Wasn’t it Peter Lynch that said “Never, never, never buy a bond fund”? Well, I’m not exactly of that mind, but very close to it.

[quote=babbling looney]

Most individuals don’t have the funds to be
able to construct a good bond portfolio.  Bond funds are where I’m
at for income clients with some ETFs thrown in to juice the yield.

[quote=babbling looney]

I’m not arguing bonds with Bond Guy, just discussing some of the different strategies and pointing out some pitfalls to Managed Money.

Bond Guy: my example was exagerated, but I have seen bonds take considerable dumps back the the early 90's.  And I also agree that bond funds can erode in any interest rate environment.  I guess the point is that there is nothing 100% safe and I wanted to point out the falacy that Managed Money has in his thinking that bonds are a way to protect principal. (Technically they are)  What is even worse than just interest rates rising on a bond portfolio is the double whammy of rising interest rates and downgraded credit quality  (GMAC) eeek.

Yes, you get your money back when the bond matures. So your principal is protected.  But to the client who is looking at the short term where his statement si showing his bond is down in value because interest rates went up, this is really cold comfort.   He doesn't think his principal is protected, much. 

[quote=joedabrkr]
2.)  As to your "bounce around a bit"
comment, I’m guessing you’ve been fortunate enough to never have the
experience of having a bond fund blow up under you.  It sucks.
[/quote]



I was being a bit extreme with the 30y bond, but I wanted a good
example of interest rate risk. That bond is only risk free after 30
years.



Other than extreme interest rate conditions (i.e mid 1970s --> early 1980s == The carter years ) I would be hard pressed to think of how a fairly short Treasury portfolio can blow up on you.



OTH, fixed rate mortgages can really blow up on you thanks to negative convexity. (I.e people keep and do not prepay low rate mortgages )



So after getting past negative convexity and overly long durrations (i.e therefore TLT is useless for investment purposes) the main way to get a blow up is reaching for yield by compromising on credit quality.



Sort of like the story of Icarus.

[quote=Starka]No, that’s still not right.  Credit Risk is the
possibility that an issuer may not meet his obligations in a timely
manner, or default entirely on  the service of the debt. 
Principal Risk is the threat of loss of principal.  In other
words, an investor may receive all interest payments in a timely
manner, yet still lose his/her principal if the company cannot return
the face amount of the instrument.  An investor may lose interest
payments (if, for example, the company files for protection from
creditors), yet still not have principal at risk.[/quote]



ARYTS? IA?



"not meet his obligations in a timely manner, or default entirely on  the service of the debt."



Which is exactly the same as not paying principal and interest when it is due.



All the bad stuff that can happen when obligors default on timely
payment of interest or principal go under the heading of credit risk.



If a company files for “protection from creditors” aka Chapter 11 Bankruptcy, your principal is very much risk. If you don’t believe me, I have stacks of Enron and WorldCom bonds at fabulous prices.

[quote=AllREIT] [quote=Starka]No, that’s still not right. Credit Risk is

the

possibility that an issuer may not meet his obligations in a timely

manner, or default entirely on the service of the debt.

Principal Risk is the threat of loss of principal. In other

words, an investor may receive all interest payments in a timely

manner, yet still lose his/her principal if the company cannot return

the face amount of the instrument. An investor may lose interest

payments (if, for example, the company files for protection from

creditors), yet still not have principal at risk.[/quote]



ARYTS? IA?



"not meet his obligations in a timely manner, or default entirely on the

service of the debt."



Which is exactly the same as not paying principal and interest when it is

due.



All the bad stuff that can happen when obligors default on timely

payment of interest or principal go under the heading of credit risk.



If a company files for “protection from creditors” aka Chapter 11 Bankruptcy, your principal is very much

risk. If you don’t believe me, I have stacks of Enron and

WorldCom bonds at fabulous prices.

[/quote]



Only if you’ll sell me an equal amount of Delta Airlines obligations at the

same prices.



Get it Ace?

[quote=babbling looney]Apparently, the fact that it is possible
that a bond fund may lose and not recover all or part of the client’s
investment is an issue that no one here wants to acknowledge. 
It’s like the big elephant in the room.

I don't think anyone is in denial that bond funds wont'/can't lose money if rates go up.  Having seen this happen over the years I can also tell you that the bond fund is more likely to recover in principal (share price) because as rates do go up they are able to gradually add new higher yielding bonds that eventually stablize the portfolio and allow the share prices to go up as more new money is invested to take advantage of the new higher yield.   An individual bond is just stuck at the lower evaluation.[/quote]

Any actively run bond ladder (a constant durration portfolio), in a sloped yeild curve enviroment will eventually converge on par value over time. The portfolio manager will let the sub-market bonds mature at par, while buying longer-than-benchmark bonds thus keeping portfolio duration the same.

Bond portfolios are in a constant state of converging to par, after being dislocated from interest rate shocks.

Again, Babs is right. If you keep telling clients that single bonds are free from interest rate risk, you will eventually be facing the wrong end of an ACAT form or a plaintiffs attorney.

[quote=BondGuy]

BL, bond funds also erode in up rate
environments. The primary difference being that with a fund there is a
possibility that you may never get back to even. Bond fund performance
and the inabilty of BF managers to recoup loses, guess correctly, and
in some cases act in their sharehoders best interest, WAS graphically
illustrated by the bond market collapses of 94 and 98/99. The
problem was and still is that for managers to keep their jobs
managers they need to perform this quarter. That short term thinking led
to a lot of locked in loses by managers repositioning to improve
performance going forward. Many of these managers added to the misery
by guessing wrong a second time.

[QUOTE]

Which is an example of why active management of bond portfolios (other than replicate an index) is harmless at best (alpha == expenses) or very harmful at worst. BND at 11bp, looks better every day.

Meanwhile, I can rely on the AGG to passivly roll off the bonds when they have less than a year to go (i.e near par), and buy new fresh bonds (at par) over time, thus causing the whole portfolio to be in a constant state of convergence.

This is all great stuff, but at the end of the day I will take a healthy dose of Bill Gross, John Brynjohlfson, Dan Fuss, and Margie Patel for a little high yield. I cant imagine ever getting to the point where I would either have the knowledge to run money like these people, or have the time and/or inclination to do so.

Call me simple but I would rather outsource that particular piece and keep on moving...

[quote=mikebutler222]Wasn't it Peter Lynch that said "Never, never, never buy a bond fund"? Well, I'm not exactly of that mind, but very close to it.[/quote]

I don't know if Peter Lynch said it but I saw Michael Rosen within days of selling the Rochester Funds to Oppie say to a room of Mutual Fund Producers "If you buy a Bond fund and hold on to it forever, you are an idiot!"

Granted, he then went on to pitch his "Bond Fund for Growth" which was a convert fund that was one of the tops in the category at the time.

For myself. HARD FAST rules in this business don't make sense. I buy where the deal is the best and then I watch in case I need to sell.

I'll buy CEBFswhen they're discounted and paying more than the long bonds. I'll sell them when I think it's time to too.

Personally, not a fan of Open Bond funds. I buy many individual bonds (not as many as some, but, still).

I'll buy Preferreds when the time is right too (I would say never at a premium, but then, there are times when they're undervalued and so...)

Ron Fielding of the Rochester Funds at Oppenheimer, as WHOMIT had mentioned, is another guy who I would trust 100% with my money as well as my clients.

[quote=blarmston]

This is all great stuff, but at the end of the day I will take a healthy dose of Bill Gross, John Brynjohlfson, Dan Fuss, and Margie Patel for a little high yield. I cant imagine ever getting to the point where I would either have the knowledge to run money like these people, or have the time and/or inclination to do so.

Call me simple but I would rather outsource that particular piece and keep on moving...

Ahhhh !!! Oh well, I never liked her cooking anyway… Too much salt and she was always forcing me to have an extra helping… Pretty rude if you ask me…

[quote=blarmston]Ron Fielding of the Rochester Funds at Oppenheimer, as WHOMIT had mentioned, is another guy who I would trust 100% with my money as well as my clients.[/quote]

+1 on Fielding.

ORNAX is managed for income not total return. This is exactly the same way most muni buyers manage their portfolios. This is important because you won't find him selling high income bonds to sure up a poor quarter. Fielding does a credit analysis and if the bond passes he buys it. One of the coolest things he does is buy very small blocks.

Does anyone here still do campaigns? A campaign is where you pick a product and do a major push to sell as much of it as possible. I realize this involves actual selling, but campaigns are real month makers. If someone wanted to find a good product to either prospect with or to campaign, ORNAX and it's C share version are good products to use.  

[quote=AllREIT] [quote=BondGuy]

BL, bond funds also erode in up rate environments. The primary difference being that with a fund there is a possibility that you may never get back to even. Bond fund performance and the inabilty of BF managers to recoup loses, guess correctly, and in some cases act in their sharehoders best interest, WAS graphically illustrated by the bond market collapses of 94 and 98/99. The problem was and still is that for managers to keep their jobs managers they need to perform this quarter. That short term thinking led to a lot of locked in loses by managers repositioning to improve performance going forward. Many of these managers added to the misery by guessing wrong a second time.

[QUOTE]

Which is an example of why active management of bond portfolios (other than replicate an index) is harmless at best (alpha == expenses) or very harmful at worst. BND at 11bp, looks better every day.

Meanwhile, I can rely on the AGG to passivly roll off the bonds when they have less than a year to go (i.e near par), and buy new fresh bonds (at par) over time, thus causing the whole portfolio to be in a constant state of convergence.

[/quote]

All, were in the business in 94?

[quote=BondGuy][quote=AllREIT] [quote=BondGuy]

BL, bond funds also erode in up rate environments. The primary difference being that with a fund there is a possibility that you may never get back to even. Bond fund performance and the inabilty of BF managers to recoup loses, guess correctly, and in some cases act in their sharehoders best interest, WAS graphically illustrated by the bond market collapses of 94 and 98/99. The problem was and still is that for managers to keep their jobs managers they need to perform this quarter. That short term thinking led to a lot of locked in loses by managers repositioning to improve performance going forward. Many of these managers added to the misery by guessing wrong a second time.

[QUOTE]

Which is an example of why active management of bond portfolios (other than replicate an index) is harmless at best (alpha == expenses) or very harmful at worst. BND at 11bp, looks better every day.

Meanwhile, I can rely on the AGG to passivly roll off the bonds when they have less than a year to go (i.e near par), and buy new fresh bonds (at par) over time, thus causing the whole portfolio to be in a constant state of convergence.

[/quote]

All, were in the business in 94?

[/quote]

Ops, let's try this again.

AllREIT, were YOU in the business in 94?

[quote=BondGuy]

All, were in the business in 94?

I loved 1994!

I had the misfortune to have loaded up on the Eaton Vance "b" share muni fund in the years leading up to '94 (I guess 91 92 and 93, but I can't be possitive) and then at the end of the year the IRS decided that EV's method of taking the fees out of capital gains and not out of income was UnIRStional (EV was, if I was informed correctly, the first company to come out with a B share Muni fund product and by taking the fees out of cap gains, they were able to have a high current income).

I also had a passal of closed ended muni funds. Both fund groups were on dividend reinvest.

I had the greatest time calling clients and telling them "Mr. Jones, we put $50,000 into this fund initially, the market value today is $75,000 and we are going to take a $15,000 loss by selling it!

"Not only that, Mr. Jones, but we are going to use the money to buy these individual bonds with a 6% coupon, trading at 80 to give us a 7.5% tax free current income, which is higher than we are getting on the bond fund, and when the bond matures it will be worth more than the bond fund was at it's top!"

That the bond market turned around in 95 and the bonds were trading near par within that year was just icing on the cake!

It was one of those moves that cemented me in the minds of clients as a guy who knew something about the markets (whether they were right or not is immaterial).

[quote=AllREIT] [quote=BondGuy]

All, were in the business in 94?

[/quote]

Nope, were you there in 1931?
[/quote]

I asked, because your posts are filled with logic. They struck me as written by someone who has never seen a real bear market, or worse, in the bond market. That's not to say that everything you've written isn't valid, or won't work when the bear comes our way. I hope it does work for you and your clients.

As for 1931, not around for that one. For that reason I'm an avid Alfred Cowles fan.

[quote=BondGuy][quote=AllREIT] [quote=BondGuy]

All, were in the business in 94?

[/quote]

Nope, were you there in 1931?
[/quote]

I asked, because your posts are filled with logic. They struck me as written by someone who has never seen a real bear market, or worse, in the bond market. That's not to say that everything you've written isn't valid, or won't work when the bear comes our way. I hope it does work for you and your clients.

As for 1931, not around for that one. For that reason I'm an avid Alfred Cowles fan.