PIMCO Total Return vs. Vanguard Total Bond Index

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ithryn
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PIMCO Total Return vs. Vanguard Total Bond Index

Post by ithryn » Mon Aug 16, 2010 3:07 am

Is there any benefit to holding the PIMCO Total Return Fund over the Vanguard Total Bond Index?

PIMCO (institutional shares):
Expense: 0.47%
Turnover: 400-ish%
10 Year Return Before Taxes 7.65%

Vanguard (institutional shares):
Expense: 0.07%
Turnover: 72%
10 Year Return Before Taxes 6.19%

PIMCO was my bond fund in my 401k but the Vanguard fund is available to me. I wasn't initially worried about PIMCO's high turnover (and presumably high taxes) because I'm holding it in a tax-deferred account. But maybe I don't understand the taxes right and they eat up the returns anyway?

PIMCO shows a chart with lots of 10+% returns, but I probably shouldn't be swayed by that, right? I am swayed by Vanguard's lower expense, like $90 on a $10,000 investment over ten years vs several hundred with PIMCO. Wouldn't that eat the difference from PIMCO's apparently higher returns?

I'm pretty sure I'm going to switch. Just wanted to check here before I did.

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Post by Bob's not my name » Mon Aug 16, 2010 4:31 am

There have been many threads on this question. Just type PIMCO TBM in the search bar and you'll find some of them readily. Be alert to different ER's the posters are paying for PIMCO, depending on their plan.

I believe you'll find persuasive pro-PIMCO and pro-TBM arguments. Unless there are dollar thresholds for either that will reduce your costs, you might conclude that you should "switch" your future contributions to TBM, but leave your current investment in PIMCO.

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Post by jimkinny » Mon Aug 16, 2010 6:04 am

I do not think there is any advantage. Pimco's fund is actively managed and has higher fees. Both of these attribrutes are disadvantages for the Pimco fund. I would chose the Vanguard fund because I do not want to pay more and and take on an uncompensated risk in the form of active management.

Jim

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Post by Erwin » Mon Aug 16, 2010 6:23 am

jimkinny wrote:I do not think there is any advantage. Pimco's fund is actively managed and has higher fees. Both of these attribrutes are disadvantages for the Pimco fund. I would chose the Vanguard fund because I do not want to pay more and and take on an uncompensated risk in the form of active management.

Jim


I would tend to agree with you, but Pimco's total return fund is not just any fund, it is run by the king of the bond market, Bill Gross. I own it because of its record, but beyond that because of the the super way that Gross managed it during the last financial crisis. To me stability is worth much.
Erwin

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Post by Adrian Nenu » Mon Aug 16, 2010 6:37 am

The PIMCO Total Return bond fund has wide latitude to invest in bonds from all over the world and buy and sell them as the managers see fit. The Vanguard Total Bond Market index fund invests in US bonds and attempts to mirror the Barclays Capital U.S. Aggregate Float Adjusted Bond Index.

https://personal.vanguard.com/us/FundsS ... IntExt=INT

Aside from the high cost issue, you never really know what you have when you invest in the PIMCO fund because the turnover is 400% a year and it can invest basically anywhere. The credit quality can vary greatly - think equity risk. You know what you have with the Vanguard fund.

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Post by Munir » Mon Aug 16, 2010 7:37 am

Why not own both? You will have greater diversity at reasonable cost, and gain the expertise of Bill Gross.

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Post by Adrian Nenu » Mon Aug 16, 2010 8:20 am

Why not own both? You will have greater diversity at reasonable cost, and gain the expertise of Bill Gross.


Better off taking higher known risk than unknown risk (because the risk is controlled by the manager, not the investor). A combo of High Yield + International Bond in addition to Total Bond Market Index + TIPS would be more risk transparent and you know what you have...that is if you want to take on more risk with the bond allocation. It is tempting to reach for extra yield nowadays but be aware of the extra risk associated.

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Post by rcshouldis » Mon Aug 16, 2010 8:24 am

mpt follower wrote:
jimkinny wrote:I do not think there is any advantage. Pimco's fund is actively managed and has higher fees. Both of these attribrutes are disadvantages for the Pimco fund. I would chose the Vanguard fund because I do not want to pay more and and take on an uncompensated risk in the form of active management.

Jim


I would tend to agree with you, but Pimco's total return fund is not just any fund, it is run by the king of the bond market, Bill Gross. I own it because of its record, but beyond that because of the the super way that Gross managed it during the last financial crisis. To me stability is worth much.


I have had The Total Return Fund in my 401K and now my IRA for many years and I am completely satisfied. Bill Gross has a proven stable track record and I don't think one can go wrong with him.

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Post by Arby » Mon Aug 16, 2010 9:05 am

jimkinny wrote:I do not think there is any advantage. Pimco's fund is actively managed and has higher fees. Both of these attribrutes are disadvantages for the Pimco fund. I would chose the Vanguard fund because I do not want to pay more and and take on an uncompensated risk in the form of active management.

Jim


If an index fund mirrors a benchmark then by definition any attempt to add alpha would be more risky.

To me the question is whether or not Bill Gross is worth 0.4% a year. Would you really prefer the Vanguard fund if the ER were identical?

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Re: PIMCO Total Return vs. Vanguard Total Bond Index

Post by YDNAL » Mon Aug 16, 2010 9:43 am

ithryn wrote:PIMCO was my bond fund in my 401k but the Vanguard fund is available to me. I wasn't initially worried about PIMCO's high turnover (and presumably high taxes) because I'm holding it in a tax-deferred account. But maybe I don't understand the taxes right and they eat up the returns anyway?
ithryn,

PIMCO Tot Ret Inst (PTTRX), As of 03/31/2010
AAA 64.00
AA 9.00
A 13.00
BBB 8.00
BB 3.00
B 2.00
Below B 1.00
Not Rated 0.00

VG Total Bond (VBMFX), As of 06/30/2010
AAA 76.83
AA 4.13
A 10.16
BBB 8.85
BB 0.00
B 0.00
Below B 0.03
Not Rated 0.00

  • The above Credit Quality snap-shot for PIMCO includes about 12% Foreign Bonds and I realize it is NOT static and more subject to active management change than the Index fund. That said, I can't agree with claims of significant higher risk with a bit of added exposure to below BB Bonds.
  • What I do see is the 10- and 15-year performance for PIMCO at 7.87% and 7.84%, respectively, while Total Bond (VBMFX) is 6.18% and 6.37%, respectively.
  • If you think the +23-27% in return over these periods is not worth whatever added risk from management... go with VBMFX. Or, forget VBMFX all together. Or, a combination of the 2 funds. :)
Landy | Be yourself, everyone else is already taken -- Oscar Wilde

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Post by Doc » Mon Aug 16, 2010 9:53 am

Pimco Total Return Institutional PTTRX has out performed Vanguard Total Bond Investor Class in nearly all the rolling one year periods for the 23 years since its inception with very simililar credit risk.

http://quote.morningstar.com/fund/chart ... %2C0%22%7D

The outperformance amounts to 1.3% annually over the period after expenses. The e/r of PTTRX is .46% - higher than Vanguard but I wouldn't consider it high as many others have noted.

If you have access to the institutional share class the I think the answer is a slam dunk despite the "active management" stigma. You should also note that Vg total bond greatly underperformed its index bogey by considerable amounts in the 2002/2003 time period.

http://quote.morningstar.com/fund/chart ... %2C0%22%7D
Last edited by Doc on Mon Aug 16, 2010 9:56 am, edited 1 time in total.
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Post by Adrian Nenu » Mon Aug 16, 2010 9:54 am

Some people think that the stock market is efficient but the bond market is not. Strange. Have to take higher risk for the opportunity to earn higher return in both markets. Also have to overcome higher fees. It's that simple.

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Post by Doc » Mon Aug 16, 2010 10:01 am

Adrian Nenu wrote:Some people think that the stock market is efficient but the bond market is not. Strange. Have to take higher risk for the opportunity to earn higher return in both markets. Also have to overcome higher fees. It's that simple.

Adrian
anenu@tampabay.rr.com


Adrian, not exactly. You are missing the impact of costs not reflected in the e/r. By the use of derivatives to obtain the risk profile of the underlying securities Pimco can obtain a lower transaction costs than a fund like Vanguard's. Unfortunately we have no way to ascertain how much these cost savings are.
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Post by DTSC » Mon Aug 16, 2010 10:02 am

rcshouldis wrote:
I have had The Total Return Fund in my 401K and now my IRA for many years and I am completely satisfied. Bill Gross has a proven stable track record and I don't think one can go wrong with him.


Certainly Bill Gross has an excellent track record, but it's interesting to see this comment on the Bogleheads forum. I didn't think past performance guarantees future returns. Bill Miller of Legg Mason had a "proven track record" too - until he didn't...

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Post by Doc » Mon Aug 16, 2010 10:14 am

DTSC wrote:
rcshouldis wrote:
I have had The Total Return Fund in my 401K and now my IRA for many years and I am completely satisfied. Bill Gross has a proven stable track record and I don't think one can go wrong with him.


Certainly Bill Gross has an excellent track record, but it's interesting to see this comment on the Bogleheads forum. I didn't think past performance guarantees future returns. Bill Miller of Legg Mason had a "proven track record" too - until he didn't...


... as did Vanguard Total Return Bond until it didn't in 2002/3 :roll:
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Post by Sammy_M » Mon Aug 16, 2010 10:43 am

Doc wrote:If you have access to the institutional share class the I think the answer is a slam dunk despite the "active management" stigma.

FWIW, it'd be a slam dunk for me as well.

If not sticking exclusively to treasuries on the bond side, I'd go with PIMCO over Vanguard, provided access to institutional share class. Not saying that is the right answer, just what I'd do. I'm a little jealous. Pimco Total is 0.90 ER in my 401K; otherwise, I'd use it.

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Post by UrbanMedic » Mon Aug 16, 2010 12:23 pm

rcshouldis wrote:
mpt follower wrote:
jimkinny wrote:I do not think there is any advantage. Pimco's fund is actively managed and has higher fees. Both of these attribrutes are disadvantages for the Pimco fund. I would chose the Vanguard fund because I do not want to pay more and and take on an uncompensated risk in the form of active management.

Jim


I would tend to agree with you, but Pimco's total return fund is not just any fund, it is run by the king of the bond market, Bill Gross. I own it because of its record, but beyond that because of the the super way that Gross managed it during the last financial crisis. To me stability is worth much.


I have had The Total Return Fund in my 401K and now my IRA for many years and I am completely satisfied. Bill Gross has a proven stable track record and I don't think one can go wrong with him.


Here's what it always comes down to, people say Bill Gross is a superman. But he's not immortal. He's an old man. He's going to retire someday. Then what?

Further, as the fund grows in size, will it not just become a closet index fund by virtue of owning a little bit of everything under the sun?

We have it in our 457 plan for a decent ER, and I'm not opposed to it, but nobody has been able to explain how the justify the unknown vs the relatively vanilla bond index that isn't dependent on the cult of personality.

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Post by 555 » Mon Aug 16, 2010 12:26 pm

I have a question. What is the relative downside risk. How quickly and how drastically could PIMCO underperform TBM? An active stock fund could suddenly drastically underperform the corresponding index (someone referred to Bill Miller of Legg Mason, maybe an example of this). Could this happen with an active bond fund like PIMCO? In other words, could perfomance chasing hurt that much in bonds funds like these?

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Post by Valuethinker » Mon Aug 16, 2010 1:06 pm

555 wrote:I have a question. What is the relative downside risk. How quickly and how drastically could PIMCO underperform TBM? An active stock fund could suddenly drastically underperform the corresponding index (someone referred to Bill Miller of Legg Mason, maybe an example of this). Could this happen with an active bond fund like PIMCO? In other words, could perfomance chasing hurt that much in bonds funds like these?


Oh yes. You could see a year whenTBM +10%, Pimco TR 0%.


It's hard not to track the index when you have that much under management, but Gross makes some pretty punchy (and shrewd) bets, eg on Fannie and Freddie bonds before the US government nationalized them.

Note Gross is in his late 60s at least? He won't last forever.

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Re: PIMCO Total Return vs. Vanguard Total Bond Index

Post by Valuethinker » Mon Aug 16, 2010 1:07 pm

ithryn wrote:Is there any benefit to holding the PIMCO Total Return Fund over the Vanguard Total Bond Index?

PIMCO (institutional shares):
Expense: 0.47%
Turnover: 400-ish%
10 Year Return Before Taxes 7.65%

Vanguard (institutional shares):
Expense: 0.07%
Turnover: 72%
10 Year Return Before Taxes 6.19%

PIMCO was my bond fund in my 401k but the Vanguard fund is available to me. I wasn't initially worried about PIMCO's high turnover (and presumably high taxes) because I'm holding it in a tax-deferred account. But maybe I don't understand the taxes right and they eat up the returns anyway?

PIMCO shows a chart with lots of 10+% returns, but I probably shouldn't be swayed by that, right? I am swayed by Vanguard's lower expense, like $90 on a $10,000 investment over ten years vs several hundred with PIMCO. Wouldn't that eat the difference from PIMCO's apparently higher returns?

I'm pretty sure I'm going to switch. Just wanted to check here before I did.


Gross won't last forever.

I would diversify by being at least 50/ 50 in both.

I think Gross really does have a 'hot hand' and a gift for bond management. But he is managing huge money, and he is not getting younger.

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Re: PIMCO Total Return vs. Vanguard Total Bond Index

Post by Doc » Mon Aug 16, 2010 3:05 pm

Valuethinker wrote:Gross won't last forever.

I would diversify by being at least 50/ 50 in both.

I think Gross really does have a 'hot hand' and a gift for bond management. But he is managing huge money, and he is not getting younger.


At least we are getting down to meaningful arguments against PTTRX and not just rhetoric. :D

With as much money as Gross has under management don't you think that he has a number of trained lieutenants that can carry the ball. It's not like he's Steve Jobs where we could see the stock value drop by 10% in hours if he should suddenly depart. These are someone else's bonds that are the underlying value of the fund. If Gross departs the scene there will be plenty of time to alter our investment. Maybe that is the time to go to 50/50. And remember if you compare the two funds under consideration to the Barcap Aggregate Index it is Vanguard not Pimco that tanked. If you have a bubble burst the index fund is going to burst with it. The active fund may not. And don't forget Gross is using short term derivatives to obtain the risk of the underlying security. So if you go out a year on the yield curve and guess wrong, the position unwinds itself in a number of months not years. If he were using leveraging we would have a different situation.

Grok started a post recently "Why I love Treasuries but dislike the Total Bond Index!" viewtopic.php?p=775703 Many of the problems with TBM outlined in that thread can be alleviated with a little judicious departure from TBM.
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Post by alec » Mon Aug 16, 2010 3:33 pm

I have both VBMFX and PTTRX available to choose from in my 401(k). Personally, I don't think this is a major decision that needs to be worried about b/c I don't think it's going to make a helluva lot of difference in my 401(k) balance - or at least not so much that I need to lose any sleep over it. Kind of like titling to value with Windsor II over VIVAX.

Also, [in the grand scheme of things] I don't think that going with one over the other is going to make that much of a difference in my retirement standard of living taking into account SS and our pensions. I could have easily gone with either one. If I only had PTTRX as a bond option, i'd go with that, and if I only had VBFMX, I'd go with that.

All in all, my main reason for choosing VBMFX over PTTRX is b/c the former is cheaper... and secondly, it's very pleasing to my eye to see all the fund names start with "Vanguard" when I look at my 401(k) investments. Maybe it's my OCD wanting all the fund names to line up cleanly. Or, perhaps it's because nisiprius is rubbing off on me.
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Post by jimkinny » Mon Aug 16, 2010 4:56 pm

Adrian Nenu wrote:Some people think that the stock market is efficient but the bond market is not. Strange. Have to take higher risk for the opportunity to earn higher return in both markets. Also have to overcome higher fees. It's that simple.

Adrian
anenu@tampabay.rr.com


Precisely.

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Post by Doc » Mon Aug 16, 2010 6:59 pm

jimkinny wrote:
Adrian Nenu wrote:Some people think that the stock market is efficient but the bond market is not. Strange. Have to take higher risk for the opportunity to earn higher return in both markets. Also have to overcome higher fees. It's that simple.

Adrian
anenu@tampabay.rr.com


Precisely.

Adrian is a strong opponent of high fees and I applaud him for that position. But fees are only one component of cost and costs matter. We should not lose track of total costs - fees, transaction cost both at the investor level and at the fund level and bid/ask spreads. One should not be so concerned with fees that one loses site of the other components of cost. A dollar lost to e/r is no different than a dollar lost to spread or to fund transaction costs.
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Post by stratton » Mon Aug 16, 2010 7:20 pm

A "Hot Hands" in Bond Funds is a thread started by Barry about a paper on bond managers repeating success. The problem is high fees can counteract a lot of the skill. Unless an investor can get institutional shares it's highly likely to not be be worth it.

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Post by Doc » Mon Aug 16, 2010 7:41 pm

stratton wrote:A "Hot Hands" in Bond Funds is a thread started by Barry about a paper on bond managers repeating success. The problem is high fees can counteract a lot of the skill. Unless an investor can get institutional shares it's highly likely to not be be worth it.

Paul

Yeah Paul, but we are addressing Institutional Shares with an e/r of only .45%, not the level of a good index fund but not very high.
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Post by JoeMatye » Mon Aug 16, 2010 8:23 pm

It's not even a close question. I go with PIMCO total return in my 401k. They have the track record, they have the people, and they have a strategy that makes sense. Look at the numbers. Look at the research on their website. Low cost index funds usually make sense, but folks should not be closed minded so as to exclude all other ideas.

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Post by Adrian Nenu » Tue Aug 17, 2010 7:46 am

Adrian is a strong opponent of high fees and I applaud him for that position. But fees are only one component of cost and costs matter. We should not lose track of total costs - fees, transaction cost both at the investor level and at the fund level and bid/ask spreads. One should not be so concerned with fees that one loses site of the other components of cost. A dollar lost to e/r is no different than a dollar lost to spread or to fund transaction costs.
_________________


Makes you wonder if Vanguard has a 30 basis points cost advantage and 328% turnover cost advantage vs PIMCO, how much additional risk must Gross take in order to beat Vanguard by nearly 1.5% per year over the last 10 years. Let's find out using the standard deviation risk of loss formula:

(1-SD) to the power of the years in question. I am using Morningstar's 3 year standard deviation numbers which are 4.17 for Vanguard Total Bond Market index and 4.72 for PIMCO Total Return:

(1-.0417)^3 = .9583 x .9583 x .9583 = .8800 or 88% (12% possible loss for the Vanguard Total Bond Market index fund)

(1-.0472)^3 - .9528 x .9528 x .9528 - .8649 or 86.49% (13.51% possible loss for the PIMCO Total Return fund)

The PIMCO Total Return fund is riskier than the Vanguard Total Bond Market index fund.

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Post by mikep » Tue Aug 17, 2010 7:54 am

Since many performance chasers are now buying in to PIMCO TR, based on asset size, watch out if this fund starts underperforming. That will lead to redemptions of the chasing money at perhaps the wrong time (could be an illiquid market) and the cycle will continue in a downward spiral leading to more redemptions, further depressed values, etc. and all shareholders will suffer. The fund cannot balloon in size forever -- there will be a cycle. I have institutional shares available but I'm not biting since I also have institutional Vanguard TIPS (.09 ER) and admiral intermediate treasuries (.12 ER) in my 401(k).

All it takes is for Bill Gross or his successor to get one bet wrong and watch out when it unwinds. I prefer to take my risk on the equity side and use TIPS/treasuries on the fixed side.

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Post by Doc » Tue Aug 17, 2010 8:21 am

Adrian Nenu wrote:
Adrian is a strong opponent of high fees and I applaud him for that position. But fees are only one component of cost and costs matter. We should not lose track of total costs - fees, transaction cost both at the investor level and at the fund level and bid/ask spreads. One should not be so concerned with fees that one loses site of the other components of cost. A dollar lost to e/r is no different than a dollar lost to spread or to fund transaction costs.
_________________


Makes you wonder if Vanguard has a 30 basis points cost advantage and turnover cost advantage vs PIMCO's 400% turnover, how much additional risk must Gross take in order to beat Vanguard by nearly 1.5% per year over the last 10 years. Let's find out using the standard deviation risk of loss formula:

(1-SD) to the power of the years in question. I am using Morningstar's 3 year standard deviation numbers which are 4.17 for Vanguard Total Bond Market index and 4.72 for PIMCO Total Return:

(1-.0417)^3 = .9583 x .9583 x .9583 = .8800 or 88% (12% possible loss for the Vanguard Total Bond Market index fund)

(1-.0472)^3 - .9528 x .9528 x .9528 - .8649 or 86.49% (13.51% possible loss for the PIMCO Total Return fund)

The PIMCO Total Return fund is riskier than the Vanguard Total Bond Market index fund.

Adrian
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Adrian, if you just don't like anything except index funds then say so. Using shoddy arithmetic and misinterpretations of facts doesn't add much to your point of view.

1) I repeat, e/r is not the only cost. Yes Vg has a 30 bps advantage in e/r. Expense ratio does not address Pimco's lower transaction cost attained through volume and and use of less costly derivatives.

2) The 400% turnover is a quirk of the accounting system. It is not a cost disadvantage because it is not turning the same underlying securities that Vanguard is trading. Since Pimco is using short term derivatives to attain the risk profile of longer duration instruments it appears that it has a greater turnover. But in this case it is an advantage. If you buy a five year note you are stuck with that return for the duration. If you sell and re-purchase another note with the same credit rating you don't change the original YTM. This is basis for the price/yield relationship of FI securities. On the other hand if you use an interest rate swap to attain the same original YTM you are not stuck with it for the duration of the underlying note but only for the length of time of the swap.

3) a) Pimco has outperformed for over 20 years not only the last three. b) The differences in SD you state are likely not statistically significant. And who would put any credence to a statistic on variability during a time when the whole credit market went through a crisis highlighted by unprecedented variability. c) Your statistics may apply to a normal distribution but the markets are not normally distributed.

In his bond book, Larry Swedroe describes a trading strategy of buying say a 3 year note and selling after a year. You not only get the higher yield of the longer note but you get a capital gain on the sale if the yield curve hasn't shifted. The problem with implementing this technique is transactions costs. But you can take advantage of it if you have the volume and the derivative skills of a Pimco. The idea of higher return, higher risk in bond markets is a good first start but it is not a rule of physics and doesn't always apply.
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Re: PIMCO Total Return vs. Vanguard Total Bond Index

Post by YDNAL » Tue Aug 17, 2010 8:30 am

Adrian Nenu wrote:Makes you wonder if Vanguard has a 30 basis points cost advantage and 328% turnover cost advantage vs PIMCO, how much additional risk must Gross take in order to beat Vanguard by nearly 1.5% per year over the last 10 years. Let's find out using the standard deviation risk of loss formula:

(1-SD) to the power of the years in question. I am using Morningstar's 3 year standard deviation numbers which are 4.17 for Vanguard Total Bond Market index and 4.72 for PIMCO Total Return:

(1-.0417)^3 = .9583 x .9583 x .9583 = .8800 or 88% (12% possible loss for the Vanguard Total Bond Market index fund)

(1-.0472)^3 - .9528 x .9528 x .9528 - .8649 or 86.49% (13.51% possible loss for the PIMCO Total Return fund)

The PIMCO Total Return fund is riskier than the Vanguard Total Bond Market index fund.

Adrian
anenu@tampabay.rr.com

It depends on the definition of risk.

Risk means to lose money. PIMCO not only doesn't lose money, it handily made MORE money for the investor than VG Total Bond.

Code: Select all

PIMCO Total Return Instl vs. Barcap 5-10 Yr Govt/Credit
2009 13.83% 6.50%
2008 4.82% 5.06%
2007 9.07% 7.55%
2006 3.99% 3.81%
2005 2.89% 1.83%
2004 5.14% 5.30%
2003 5.56% 5.97%
2002 10.20% 13.03%
2001 9.50% 8.82%
2000 12.09% 12.44%

Vanguard Total Bond
2009 1.67%
2008 0.20%
2007 1.70%
2006 –0.70%
2005 –2.03%
2004 –0.19%
2003 –0.67%
2002 2.38%
2001 1.91%
2000 4.18%
1999 –6.77%
1998 2.16%
1997 2.54%
1996 –2.96%
1995 10.58%


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Re: PIMCO Total Return vs. Vanguard Total Bond Index

Post by Valuethinker » Tue Aug 17, 2010 11:42 am

Doc wrote:
Valuethinker wrote:Gross won't last forever.

I would diversify by being at least 50/ 50 in both.

I think Gross really does have a 'hot hand' and a gift for bond management. But he is managing huge money, and he is not getting younger.


At least we are getting down to meaningful arguments against PTTRX and not just rhetoric. :D

With as much money as Gross has under management don't you think that he has a number of trained lieutenants that can carry the ball.


I'll address that point.

And the answer is, generally no.

I believe there are hot hands, and I have known a few of them personally (in UK equities).

But I don't believe the skills are portable. It's an art, not a science.

When Charlie Munger or Warren Buffet go, and when Bill Gross goes, you have to watch out.

Yes you could 'time' it on his retirement-- not an invalid strategy.

Gross is also swinging around huge money.

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Post by Adrian Nenu » Tue Aug 17, 2010 2:29 pm

Adrian, if you just don't like anything except index funds then say so. Using shoddy arithmetic and misinterpretations of facts doesn't add much to your point of view.



The "shoddy arithmetic" comes right out of Zvi, Bodie and Kane's classic book "Investments" used in undergraduate and graduate level finance courses worldwide.

You have a right to your own opinion but that is all you have provided. I presented facts supporting my opinion. Facts are what matter and I have proven there is no free lunch with PIMCO Total Return. Outperformance comes with more risk.

Adrian
anenu@tampabay.rr.com

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Re: PIMCO Total Return vs. Vanguard Total Bond Index

Post by Doc » Tue Aug 17, 2010 8:06 pm

Valuethinker wrote:
Doc wrote:
Valuethinker wrote:Gross won't last forever.

I would diversify by being at least 50/ 50 in both.

I think Gross really does have a 'hot hand' and a gift for bond management. But he is managing huge money, and he is not getting younger.


At least we are getting down to meaningful arguments against PTTRX and not just rhetoric. :D

With as much money as Gross has under management don't you think that he has a number of trained lieutenants that can carry the ball.


I'll address that point.

And the answer is, generally no.

I believe there are hot hands, and I have known a few of them personally (in UK equities).

But I don't believe the skills are portable. It's an art, not a science.

When Charlie Munger or Warren Buffet go, and when Bill Gross goes, you have to watch out.

Yes you could 'time' it on his retirement-- not an invalid strategy.

Gross is also swinging around huge money.


I don't know the reason for the out-performance of PTTRX over the years. Is it because Bill Gross has "hot hands" which are arguably not portable or is it because of the "trade skills" that allows Gross and company to use low cost derivatives to exploit yield curve advantages that are known to everyone but that can't be used advantageous because of the higher cost incurred by funds with less assets under management? Probably it is a combination of the two. But if Gross leaves the scene the out-performance is not going to disappear overnight because the value of the underlying securities has little to do with any "hot hand'' that Gross might have. So we have plenty of time to liquidate our position in PTTRS should Gross depart and therefore the possibility of his departure should not have an untold affect on our decision.
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Post by Doc » Tue Aug 17, 2010 8:38 pm

Adrian Nenu wrote:
Adrian, if you just don't like anything except index funds then say so. Using shoddy arithmetic and misinterpretations of facts doesn't add much to your point of view.



The "shoddy arithmetic" comes right out of Zvi, Bodie and Kane's classic book "Investments" used in undergraduate and graduate level finance courses worldwide.

You have a right to your own opinion but that is all you have provided. I presented facts supporting my opinion. Facts are what matter and I have proven there is no free lunch with PIMCO Total Return. Outperformance comes with more risk.

Adrian
anenu@tampabay.rr.com


Using multiples of a standard deviation to determine the probability of an event based on a "normal distribution" when the underlying distribution is known to not be a normal distribution is statistically unsound. I would suspect that 'Bodie and Kane's classic book "Investments" used in undergraduate and graduate level finance courses worldwide' of which I am admitted not familiar had somewhere the qualifier "based on a normal distribution". It is not uncommon for undergraduate texts not to go into the nuances of "non-normal"distributions.

The fact remains that while statement like +/- two standard distributions, mean 95% confidence limits apply to a normal distribution the same statement does not apply to non-normal distributions like the financial markets.

The fact that PTTRX had a higher standard distribution would be meaningful if it were statistically significant which I don't belive and if the three year period which contained the biggest FI meltdown in recent history had any significance at all to the 20+ years of Pimco's our-performance. This latter assumption streches credibilty beyond reason.

Even if the increased Standard Deviation that you site was statistically significant and if it somehow the three year number could be applied to the previous twenty years, where is the data that shows that such a small difference in standard deviation can be equated to 130 bps in total return?

My remarks are not simply my opinion. There is no doubt that PTTRX has outperformed the Barcap Aggregate Bond Index consistently for over twenty years. This is fact not opinion. This out performance can not be explained by difference in risk either measured by credit quality or standard deviation. Maybe it is Bill Gross's hot hands as Valuethinker opines or maybe it is cost structure as I opine. The out-performance itself is a fact. The reasons are opinions.
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Re: PIMCO Total Return vs. Vanguard Total Bond Index

Post by Avo » Tue Aug 17, 2010 8:48 pm

Doc wrote:I don't know the reason for the out-performance of PTTRX over the years. Is it because Bill Gross has "hot hands" which are arguably not portable or is it because of the "trade skills" that allows Gross and company to use low cost derivatives to exploit yield curve advantages that are known to everyone but that can't be used advantageous because of the higher cost incurred by funds with less assets under management? Probably it is a combination of the two.

Bill Gross also runs two much smaller funds: Manager's Pimco Bond Fund (MBDFX), with $1.4B in assets, and Harbor Bond (HABDX), with $7.5B. These funds tracked PTTRX almost exactly for decades, until the financial crisis hit. Then they both underperformed, with the smaller doing worse (compared to PTTRX). Then they caught up, but not completely. This would appear to mean that the very large asset base of PTTRX helped during the crisis, but not so much otherwise.

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Re: PIMCO Total Return vs. Vanguard Total Bond Index

Post by Doc » Wed Aug 18, 2010 8:47 am

Avo wrote:
Doc wrote:I don't know the reason for the out-performance of PTTRX over the years. Is it because Bill Gross has "hot hands" which are arguably not portable or is it because of the "trade skills" that allows Gross and company to use low cost derivatives to exploit yield curve advantages that are known to everyone but that can't be used advantageous because of the higher cost incurred by funds with less assets under management? Probably it is a combination of the two.

Bill Gross also runs two much smaller funds: Manager's Pimco Bond Fund (MBDFX), with $1.4B in assets, and Harbor Bond (HABDX), with $7.5B. These funds tracked PTTRX almost exactly for decades, until the financial crisis hit. Then they both underperformed, with the smaller doing worse (compared to PTTRX). Then they caught up, but not completely. This would appear to mean that the very large asset base of PTTRX helped during the crisis, but not so much otherwise.


Thanks Avo I missed that and we own both PTTRX and HABDX.
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Re: PIMCO Total Return vs. Vanguard Total Bond Index

Post by Dingle » Wed Aug 18, 2010 8:52 am

ithryn wrote:Is there any benefit to holding the PIMCO Total Return Fund over the Vanguard Total Bond Index?

PIMCO (institutional shares):
Expense: 0.47%
Turnover: 400-ish%
10 Year Return Before Taxes 7.65%

Vanguard (institutional shares):
Expense: 0.07%
Turnover: 72%
10 Year Return Before Taxes 6.19%
PIMCO was my bond fund in my 401k but the Vanguard fund is available to me. I wasn't initially worried about PIMCO's high turnover (and presumably high taxes) because I'm holding it in a tax-deferred account. But maybe I don't understand the taxes right and they eat up the returns anyway?

PIMCO shows a chart with lots of 10+% returns, but I probably shouldn't be swayed by that, right? I am swayed by Vanguard's lower expense, like $90 on a $10,000 investment over ten years vs several hundred with PIMCO. Wouldn't that eat the difference from PIMCO's apparently higher returns?

I'm pretty sure I'm going to switch. Just wanted to check here before I did.

Yeah, I can see a benefit. This talk of less than one half of one percent expense ratio is absurd when compared to the 1.5% return difference.

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Post by Dingle » Wed Aug 18, 2010 9:03 am

Doc wrote:Using multiples of a standard deviation to determine the probability of an event based on a "normal distribution" when the underlying distribution is known to not be a normal distribution is statistically unsound..

Huh?

Doc wrote:I would suspect that 'Bodie and Kane's classic book "Investments" used in undergraduate and graduate level finance courses worldwide' of which I am admitted not familiar had somewhere..


You are not familiar with the book yet make an assumptions about the book.
Doc wrote:It is not uncommon for undergraduate texts not to go into the nuances of "non-normal"distributions.

Right, typically undergraduate texts do not go into those nuances.

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Post by Dingle » Wed Aug 18, 2010 9:07 am

Adrian Nenu wrote:
Adrian, if you just don't like anything except index funds then say so. Using shoddy arithmetic and misinterpretations of facts doesn't add much to your point of view.



The "shoddy arithmetic" comes right out of Zvi, Bodie and Kane's classic book "Investments" used in undergraduate and graduate level finance courses worldwide.

You have a right to your own opinion but that is all you have provided. I presented facts supporting my opinion. Facts are what matter and I have proven there is no free lunch with PIMCO Total Return. Outperformance comes with more risk.

Adrian
anenu@tampabay.rr.com

I agree with Adrian here. It is simple and she made her point very clear. However I do disagree with her is the sense that the increase risk is minimal compared to the increased return.

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Post by Doc » Wed Aug 18, 2010 11:30 am

Dingle wrote:
Doc wrote:Using multiples of a standard deviation to determine the probability of an event based on a "normal distribution" when the underlying distribution is known to not be a normal distribution is statistically unsound..

Huh?

Doc wrote:I would suspect that 'Bodie and Kane's classic book "Investments" used in undergraduate and graduate level finance courses worldwide' of which I am admitted not familiar had somewhere..


You are not familiar with the book yet make an assumptions about the book.
Doc wrote:It is not uncommon for undergraduate texts not to go into the nuances of "non-normal"distributions.

Right, typically undergraduate texts do not go into those nuances.


1) Huh? To use a standard deviation to determine the probability of an event usually assumes that the underlying distribution takes the form of the "normal distribution" curve we are all familiar with. We also know that market returns have kurtosis - fat tails. This makes the distribution a non-normal distribution and the percentages normally used to calculate the probability of an event do not apply. Is this clearer?

2) I didn't assume anything. I said "suspect" based on my experience that many undergraduate texts typically do not do not spend a lot of time on non-normal distributions. You apparently agree with this assessment.

I would appreciate if someone would comment on Adrian's arithmetic. Most of my statistical applications has been in the physical sciences as opposed to the behavioral sciences. I thought that the estimated variance of a mean was the variance of the underlying distribution divided by the square root of the number of points making up that mean. I must admit I am unfamiliar with the formula of (1-SD)^(n/12) that Adrian uses. Nevertheless it seems to me that the SD differences here are very small and are based on abnormal market conditions.

It seems to me that if we are going to use risk/return attributes to compare the two funds that the appropriate metric is not standard deviation but the Sharpe ratio. For the last five years that is 2.05 for PTTRX and only 1.50 for VBMFX. The five and ten year periods also show PTTRX with the higher Sharpe ratio.

At times I am sure that PTTRX has had a lower credit quality than VBMFX and likewise at times probably had a higher credit quality. But it is certainly not a "junk bond" type of fund. Right now Morningstar is showing both with a AA average credit quality.

I just don't see how PTTRX's outperformance can be attributed to higher risk.
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Post by Adrian Nenu » Wed Aug 18, 2010 3:03 pm

However I do disagree with her is the sense that the increase risk is minimal compared to the increased return.


The problem is that the PIMCO Total Return bond fund risk varies due to the ability of the fund manager to change overall bond credit quality and duration. The standard deviation risk calculation may underestimate the risk involved. All depends on the investing paramaters limiting the fund manager. What is the limit for junk bond investments? How about emerging market bonds? Or T-bills? Or MBS? What about duration? The point I am trying to make is that the risks the fund manager takes vary and it's pretty tough to figure out how much risk can be involved vs a bond fund which invests in specific credit quality and duration.

Adrian
anenu@tampabay.rr.com

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Post by Doc » Wed Aug 18, 2010 5:35 pm

Adrian Nenu wrote:
However I do disagree with her is the sense that the increase risk is minimal compared to the increased return.


The problem is that the PIMCO Total Return bond fund risk varies due to the ability of the fund manager to change overall bond credit quality and duration. The standard deviation risk calculation may underestimate the risk involved. All depends on the investing parameters limiting the fund manager. What is the limit for junk bond investments? How about emerging market bonds? Or T-bills? Or MBS? What about duration? The point I am trying to make is that the risks the fund manager takes vary and it's pretty tough to figure out how much risk can be involved vs a bond fund which invests in specific credit quality and duration.

Adrian
anenu@tampabay.rr.com


Junk bonds: Up to 10% Moody's B or higher. Currently 6% less than investment grade.

Emerging markets: up to 15%

T-Bills: Is this a risk factor?

MBS: Not limited.

Duration: within +/- 2 yrs of BarCap Aggregate (Currently 4.8. Vg is 4.4)

Foreign: Up to 30% (I think the BarCap Aggregate is about 5% all $ denominated.)

Foreign Currency Exposure: Normally less than 20%

Adrian, other than the up to 10% B or BB what do you see as the high risk here? There is some more diversification in foreign than the BarCap Index but many think that foreign diversification is a risk mitigator.
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Post by Adrian Nenu » Wed Aug 18, 2010 9:24 pm

Adrian, other than the up to 10% B or BB what do you see as the high risk here? There is some more diversification in foreign than the BarCap Index but many think that foreign diversification is a risk mitigator.


I think we are comparing apples and oranges - PIMCO Total Return can invest anywhere in the world while Vanguard's Total Bond Market index has a specific index to match. PIMCO also has more flexibility on duration too. It boils down to a little more risk for a little more return. I was just pointing out that it is not the free lunch many investors think it is.

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Post by TJAJ9 » Thu Aug 19, 2010 2:27 am

ithryn wrote:Is there any benefit to holding the PIMCO Total Return Fund over the Vanguard Total Bond Index?

PIMCO (institutional shares):
Expense: 0.47%
Turnover: 400-ish%
10 Year Return Before Taxes 7.65%

Vanguard (institutional shares):
Expense: 0.07%
Turnover: 72%
10 Year Return Before Taxes 6.19%

PIMCO was my bond fund in my 401k but the Vanguard fund is available to me. I wasn't initially worried about PIMCO's high turnover (and presumably high taxes) because I'm holding it in a tax-deferred account. But maybe I don't understand the taxes right and they eat up the returns anyway?

PIMCO shows a chart with lots of 10+% returns, but I probably shouldn't be swayed by that, right? I am swayed by Vanguard's lower expense, like $90 on a $10,000 investment over ten years vs several hundred with PIMCO. Wouldn't that eat the difference from PIMCO's apparently higher returns?

I'm pretty sure I'm going to switch. Just wanted to check here before I did.


I personally believe that you'd be better off using Vanguard's Total Bond Market Index Fund. Either that, or you could go 50/50.

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Post by Valuethinker » Thu Aug 19, 2010 5:27 am

Doc wrote:
Adrian Nenu wrote:
However I do disagree with her is the sense that the increase risk is minimal compared to the increased return.


The problem is that the PIMCO Total Return bond fund risk varies due to the ability of the fund manager to change overall bond credit quality and duration. The standard deviation risk calculation may underestimate the risk involved. All depends on the investing parameters limiting the fund manager. What is the limit for junk bond investments? How about emerging market bonds? Or T-bills? Or MBS? What about duration? The point I am trying to make is that the risks the fund manager takes vary and it's pretty tough to figure out how much risk can be involved vs a bond fund which invests in specific credit quality and duration.

Adrian
anenu@tampabay.rr.com


Junk bonds: Up to 10% Moody's B or higher. Currently 6% less than investment grade.

Emerging markets: up to 15%

T-Bills: Is this a risk factor?

MBS: Not limited.

Duration: within +/- 2 yrs of BarCap Aggregate (Currently 4.8. Vg is 4.4)

Foreign: Up to 30% (I think the BarCap Aggregate is about 5% all $ denominated.)

Foreign Currency Exposure: Normally less than 20%

Adrian, other than the up to 10% B or BB what do you see as the high risk here? There is some more diversification in foreign than the BarCap Index but many think that foreign diversification is a risk mitigator.


F/X - well USD can move 20% easily in a couple of months. So if it appreciated that much, potentially -4% on returns. I'd call that a risk in a bond fund.

T Bills - a risk if there are big swings in interest rates.

Usually T Bills used as collateral, though, against derivative positions. There are risk controls on derivative positions although in a market meltdown they might well not move.

Probably there are underlying currency hedges?

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Post by jimkinny » Thu Aug 19, 2010 6:38 am

I own Vanguards Ttl Bnd Idx and their Intermediate Term Index. I do so because the mix has a longer duration and higher risk/ return profile than the Total Bond Index has and that is what I want. I know what it is and accept the risks. My ER is about .15%. I have access to Pimco's total return and Pimco's short duration fund with an expense ration of .6% in a 403. Maybe I could find it somewher else with a lower ER. I have owned both Pimco funds. If I did not have access to an index fund(s) I would probably own Pimco's bond funds because they are my 2nd and 3rd best choices in the 403. My guess is that I match or beat the Pimco returns and I know what I own and understand the risks with the two Vanguard bond funds. I do not know/understand what Pimco does and I do not know the underlying risks are. That is my problem but I will put my money where I know and understand the risks.

I did own a index S&P 500 stock fund in the 403. The people making the choices of the funds in the 403 dropped that fund and made available a large cap index that had 80% of the fund's money tracking the index. The other 20% could be invested anywhere. The fund had international stock and domestic small cap stock in that 20% allocation. More risk, but I guess they get to say sometimes that they beat the large cap index. I own Vanguard's small/large cap and small/large cap value funds as well as international small cap and large cap through their FTSE fund and ETF.

I do not want a stock fund that charges me 0.6% to replicate what I am doing for much less. I sold that 403 large cap fund. I do not want a bond fund that essentially does the same thing as that stock fund. More risk for more return. I do not think there is any free lunch and do not think that Pimco return's are due to efficiency's due to their size but I do not any data regarding trading costs to back this up. If someone has the data to support this claim, I would be interested because I could be wrong. I certainly have been wrong many times in the past.

I think I read in one of Zweig's books that people tend to believe that what they own is better than anything else. I guess that is where I am at.
I will go with indexing until some one proves that active management out performs indexing/passive management.

Jim

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Post by realfan » Thu Aug 19, 2010 8:26 am

jimkinny wrote:I own Vanguards Ttl Bnd Idx and their Intermediate Term Index. I do so because the mix has a longer duration and higher risk/ return profile than the Total Bond Index has and that is what I want. I know what it is and accept the risks. My ER is about .15%. I have access to Pimco's total return and Pimco's short duration fund with an expense ration of .6% in a 403. Maybe I could find it somewher else with a lower ER. I have owned both Pimco funds. If I did not have access to an index fund(s) I would probably own Pimco's bond funds because they are my 2nd and 3rd best choices in the 403. My guess is that I match or beat the Pimco returns and I know what I own and understand the risks with the two Vanguard bond funds. I do not know/understand what Pimco does and I do not know the underlying risks are. That is my problem but I will put my money where I know and understand the risks.

I did own a index S&P 500 stock fund in the 403. The people making the choices of the funds in the 403 dropped that fund and made available a large cap index that had 80% of the fund's money tracking the index. The other 20% could be invested anywhere. The fund had international stock and domestic small cap stock in that 20% allocation. More risk, but I guess they get to say sometimes that they beat the large cap index. I own Vanguard's small/large cap and small/large cap value funds as well as international small cap and large cap through their FTSE fund and ETF.

I do not want a stock fund that charges me 0.6% to replicate what I am doing for much less. I sold that 403 large cap fund. I do not want a bond fund that essentially does the same thing as that stock fund. More risk for more return. I do not think there is any free lunch and do not think that Pimco return's are due to efficiency's due to their size but I do not any data regarding trading costs to back this up. If someone has the data to support this claim, I would be interested because I could be wrong. I certainly have been wrong many times in the past.

I think I read in one of Zweig's books that people tend to believe that what they own is better than anything else. I guess that is where I am at.
I will go with indexing until some one proves that active management out performs indexing/passive management.

Jim



Jim - what is your allocation between the Total Bond Indx and the Intermediate Term Index fund?

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Post by Doc » Thu Aug 19, 2010 10:27 am

Valuethinker wrote:
Doc wrote:
Adrian Nenu wrote:
However I do disagree with her is the sense that the increase risk is minimal compared to the increased return.


The problem is that the PIMCO Total Return bond fund risk varies due to the ability of the fund manager to change overall bond credit quality and duration. The standard deviation risk calculation may underestimate the risk involved. All depends on the investing parameters limiting the fund manager. What is the limit for junk bond investments? How about emerging market bonds? Or T-bills? Or MBS? What about duration? The point I am trying to make is that the risks the fund manager takes vary and it's pretty tough to figure out how much risk can be involved vs a bond fund which invests in specific credit quality and duration.

Adrian
anenu@tampabay.rr.com


Junk bonds: Up to 10% Moody's B or higher. Currently 6% less than investment grade.

Emerging markets: up to 15%

T-Bills: Is this a risk factor?

MBS: Not limited.

Duration: within +/- 2 yrs of BarCap Aggregate (Currently 4.8. Vg is 4.4)

Foreign: Up to 30% (I think the BarCap Aggregate is about 5% all $ denominated.)

Foreign Currency Exposure: Normally less than 20%

Adrian, other than the up to 10% B or BB what do you see as the high risk here? There is some more diversification in foreign than the BarCap Index but many think that foreign diversification is a risk mitigator.


F/X - well USD can move 20% easily in a couple of months. So if it appreciated that much, potentially -4% on returns. I'd call that a risk in a bond fund.

T Bills - a risk if there are big swings in interest rates.

Usually T Bills used as collateral, though, against derivative positions. There are risk controls on derivative positions although in a market meltdown they might well not move.

Probably there are underlying currency hedges?




The foreign bond exposure is 30% in foreign denominated currency but the foreign currency exposure is only 20%. The implication is that they can/will hedge foreign currency. I don't think that the foreign currency fluctuations offer any additional risk to that which is already reflected in the standard deviation. After all the currency fluctuations go in both durations. I have seen some data that shows hedging foreign currency in equity funds is a wash over the long run.

T Bills are usually considered the riskless security. The maturity is so short that interest rate swings have minimal impact.

PTTRX did under perform the BarCap during the 2008 crisis and short Treasuries as expected. See the 3 month rolling return chart:
http://quote.morningstar.com/fund/chart ... %2C0%22%7D I would suggest that if your are concerned with losses during a financial meltdown the only "safe" bet is t-bills or maybe short Treasuries not any intermediate term diversified bond fund.
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Post by Valuethinker » Thu Aug 19, 2010 10:36 am

Doc wrote:
Valuethinker wrote:
Doc wrote:
Adrian Nenu wrote:
However I do disagree with her is the sense that the increase risk is minimal compared to the increased return.


The problem is that the PIMCO Total Return bond fund risk varies due to the ability of the fund manager to change overall bond credit quality and duration. The standard deviation risk calculation may underestimate the risk involved. All depends on the investing parameters limiting the fund manager. What is the limit for junk bond investments? How about emerging market bonds? Or T-bills? Or MBS? What about duration? The point I am trying to make is that the risks the fund manager takes vary and it's pretty tough to figure out how much risk can be involved vs a bond fund which invests in specific credit quality and duration.

Adrian
anenu@tampabay.rr.com


Junk bonds: Up to 10% Moody's B or higher. Currently 6% less than investment grade.

Emerging markets: up to 15%

T-Bills: Is this a risk factor?

MBS: Not limited.

Duration: within +/- 2 yrs of BarCap Aggregate (Currently 4.8. Vg is 4.4)

Foreign: Up to 30% (I think the BarCap Aggregate is about 5% all $ denominated.)

Foreign Currency Exposure: Normally less than 20%

Adrian, other than the up to 10% B or BB what do you see as the high risk here? There is some more diversification in foreign than the BarCap Index but many think that foreign diversification is a risk mitigator.


F/X - well USD can move 20% easily in a couple of months. So if it appreciated that much, potentially -4% on returns. I'd call that a risk in a bond fund.

T Bills - a risk if there are big swings in interest rates.

Usually T Bills used as collateral, though, against derivative positions. There are risk controls on derivative positions although in a market meltdown they might well not move.

Probably there are underlying currency hedges?




The foreign bond exposure is 30% in foreign denominated currency but the foreign currency exposure is only 20%. The implication is that they can/will hedge foreign currency. I don't think that the foreign currency fluctuations offer any additional risk to that which is already reflected in the standard deviation. After all the currency fluctuations go in both durations. I have seen some data that shows hedging foreign currency in equity funds is a wash over the long run.

T Bills are usually considered the riskless security. The maturity is so short that interest rate swings have minimal impact.

PTTRX did under perform the BarCap during the 2008 crisis and short Treasuries as expected. See the 3 month rolling return chart:
http://quote.morningstar.com/fund/chart ... %2C0%22%7D I would suggest that if your are concerned with losses during a financial meltdown the only "safe" bet is t-bills or maybe short Treasuries not any intermediate term diversified bond fund.


T Bills are an interest rate risk if longer interest rates go *down*. ie benchmark risk.

Probably they are pledged as collateral against the derivative hedges.

The question then is can the fund speculate using derivatives? Probably the documentation is not 100% clear on this.

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