Active vs. passive for REITs and BONDs

[hotwired]

I've heard more than once that (well chosen) active funds CAN be a much better choice for REITs, preferred stocks and BONDS. That is to say, active management can make a difference. It's not as hard to get "Alpha" in the REIT, preferred stock and Bond world as it can be with stocks.

I'm getting myself a little bogged down in details though. I have a pretty big position in Vang total bond. I also have a decent position in both VNQ and VNQI (the international version of VNQ), and PFF. Does anyone have some decent suggestions for alternatives for VNQ, VNQI and BND? If not, maybe some thoughts in general, some guidance in general, in learning more about active vs. passive in terms of these things. I realize this is not a very "crisp" question, so I don't expect clear, concise answers. Random thoughts welcomed!!


Factoids: Age 54, married, one child just turned 18, 1M portfolio, (almost all retirement funds) 1M equity in rental real estate.

 

[DrRoy]

Some active funds may do better some of the time. In the long run, you cannot know which ones, and they will also change over time. You know for sure that lower fees are better all the time. Stick with passive.

 

[Dtail]

Some active funds may do better some of the time. In the long run, you cannot know which ones, and they will also change over time. You know for sure that lower fees are better all the time. Stick with passive.

+1

 

[BeachOrCity]

For real estate, I would argue that it is NOT a price efficient market. So picking which real estate you invest in, or if via REIT which sponsor / manager can have a material effect on your returns.

The problem is how to find the property and sponsor / manager. Its not easy.

Bonds / preferred have inefficiency issues as well, but to a much lesser extent. And the same issue, how to find the person / manager who is going to help you find these inefficiently priced bonds.

Unless you can find someone who you have this confidence in (and how to you differentiate track record with the luck of the fact that some people at random will beat the market)....might as well just index.

 

[Montecfo]

Bonds are not the same as equities for a variety of reasons. Costs matter but lowest cost is not the be all, in my view.

Bond active managers beat indices far more frequently than is the case for equities. The best have long track records which may be researched.

For me I like these 2 core plus bond funds:

DLTNX
DODIX

And this multisector fund

PONAX

If you would like exposure to munis, this has done well over the long-term (closed - end fund, no leverage)

NUV

Read the Morningstar, make sure your bond choices make sense given your objectives and risk profile.

I buy individuals REITS but not REIT funds. I have owned preferred closed-end funds but would not buy them in this low rate environment.

Good investing!

 

[Brat]

I have owned O (Realty Income Corp) but sold it when I achieved that investment goal. The dividend is now a paltry 3.4% because that stock has gone up so much. The other real estate firms I looked at, storage businesses, have about the same dividend rate.

Perhaps you should consider utility ETFs or mutual funds.

 

[target2019]

I've heard more than once that (well chosen) active funds CAN be a much better choice for REITs, preferred stocks and BONDS. That is to say, active management can make a difference. It's not as hard to get "Alpha" in the REIT, preferred stock and Bond world as it can be with stocks.

I'm getting myself a little bogged down in details though. I have a pretty big position in Vang total bond. I also have a decent position in both VNQ and VNQI (the international version of VNQ), and PFF. Does anyone have some decent suggestions for alternatives for VNQ, VNQI and BND? If not, maybe some thoughts in general, some guidance in general, in learning more about active vs. passive in terms of these things. I realize this is not a very "crisp" question, so I don't expect clear, concise answers. Random thoughts welcomed!!

Factoids: Age 54, married, one child just turned 18, 1M portfolio, (almost all retirement funds) 1M equity in rental real estate.

I hold VNQ in Roth (5%), and VNQI in taxable. Along with that I hold O and HTA in the brokerage. I've never looked into actively managed REIT fund(s) or ETF(s). All add up to less than 7.5% overall AA.

If you have decent positions in VNQ and VNQI, then what is the actual percentage of those you hold? These funds drop a lot more than expected when the SHTF.

 

[audreyh1]

For real estate, I would argue that it is NOT a price efficient market. So picking which real estate you invest in, or if via REIT which sponsor / manager can have a material effect on your returns.

The problem is how to find the property and sponsor / manager. Its not easy.

Bonds / preferred have inefficiency issues as well, but to a much lesser extent. And the same issue, how to find the person / manager who is going to help you find these inefficiently priced bonds.

Unless you can find someone who you have this confidence in (and how to you differentiate track record with the luck of the fact that some people at random will beat the market)....might as well just index.

+1

 

[tdv2]

Some active funds may do better some of the time. In the long run, you cannot know which ones, and they will also change over time. You know for sure that lower fees are better all the time. Stick with passive.

+ 100%. Picking individual funds that will beat the index is a crap shoot.....impossible to know in advance what ones will outperform. And, it comes with the added cost of active management. Stick with passive and you will do fine.

 

[BeachOrCity]

+ 100%. Picking individual funds that will beat the index is a crap shoot.....impossible to know in advance what ones will outperform. And, it comes with the added cost of active management. Stick with passive and you will do fine.

Well, if I was going to go active bond, I would just use wellesley even though it is only 65% bonds. Track record is excellent and expense ratio is minimal for active management. In the end, I would rather index than take active management, but for those who can't resist the illusion of control, Wellesley is a good choice.

See table below, where the 1st line is wellesley, 2nd is benchmark

Wellesley Income Fund Adm
Wellesley Income Composite Index* (Benchmark)
1-yr 3-yr 5-yr 10-yr Since inception
05/14/2001
16.47% 7.79% 6.54% 8.05% 7.06%
16.08% 7.16% 6.11% 7.74% 6.18%

The problem with this outperformance is the index chosen. The index is either A or AA or better, but 20% of the bonds they own are B rated. So not apples to apples.

These are the comparison indexes: For bonds: Lehman U.S. Long Credit AA or Better Bond Index through March 31, 2000, and Bloomberg Barclays U.S. Credit A or Better Bond Index thereafter. For stocks: 26% S&P 500/Barra Value Index and 9% S&P Utilities Index through June 30, 1996, when the utilities component was split into the S&P Utilities Index (4.5%) and the S&P Telephone Index (4.5%); as of January 1, 2002, the S&P Telephone Index was replaced by the S&P Integrated Telecommunication Services Index; as of July 1, 2006, the S&P 500/Barra Value Index was replaced by the S&P 500/Citigroup Value Index; as of August 1, 2007, the three stock indexes were replaced by the FTSE High Dividend Yield Index.

 

[KenZ71]

In an ever rising market I doubt anyone can beat the market consistently.

To me, the concern in this record length market is good returns and lower risk for the eventual correction. For that reason I am following this author - https://seekingalpha.com/author/colorado-wealth-management-fund/research

Over past 2 years I've see returns similar to market without tech exposure.

 

[Onward]

Vanguard's answer to the number of active bond managers who beat the index is that the managers invest in riskier, higher-yielding bonds. I've looked at fund portfolios compared, and I think VG has a point.

I attribute a big part of whatever success I've had in investing to never having had to question the competence, commitment, or clairvoyance of a stock- or bond-picker. My progress toward FIRE began when I abandoned all active management.

 

[audreyh1]

Vanguard's answer to the number of active bond managers who beat the index is that the managers invest in riskier, higher-yielding bonds. I've looked at fund portfolios compared, and I think VG has a point.

I attribute a big part of whatever success I've had in investing to never having had to question the competence, commitment, or clairvoyance of a stock- or bond-picker. My progress toward FIRE began when I abandoned all active management.

Yes, I agree with this. I have observed the very same and amended my bond fund holdings accordingly. Core bond index funds tend to hold higher quality paper than actively managed core bond funds.

I had a nasty ride with well respected core bond fund DODIX during the 2008 financial crisis and I learned my lesson. Actively managed bond funds tend to take on more credit risk - lower overall credit quality and more corporate bonds. This makes them outperform when markets are good. But this will likely turn around and bite you in the butt when equity markets go south and/or credit crises or sudden widening of credit spreads occur, which is precisely when you want your bond fund to be a safe haven.

 

[tdv2]

Yes, I agree with this. I have observed the very same and amended my bond fund holdings accordingly. Core bond index funds tend to hold higher quality paper than actively managed core bond funds.

I had a nasty ride with well respected core bond fund DODIX during the 2008 financial crisis and I learned my lesson. Actively managed bond funds tend to take on more credit risk - lower overall credit quality and more corporate bonds. This makes them outperform when markets are good. But this will likely turn around and bite you in the butt when equity markets go south and/or credit crises or sudden widening of credit spreads occur, which is precisely when you want your bond fund to be a safe haven.

Agree also. I have a very small position in DODIX from an old 401k that I rolled into my primary IRA....it was the core bond option at the time....I moved most of it to FSNAX a several years back and have been doing fine ever since. When the proverbial $hit hits the fan, higher yield corporate bonds go south in a hurry.

 

[hotwired]

It does amaze me that some of the things I picked up (ignorantly without doing more research) were intended for the "income" or "bond" part. Preferreds, CLO fund and most notably, two of Pimcos start floating rate funds. I felt that in the low interest envirnoment, it was a good risk reward to have some floating rate, but sheesh, (because they're leveraged) they sunk as bad as SPY. They are trading near their lowest premium in years, so my plan is to hold onto them for a bit until they recover. (PCI, PFN). But preferred's in particular crashed hard. I really need to be careful on what I consider the "ballast" portion of my bond position. Phew!

I do love the idea of purchasing ACTUAL bonds vs. funds and will investigate that over the next week. But otherwise will plan on using either intermediate term vanguard and TIPS.

 

[KenZ71]

I too bought preferreds thinking they would be more stable. My picks, mreits & Nat Gas, have not held up. However the dividends won't be cut so the value should logically bounce back.

Worst case the market values take a while to recover the income still shows up. So we are paid to wait. That high income is nice ballast for me.

 

[pb4uski]

I too bought preferreds thinking they would be more stable. ...

My preferred portfolio (all investment-grade, ~20 issuers) is only down 6% since the end of 2019.... and the vast majority of the decline relates to two Canadian energy related issuers yield over 7% based on my cost, so I can live with that for now.

 

[VanWinkle]

My preferred portfolio (all investment-grade, ~20 issuers) is only down 6% since the end of 2019.... and the vast majority of the decline relates to two Canadian energy related issuers yield over 7% based on my cost, so I can live with that for now.

Do you compare your returns to the stock index, bond index, or something entirely different. How do you determine if there isn't a better risk adjusted
return for your money? Just curious as you usually have a good handle on returns in comparison to an index.

VW

 

[Montecfo]

On the REIT and leveraged fund fronts, I consider those to be part of my equity allocation, not debt. Same with preferred stocks. I do like the REITs and preferreds in this environment.

As far as core bond funds vs AGG, we have an excellent real world example of stressed performance. Here are the returns:

1Month
DODIX: -2.24%
DLTNX: +.61%
AGG:. -2.02%

YTD:
DODIX:. -.78%
DLTNX: +1.91%
AGG:. -.73%

12 Mo:
DODIX: 6.3%
DLTNX: 6.64%
AGG:. 3.97%

AGG=Barclays iShare Aggregate ETF
DODIX= Dodge & Cox income
DLTNX=Double Line TR bond

All results per Morningstar.

 

[hotwired]

This is what is actually SLOWING ME DOWN in terms of moving to my new "Hands off" portfolio. (the high yields "left behind" in the aftermath. about 15 of my 5K picks which are now 3-4K have 8-40% dividends, some of which will stay, and only go down as share prices rise. That's to say I think they are still a better place for my $$$ right NOW than selling and moving to Vanguard Total Stock market and Total Bond. I could be wrong. I'm not "topping them off" to briong them back to 5K each, that's for sure! But I do want to move slowly. A couple of them are super risky liek WPG and OXLC but I still think they might pop enough to justify taking a chance. Then I have PFN and PCI, Then steel partners pfd at 20 which is getting called in a few years at 25 and yields over 7% now, farmland partners pfd, JPS pfd CEF yielding a little over 8 and MORT and NLY and Cohen and Steers realty income and MLP income ... the MLP income got nailed 25% in one day with oil's drop.

 

[audreyh1]

On the REIT and leveraged fund fronts, I consider those to be part of my equity allocation, not debt. Same with preferred stocks. I do like the REITs and preferreds in this environment.

As far as core bond funds vs AGG, we have an excellent real world example of stressed performance. Here are the returns:

1Month
DODIX: -2.24%
DLTNX: +.61%
AGG:. -2.02%

YTD:
DODIX:. -.78%
DLTNX: +1.91%
AGG:. -.73%

12 Mo:
DODIX: 6.3%
DLTNX: 6.64%
AGG:. 3.97%

AGG=Barclays iShare Aggregate ETF
DODIX= Dodge & Cox income
DLTNX=Double Line TR bond

All results per Morningstar.

I don’t believe that your AGG total return numbers are correct. FXNAX tracks it and is outperforming DODIX for all the intervals you list.

My 1 month, 3 month, YTD and 1 year total return numbers are looking way better on FXNAX than DODIX. Are you sure you are comparing total return? Often for ETFs NAV only is given.

FXNAX versus DODIX total return using M* performance comparison

1 month +0.20% vs -2.24%
YTD +1.76% vs -0.58%
3 month +1.82% vs -0.78%
1 year +8.99% vs +6.33%

 

[Montecfo]

Audreyh, thanks for pointing that out. Here is a revision.

The figures in my original post were all produced from the same Morningstar total return graph. But there is a difference from the total returns stated on each individual Morningstar page mainly affecting the ETF. Capturing those figures instead reveals the following (and adding FXNAX):

1Month
DODIX: -2.24%
DLTNX: +.61%
AGG:. -1.82%
FXNAX: +.20%

YTD:
DODIX:. -.64%
DLTNX: +2.10%
AGG:. -.04%
FXNAX: +2.11%

12 Mo:
DODIX: 6.3%
DLTNX: 6.64%
AGG:. 6.77%
FXNAX: 8.99%

AGG=Barclays iShare Aggregate ETF
DODIX= Dodge & Cox income
DLTNX=Double Line TR bond
FXNAX = Fidelity US bond fund

All results per Morningstar.

It mattered a lot how you "index". Bond ETFs that I have looked at moved to discounts to NAV, which lowered returns. Mutual funds did not have this issue, by definition.

Other observations welcome.

 

[audreyh1]

Well, I guess that’s the problem with the ETF then. If there is a big discount to NAV, all bets are off.

But I was getting different total return numbers at different sites for AGG.

FXNAX is the Fidelity US Bond index fund which tracks the Bloomberg Barclays US Aggregate Bond Index.

 

[hotwired]

Speaking of researching bond funds, is morningstar a pretty straightfoward tool? I found myself "tricked" (by my own lack of research and laziness) with PCI, PFN, and a couple other "bond funds" that I had as part of my 40% "bond allocation". I count on anything I stick there to give ballast, NOT go down in lockstep with SPY during a correction like most of mine did. I do realize I can't include REITs, MLPs and 20% yielding CLO funds in that mix but I did have my preferreds, and floating rates there and they did NOT give me that ballast.

I'd like to know how a given income instrument like a floating rate bond fund for example, will perform vis a vis Vanguard Total Bond in various scenarios. Not "crystal ball" level of knowledge but enought that I don't get my legs swept out from under me again, so to speak.

 

[Montecfo]

Speaking of researching bond funds, is morningstar a pretty straightfoward tool? I found myself "tricked" (by my own lack of research and laziness) with PCI, PFN, and a couple other "bond funds" that I had as part of my 40% "bond allocation". I count on anything I stick there to give ballast, NOT go down in lockstep with SPY during a correction like most of mine did. I do realize I can't include REITs, MLPs and 20% yielding CLO funds in that mix but I did have my preferreds, and floating rates there and they did NOT give me that ballast.

I'd like to know how a given income instrument like a floating rate bond fund for example, will perform vis a vis Vanguard Total Bond in various scenarios. Not "crystal ball" level of knowledge but enought that I don't get my legs swept out from under me again, so to speak.

I am not an expert, but it is relatively easy to do initial screens using Morningstar (and a lot of it is available free-just go to the website).

If you notice the very high distribution yields of PCI and PFN (10%+), that is your first clue that these are not ballast type investments. You can also see they are leveraged 27-50%. Leveraged funds are more aggressive. 3rd, they are closed-end funds (CEF's) which can trade at a premium or a discount to the net asset value of underlying holdings. CEF's are fine, I own some, but i try to buy them when trading at a discount (per morningstar or fund website) and understand they can move quickly from premium to discount). You can get a double whammy with CEF's if the underlying holdings sell off AND the fund goes from premium to discount (common in tough markets).

These can do great in our low interest rate environment, but in a heavy selloff the risks reveal themselves. I would think of these as more a part or my equity allocation than as bonds/safe investments.