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Old 01-24-2013, 06:45 AM   #61
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Then there's this:

The Great Rotation: a flight to equities in 2013 - Yahoo! Finance#
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Old 01-24-2013, 07:02 AM   #62
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A snippet would be helpful to interested members, letting them know what is in the link without having to open it.
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Old 01-24-2013, 07:32 AM   #63
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Perhaps I am the one missing something. But since Brewer is backing me up, and is well credentialed in this area (unless he is some kid posting from his parent's basement), I'm not jumping on that one.

More likely that we just aren't fully communicating.

So sure, a bond fund's NAV will drop when interest rates rise. But you are still holding bonds at a lower yield. I'm pretty sure it all translates to the same thing over the long run. A dip in yield, or dip in NAV.

Again, if one was out of whack with the other, the difference would quickly be arbitraged out by computers run by people with resources. Any difference would be gone before you or I could refresh our browser.

-ERD50
No, you got it right, but then the topic changed slightly. In a rising rate environment, over time there should be little difference between investing in a FI fund or holding and reinvesting laddered bonds. (The advantage is really to the fund because of lower costs, better access, better credit analysis).

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WADR you're the one who is missing something. If I were to create a ladder I would have the maturities align with my expected cash flow needs so fluctuations in fair value would be interesting but that is about it because the cash flows from the bonds would align with my cash flow needs and would be spent rather than reinvested.
If there is a specific cash flow need, bond funds are not a good choice and it is less risky simply to hold individual bonds that mature based on scheduled need.

The daily volatility in fund NAV vs an unchanging bond par value creates the illusion that the fund loses something that the individual bond does not.
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Old 01-24-2013, 09:45 AM   #64
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A snippet would be helpful to interested members, letting them know what is in the link without having to open it.
Sorry, I thought the link itself contained a sufficient descriptive. Here's more:

LONDON (Reuters) - One of the big investment shifts of our day may be at hand - regardless of how global markets actually perform this year.
What's already known as the "The Great Rotation" - a tilting of pension and insurance funds' strategic, long-term asset preference back toward equity from extreme positioning in bonds - has been one of themes of the new year so far.
The gist of the argument is that investor holdings of now expensive, ultra-low yielding government debt - following a virtually unbroken 20-year bull market in bonds - are ripe for rebalancing. The attraction of relative and absolute valuations in equity will coax the outflow to stocks.
It's this juncture that has some of the most persistent global equity bears of the past two decades, such as Societe Generale strategist Albert Edwards, rethinking the big picture.
While there's little thaw evident in his view of an investment 'Ice Age' over the next couple of years, Edwards now reckons that over 10 years long-term institutional funds are in danger of missing "the cheapest equity prices in a generation."
From such a committed bear, that's really saying something.
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Old 01-24-2013, 10:09 AM   #65
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Edwards now reckons that over 10 years long-term institutional funds are in danger of missing "the cheapest equity prices in a generation."
Some people may object to the description of equities as "cheapest" based on P/E valuation. But among all the things that one can invest in, relative risk/reward factor of various assets is all we have to work with. And that of bond does not look that enticing right now, relative to stocks.
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Old 01-24-2013, 12:01 PM   #66
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Another article on the subject...

What Happens to Bond Funds When Rates Go Up?
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Old 01-25-2013, 08:56 AM   #67
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....

The daily volatility in fund NAV vs an unchanging bond par value creates the illusion that the fund loses something that the individual bond does not.
I think 'illusion' is a good (and gentle) way to describe it.

This is one case where I think the 'illusion' is not too dangerous. Though some of us are saying a bond ladder doesn't act significantly different from a bond fund in the long run, I don't think much harm will come from believing otherwise. Maybe higher fees, less diversification, more time spent researching individual holdings?

-ERD50
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Old 01-25-2013, 12:47 PM   #68
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This is one case where I think the 'illusion' is not too dangerous. Though some of us are saying a bond ladder doesn't act significantly different from a bond fund in the long run, I don't think much harm will come from believing otherwise. Maybe higher fees, less diversification, more time spent researching individual holdings?

-ERD50
This last one can be a biggie. Credit analysis is something that a few of us have done rigorously, but it is specialized and perhaps boring. Unless one is sticking with certain investment grade bonds, I think it could be a biggie.

For example, would you want to put together your own portfolio of non-agency MBS? Me either, but at least several very successful hedge fund managers are mainly doing only that right now. Including some who made big scores when the mortgage crisis hit a few years ago.

Ha
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Old 01-25-2013, 03:21 PM   #69
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For example, would you want to put together your own portfolio of non-agency MBS? Me either, but at least several very successful hedge fund managers are mainly doing only that right now. Including some who made big scores when the mortgage crisis hit a few years ago.
And some who lost a BOATLOAD for their unlucky investors. Those MBS's can behave much differently than investment grade bonds.
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Old 01-25-2013, 03:55 PM   #70
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And some who lost a BOATLOAD for their unlucky investors. Those MBS's can behave much differently than investment grade bonds.
I am not sure of what you are saying. Of course some make money, some lose money, and some break even. What I said is available information- some of the biggest shorts from the mortgage crash are now long selected non agency MBS. Whether they make money at it over the longer term remains to be seen. I am also sure that these positions are not set and forget, forever unchanging asset allocations but rather business speculo-investments

I am not trying to sell MBS, only saying that for most of us credit analysis of any but the bluest of blue chips is pretty deep water.

Ha
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Old 01-25-2013, 09:30 PM   #71
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The loss of NAV won't be linear. That is if interest rates rise over the next 20 years there won't be twenty years of losses in NAV. There will be plenty of years where fear drives folks back into bonds regardless of interest rates.
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Old 01-26-2013, 12:44 AM   #72
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I am not sure of what you are saying. Of course some make money, some lose money, and some break even. What I said is available information- some of the biggest shorts from the mortgage crash are now long selected non agency MBS. Whether they make money at it over the longer term remains to be seen. I am also sure that these positions are not set and forget, forever unchanging asset allocations but rather business speculo-investments

I am not trying to sell MBS, only saying that for most of us credit analysis of any but the bluest of blue chips is pretty deep water.

Ha
Trust me, credit analysis takes a second hand to whether or not the fed is buying hand over fist every month.

I definitely agree with you about a majority of former shorts getting long mbs. It is actually scaring me a bit. It seems like every time I turn on cnbc, there is another guy highlighting a bullish mortgage play. Plus a lot of the top performing hedge funds all made their money off mbs bets. Lastly, my spidey senses have been getting really turned on high by local radio commercials advertising real estate flipping!
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Old 01-26-2013, 11:22 AM   #73
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So what's the outlook for balanced funds containing a portion of bond funds, that have performed well for the last ten plus years?

-Moxie
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Old 01-26-2013, 11:32 AM   #74
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So what's the outlook for balanced funds containing a portion of bond funds, that have performed well for the last ten plus years?

-Moxie
If rates go up, the bond portion will struggle and the equity portion will do whatever equities do. It might be worth reviewing the performance of the balanced fund you are thinking of in 1994.
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Old 01-26-2013, 12:34 PM   #75
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It might be worth reviewing the performance of the balanced fund you are thinking of in 1994.
FWIW, Wellesley's performance in 1994 was -4.4%.
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Old 01-27-2013, 06:19 AM   #76
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Quote:
Originally Posted by LakeTravis View Post
Sorry, I thought the link itself contained a sufficient descriptive. Here's more:

LONDON (Reuters) - One of the big investment shifts of our day may be at hand - regardless of how global markets actually perform this year.
What's already known as the "The Great Rotation" - a tilting of pension and insurance funds' strategic, long-term asset preference back toward equity from extreme positioning in bonds - has been one of themes of the new year so far.
The gist of the argument is that investor holdings of now expensive, ultra-low yielding government debt - following a virtually unbroken 20-year bull market in bonds - are ripe for rebalancing. The attraction of relative and absolute valuations in equity will coax the outflow to stocks.
It's this juncture that has some of the most persistent global equity bears of the past two decades, such as Societe Generale strategist Albert Edwards, rethinking the big picture.
While there's little thaw evident in his view of an investment 'Ice Age' over the next couple of years, Edwards now reckons that over 10 years long-term institutional funds are in danger of missing "the cheapest equity prices in a generation."
From such a committed bear, that's really saying something.
I think these articles trumpeting fund flows based on the first two weeks of this year, especially after another big outflow year in 2012, are a bit premature.

There was a bunch of tax gain selling last year, and it makes sense that there would be new buying at the start of the year, especially after the tax part of the fiscal cliff was resolved. The start of year data could simply reflect that.

Even if the regular fund flows start to reverse, it's been 4 years going the other way, so it should take a few years in the new direction. Pendulum swings are slow.
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