Re: Vanguard Junk Bond fund

Post by nisiprius » Thu May 17, 2018 7:52 am

mikebee (and Flymore), there's another factor here. I don't want to overemphasize it for two reasons. The first is that I perceive, for no very good reason, that Vanguard is a prudent, cautious, and conservative manager, and I would not be worried about Vanguard's high-yield bond fund. The second is that the SEC put in some new regulations for bond funds in 2017 to guard against the problem I'm going to mention. However.

A mutual fund promises you daily liquidity. Every day they calculate the NAV and if you want your money they calculate what your shares are "worth" and pay you. But neither you nor they have literally tried to sell those shares. With run-of-the-mill mutual funds this isn't a problem. Normally, the fund knows the market price of a stock and if the fund needs money to pay a redemption, they can easily sell it for almost exactly the amount that is needed.

However, if a mutual fund is promising you daily liquidity, but it is investing in assets that are not liquid, that is a potential risk. Regulations guard against it by requiring funds to invest no more than 15% in illiquid assets, and by allowing funds seven days to actually come up with the money for a redemption. Usually that's good enough.

Since 2008, corporate bonds have been less liquid than before, and the worse the credit, the lower the liquidity. Again, normally that doesn't matter, the fund promises you daily liquidity and if it takes the fund some time to find a buyer for a bond, that's their problem, not yours.

It becomes a problem under unusual high-stress situations. If investors believe that a fund's stated end-of-day NAV is too high--the fund promises investors $X/share but they don't believe the fund's assets can really be sold for that because the market has dried up--then you get a situation resembling a run on a bank.

The IMF and the SEC recognized this as a potential problem in bond funds a few years ago. In 2017 new rules were instituted to deal with it. For example, funds are now allowed to impose a redemption fee to slow down redemptions in a crisis.

Nevertheless, there has been one actual mutual fund collapse due to liquidity problems in junk bonds: the Third Avenue Focused Credit Fund. To be clear, this wasn't any ordinary high-yield bond fund, these were not just junk bonds, not like the mostly-B-rated bonds in the Vanguard High-Yield Bond Fund, these were the bonds of distressed companies in real danger of going under and defaulting on their bonds.

However, I remember a Vanguard manager once mentioning that there had been some really tense days in 2008 in the Total Bond fund. They in fact always managed to meet redemptions, but apparently there were times when the market had really dried up and it was hard to find buyers for the bonds they needed to sell.

It is very hard to judge the kind of risk involved in a financial crisis, but I think it is sensible to assume that junk bond funds in general have more risk of nasty behavior in a real crisis than investment-grade bond funds.
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goblue100
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Re: Vanguard Junk Bond fund

Post by goblue100 » Thu May 17, 2018 8:01 am

nisiprius wrote:
Thu May 17, 2018 7:20 am
mikebee, what's not to like about it is that you might be crapping up a simple portfolio for no good reason, and kidding yourself that you've accomplished something important when all you've done is the same thing you could have done just tweaking up your stock allocation while staying in investment-grade bonds for the bond allocation.

I added a third portfolio:
https://www.portfoliovisualizer.com/bac ... tion4_3=40

While I know the bond bull market is over, and the future returns of a long bond fund are going to be muted, I like how the long bond acts in a down market.
Some people are immune to good advice. - Saul Goodman

FactualFran
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Re: Vanguard Junk Bond fund

Post by FactualFran » Thu May 17, 2018 2:53 pm

mikebee wrote:
Tue May 15, 2018 6:59 pm
FactualFran wrote:
Tue May 15, 2018 5:02 pm
AJS wrote:
Tue May 15, 2018 11:03 am
Why would an investor care if the value drops if the investment purpose is just to receive income? With no intention to ever sell shares.
An investor who took the income distributions of VWEHX in cash over its history would have cared about the long-term trend. The annual amount of cash would have increased every year from 1979 (the first full year of the fund) to 1983. The cash during 1983 would have been 6.7% more than for 1979. From 1983 to 2017 the annual amount of cash would have decreased most years. The cash during 2017 would have been 75% less than than for 1983.
Nothing alarming or very surprising in this record. The 10 year treasury has been in decline since Volker raised the fed rate to 20% in 1981. Has not VWEAX paid out well compared with other bond types since that time ? If, as seems likely, we are in for a long period of interest rate rises then VWEAX dividends will now increase and non-selling holders will be very happy.
.
An alarming drop in income for those who purpose is just receive income, as AJS wrote. It is a fine investment for those who do not care if value and income drop.

For the calendar years the both VWHEX and VFICX (Vanguard Intermediate-Term Investment Grade) have existed, the sum of the income dividends taken in cash plus change in account balance has been 7.4% greater for VFICX. That is for those who care about account value and income.

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