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Active vs. Passive Bond Funds
Old 08-27-2017, 12:44 PM   #1
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Active vs. Passive Bond Funds

This is the fourth article I've run into pushing actively managed bond funds over passive. I know it's a bit of a sales pitch, but it got me thinking - how many of us use an actively managed bond fund?
I currently have about half of my bond money in one now.
https://www.pimco.com/handlers/displ...U95rP46Xrkugnk
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Old 08-27-2017, 03:48 PM   #2
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My go-to for this type of information is the series of S&P SPIVA report cards. IIRC bond funds do better than equity funds relative to passive investing but the data is still that well under half of active bond funds do better than their passive benchmarks. IOW, active loses. You might want to review a few of these report cards and, also, review a few Manager Persistence report cards.

I don't have a lot of interest in spending time to pick apart that PIMCO advertising piece, but one thing I immediately noticed is that the bar charts on page 3 cover different periods -- on is five years and one is ten. This is an almost certain indicator that they are cherry picking the data. I also note that not all categories of bonds are included in the charts. I'd like to see the charts that contain all categories. Or, to be more honest, I don't care about seeing those because I don't make decisions based on advertising pieces.

That said, IMO there is no reason to buy any kind of bond fund if one is buying govvies, agencies, and high-grade corporates. I just buy them directly & hold to maturity, then (barring default) I get every penny promised to me and I do not have to worry about rates rising, knocking down the value of a fund and resulting in less money for me when I sell. As far as selecting corporates I am little more than a monkey with a dartboard but if I limit my dartboard to highly rated stuff I think that is adequate.

I'm not interested in emerging market bonds but am holding a floating rate fund, SAMBX. IMO these types of fund really do require expertise in security selection. I am not going to try to select securities for myself, that's for sure. A very cursory check gives me SAMBX SEC yield of about 80bps higher than BKLN, which is said to be a floating rate index fund. So maybe my theory is sound.
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Old 08-27-2017, 03:48 PM   #3
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I don't use any bond funds. I ladder individual bonds.
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Old 08-27-2017, 04:14 PM   #4
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Thanks for the input OldShooter
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Old 08-27-2017, 04:39 PM   #5
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All of my bond funds are active. VG Tax Exempt and VG Investment Grade. I also hold some individual Tips.
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Old 08-27-2017, 05:30 PM   #6
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Didn't we just have this thread 6-9 months ago? I've searched(I don't feel I'm very good at it) but can't find it.

Seems like the beginning of this year. I remember it as I changed my mind about suggestions Fidelity gave me about moving to index bond funds. Looking at my Fidelity bond fund activity I made changes this February based on that threads awesome information. It probably was active a few weeks/months before I made changes.

That thread made me believe that active management may be slightly better than an index for certain bond funds.
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Old 08-27-2017, 07:34 PM   #7
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Bond Indexes Are Fundamentally Flawed | ETF.com

Index vs active bonds discussion has been around s long time. Above article is from 2009.

Basically makes the "bums" argument against bond indexes, saying who would want to own more of the most indebted companies. I guess it's a little different with stocks.

But I agree with most previous posts, buying individual issues of insured CDs, Treasuries, maybe other very high quality issues, and using some funds for the more esoteric, like Emerging Market or Hi Yield.
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Old 08-28-2017, 05:46 AM   #8
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i use only fidelity managed bond funds for my portfolio's . i dabble in and out of things like TLT as speculation .

with only a hint of additional risk my fidelity total bond fund did so much better than just buying a bond index like bnd . whether apples to apples exactly does not matter to me .

what matters is for barely an uptick in risk returns are so much better over almost all time frames .
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Old 08-28-2017, 07:39 AM   #9
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And Just to pile on:

https://www.bloomberg.com/news/artic...lion-this-year

Quote:
And this year’s stellar performance by stock pickers may have helped stem some of the exodus. Partly bolstered by a record overweight in technology shares, July marked the fifth straight month in which more than half of large-cap fund managers beat their benchmark indexes, according to data compiled by Bank of America Corp. That’s the best streak since 2009.
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Old 08-28-2017, 09:56 AM   #10
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Originally Posted by RonBoyd View Post
You have to be very careful with this stuff. The hucksters are getting very cagey.

If you go back to William Sharpe's 1993 paper, The Arithmetic of Active Investing, in three pages he makes it crystal clear why the average of all active managers delivers the market average, before costs, and is beaten by passive managers whose cost is less. Sharpe won his Nobel prize a couple of years prior and has a very good command of arithmetic.

The important thing to understand, though, is that Sharpe's average is the market average of the market where the active managers are working. The arithmetic does not work if the measuring stick, the market average, is measuring something different than where the active managers are working.

So what is happening is that the active managers are leaving their stated styles in order to pursue gains that will make them look good against the measuring stick for their nominal style. Sometimes this works, sometimes it does not. It's just stock picking after all. A few weeks ago I read an article that advised active managers to do exactly this -- abandon their style constraints and seek opportunities in styles outside their stated style.

So, nothing has really changed except that the hucksters are getting smarter and smarter about how to fudge their results to look like they are winning. The result, though, is that we as investors can no longer be sure that when we buy a particular style, like large cap US stocks, that the fund manager will actually be sticking to the style. With the decline of the dollar and consequent apparent rise in international stocks, they may be buying in Europe in order to look good against their (now somewhat irrelevant) benchmark.
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Old 09-04-2017, 09:29 PM   #11
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Active managers only are statistically advantageous in emerging markets where information is fragmented and arguably corruptible. In developed markets, they underperform indices by and large.
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Old 09-05-2017, 05:36 AM   #12
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I have a mix of bond funds, some active, some index, nothing particularly niche or exotic.

AGG (Barclays US Aggregate Bond TR USD) has been used as a benchmark against many bond funds for a long time, and many cheap index funds and ETFs track it, so it's easy to go back and compare active/index performance over a long period of time.
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Old 09-05-2017, 06:06 AM   #13
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i use only actively bond funds and the mix of funds change over time . some of mine were heavier in high yield last year when high yield was low hanging fruit . today some of those funds were swapped now that the low hanging fruit is gone .

we do hold bond funds with high yield but the high yield is only a very small piece . i like both fidelity total bond and fidelity strategic income. they provide a nice risk adjusted balance . throw in some short term bond funds and the mix works well .

recently fidelity total bond made some changes themselves as they brought down the fund’s exposures , they cut higher yielding bonds to 11.9% from 14.6% in February.

they reduced the higher level of corporate bonds and added more treasuries .

emerging markets are now less than 5% of holdings .

so they have had a very good track record for the last 15 years easily surpassing an index fund like bnd over just about all time frames and they do it with a small smidgen of increased risk .
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Old 09-05-2017, 05:00 PM   #14
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Thanks Mathjak
One more great thing about this forum, when I get lazy others do the heavy lifting
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Old 09-05-2017, 09:36 PM   #15
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Quote:
Originally Posted by mathjak107 View Post
i ike both fidelity total bond and fidelity strategic income. they provide a nice risk adjusted balance .
I own both, along with Fidelity New Markets. And the Zero-Coupon 2025 fund mentioned in another post, and Fidelity Floating Rate.
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