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Frequent Contributor

Bond fund active management = BS?

The link below should bring up DODIX vs VBILX on the old M* charts.

VBILX beats DODIX over every time frame. (Add BCOIX if you like ... VBILX still wins every time.)

I’m not going to enter an analysis paralysis exercise. DODIX is a relatively cheap, supposedly well-managed bond fund. Dozens of managers and analysts with Stanford PhDs, decades of experience, massive amounts of in-depth company research, etc.

What’s the point?

http://quotes.morningstar.com/chart/fund/chart?t=DODIX&region=usa&culture=en_US&dataParams=%7B%22zoo...

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97 Replies
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Re: Bond fund active management = BS?

DODIX has not done better than VBILX/BIV, and that is likely due to its expense ratio, and also possibly lower volatility. Eyeballing the chart, it looks like DODIX provided a slightly smoother ride.  In the basically low return world of non-leveraged bond funds, it is hard to do better than the index if you start 20-30 bp behind.  I suspect that for a bond fund to have better returns than an index the managers (and so us investors) are either taking on more credit risk or a longer duration.

Supporting your thesis, Vanguard's active bond funds, which have the low expense ratios of the index funds, seem only to do about as well as the corresponding index fund/ETF, e.g. VUSUX vs VLGSX/VGLT (index) both of which play in the LT Treasury arena, or VTEB (index) vs VWITX in intermediate munis.

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Participant ○○

Re: Bond fund active management = BS?

I look at the bond situation like this. Start with the Boglehead's favorite bond ETF = BND. ER = 0.04% SEC Yield = 1.49%.

DIDIX has an ER = 0.46%. So net ER with BND = 0.42%.

We are in an extremely low interest rate environment. 0.42/1.49 = 28%.

To use DIDIX you are paying a manager 28% of BND's SEC Yield in an attempt to beat it. The only way the manager can beat it is if he increases the riskiness of BND's bond portfolio which is 46% US Treas + 27% Corp Bonds + 25% MBS + 2% CASH.

For me it's a bad bet.

 

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Participant ○○

Re: Bond fund active management = BS?

You picked one of the worst active management shops (Dodge & Cox) for your comparison!

Why not add a respected active bond fund shop  to this comparison?

Add PIMIX and see the outperformance of active management... 

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Participant ○○

Re: Bond fund active management = BS?

Doesn't PIMIX use modest leverage?

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Frequent Contributor

Re: Bond fund active management = BS?

PIMIX is not a vanilla I/T bond fund. Anything but. Pointless comparison.

Go stalk somebody else, would you? Not the first time I’ve had to ask you. @RyanM 

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Re: Bond fund active management = BS?


h@chang wrote:

PIMIX is not a vanilla I/T bond fund. Anything but. Pointless comparison.

Go stalk somebody else, would you? Not the first time I’ve had to ask you. @RyanM 


I will comment on any thread I please. Including yours! 

I guess you can comment multiple times on my threads and I say nothing to you.

Here are some threads I started and YOU commented on...

https://community.morningstar.com/t5/Mutual-Funds/Three-active-fund-portfolio-construction/m-p/70011...

 

Go bully someone else... @RyanM 

 

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Re: Bond fund active management = BS?


@chang wrote:

PIMIX is not a vanilla I/T bond fund. Anything but. Pointless comparison.


Use PIMCO’s I/T IG Corp bond fund (PIGIX) and it still shows significant outperformance.F7D0840E-206D-4135-B320-6927C7195ED9.png

 

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Re: Bond fund active management = BS?

Agree! With yields so low, active management has to really “stretch” for additional returns somewhere- longer duration, lower quality, unrated bonds, etc. These add additional risk, and I’m not keen on taking too much risk in “bond land”. If I want risk, I look to equities (and I’ve got PLENTY of risk at 84% equity!).

Even when you add in “good” active management (like PIMCO, etc.), you still have the “potential” for something to “blow up” with riskier positioning, so I am sticking with LOW COST index funds, and low cost muni funds here.

Win
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Participant ○○

Re: Bond fund active management = BS?


@Win1177 wrote:

Even when you add in “good” active management (like PIMCO, etc.), you still have the “potential” for something to “blow up” with riskier positioning, so I am sticking with LOW COST index funds, and low cost muni funds here.


If you want average, then passive, index funds are for you! 

There is nothing wrong with that!

The original statement & title of the thread led people to believe active management of bond funds adds no value (same performance) as index bond funds.

This isn’t necessarily the case. You have to find a good, respected active bond fund shop. D&C isn’t one of those but it was chosen to prove a narrative... 

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Frequent Contributor

Re: Bond fund active management = BS?

The only PIMCO fund that makes any sense to compare here is Moderate Duration Fund PMDRX. Its duration is 4.70 vs. DODIX at 4.20 (latest M* stats fwiw).

VBILX beats BCOIX beats DODIX beats PIMCO.

https://www.pimco.com/en-us/investments/mutual-funds/moderate-duration-fund/inst

An intermediate-term core bond investment

PIMCO Moderate Duration Fund is a core bond fund that provides broad market exposure to high-quality, intermediate-term fixed income securities. The Fund is managed for an overall portfolio duration ranging between two and five years. Following PIMCO’s signature total return philosophy and process, it employs a variety of strategies to enhance return potential and manage overall portfolio risk.”

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Participant ○○

Re: Bond fund active management = BS?

IMHO a lot of the conflicts and arguments on this board occur between people that want their bonds to play OFFENSE and those that want them to play DEFENSE.

To play OFFENSE with bonds one needs to take more bond RISK. You can either DIY or pay a bond manager to do it.

Like I said before. Regarding DODIX and today's super low interest rate environment paying its manager 28% of BND's SEC Yield may not be a good idea at this time for offensively minded bond investors.

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Frequent Contributor

Re: Bond fund active management = BS?

This is a tough subject to get my arms around. It seems obvious that several factors can explain differing bond fund performance. These include fees, duration, quality, and leverage. It's difficult to say which fund is "best".

With the benefit of hindsight, I can tell you that long-term Treasuries have been the place to be over the past ten years; great total returns and excellent counterweight to equities.

We also know that PIMIX had a great run thanks to well-timed / lucky MBS exposure. Now it's bloated.

I'm partial to PIGIX for investment grade bonds, but realize that Treasuries have worked better if I focus on 10-year returns and care about portfolio volatility.

DODIX vs. VBMFX? Meh.

N.

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Participant ○○

Re: Bond fund active management = BS?

To say active management is BS or doesn’t provide outperformance, isn’t an accurate depiction of how active management can provide  a role in your portfolio.

According to M*, there 167 active funds in the I/T Core Plus category which outperformed their category over a 10 year period. 

200+ over a 5 year period.

 

“With the benefit of hindsight, I can tell you that long-term Treasuries have been the place to be over the past ten years; great total returns and excellent counterweight to equities.“

With the benefits of the fed and ultra low rates, treasuries were the place to be but will they be in the future? :)

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Re: Bond fund active management = BS?

Comparisons of active vs passive bond funds are just like active vs passive equity funds; you must compare apples to apples.  In this case VBILX is an Intermediate core bond fund.  You can't compare to a leveraged fund or a corporate fund, or a high yield fund.  So looking at VBILX's performance record against its actual peers (currently 426 funds according to M*) it has a record that is so good it is almost unbelievable;  Its percentile ranks are 1 year; 2  3 years; 2  5 years; 4  10 years; 2 and 15 years 1.  If you can find an active intermediate core bond fund even close to that, I'd love to see it.

 

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Re: Bond fund active management = BS?

Chang compared an IT Core index fund VBILX to a Active IT Core PLUS fund DODIX. I gave numbers for the active core plus fund which is what was being discussed.

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Re: Bond fund active management = BS?

M* thinks VIBLX is over-exposed to USTs so has a low yield and is interest-rate sensitive. Passively managed may be OK for something like this, but managed may be better for broader bond funds.

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Re: Bond fund active management = BS?


@BigTom wrote:

Chang compared an IT Core index fund VBILX to a Active IT Core PLUS fund DODIX. I gave numbers for the active core plus fund which is what was being discussed.


But comparing an IG core PLUS fund with an IG core fund is still a bad comparison.  Again, there are 400+ funds in the IG core category and VBILX beats them all, active or passive.  All the other categories discussed come with more risk, so if they underperform, that is poor alpha.

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Re: Bond fund active management = BS?

With so many choices in bond land it does not have to be all or one.  As I posted a while back, believing the market and economy would soon crater, I sold my only remaining stock allocation fund in my IRA and threw it all into 4 bond funds.  44% of my IRA is in CD's, 1/2 the balance I put in A/F's AMBAX, a core+ fund, and the other half was divided into equal %'s of MTG, Tips, and Treasury, which are included in AMBAX, along with Corps.  All are active managed and have done well, with AMBAX up the most.  In taxable, PIMIX, my only fund, had gotten hammered, so I decided to sell half and put I/2 the balance in DBLTX, and the other half in VCOBX.  I also exchanged prime M/M into VUBFX for a cash sub and more interest.  The point of all this is active management, in the right hands, can add value but can also blow up on occasion if the wrong bets are made.  I feel better with the diversification, as they zig and zag, although my interest $'s have shrunk approx 12% with less PIMIX.   I cannot believe how fast the market has rebounded,  With a crystal ball, I may have stayed with my asset allocation fund, which paid a higher dividend.  Unwittingly I must have bought DBLTX at a low point, as it has posted a gain equal to PIMIX's loss.  WARNING:  I have one rung of my CD ladder maturing June 30th, and plan to purchase a growth fund (active) (this may change) with the proceeds, as new brokerage CD rates are .30 to .50% and bond fund prices are so high now.  I fully expect the market to tank shortly thereafter.  Phil.   

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Re: Bond fund active management = BS?


@bilperk wrote:

But comparing an IG core PLUS fund with an IG core fund is still a bad comparison.  Again, there are 400+ funds in the IG core category and VBILX beats them all, active or passive.  All the other categories discussed come with more risk, so if they underperform, that is poor alpha.


“Bad comparison” ... yes and no. DODIX and BCOIX are “core plus” and should do better than core. They did worse. The industry’s best and brightest thinkers and analysts ... failed. Over every time period.

I wouldn’t get too hung up on M* labels. It’s more important to understand DODIX and BCOIX and realize that these are basic, conventional, vanilla I/G, I/T bond funds that are using active management to try to generate superior returns. They play around with portfolio duration but generally keep it medium. They play around with the portfolio mix, but rarely own HY. They both have among the lowest ERs of all actively-managed funds.

Perhaps “Core Plus” should more accurately be labeled “Core Minus”?

PIMIX is another category (or, more accurately, no category) altogether. One might as well compare VBILX to Contrafund. The closest PIMCO traditional I/G, I/T Fund is PMDRX, which has been crushed by everything else mentioned.

Again, there are 400+ funds in the IG core category and VBILX beats them all, active or passive.” — And I agree this casts doubt on active management ... my original point.

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