Forced selling of bond fund shares

[lawman]

When bond fund mutual fund managers are forced to make large redemptions in order to meet sales demand how does that effect total return..I know it results in lower share price but for long term investors that stay in how does it effect long term total return? Does it reduce the end of year capital gain?

 

[jazz4cash]

First off, the fund might need to distribute capital gains that fund holders did not want. The forced selling would likely depress prices making it less attractive to sell. That wont affect the buy and hold fund investors. Beyond that i think it depends on what happens in the months and years following the forced redemptions. If investors decide to rush back into the fund the manager may be forced to buy replacement bonds at less favorable rates. It could take a while to find enough bonds to met the demand with new deposits earning zip until deployed. That will affect the fund investors that held tight. Its also possible that could work in favor of all fund investors depending on how rates have changed

 

[audreyh1]

I just buy more when prices are depressed. It’s not a permanent situation.

Bond funds don’t distribute much in terms of capital gains, and that’s mostly when interest rates are dropping, not rising.

 

[njhowie]

i just buy more when prices are depressed. It’s not a permanent situation.

+1

yes!

 

[Out-to-Lunch]

Why do you say that you "know it (forced redemptions) results in lower share price"?

 

[NW-Bound]

I just buy more when prices are depressed. It’s not a permanent situation.

Bond funds don’t distribute much in terms of capital gains, and that’s mostly when interest rates are dropping, not rising.

+1

yes!

When both stocks and bonds are depressed, I guess you sell the less depressed one to buy the other.

Or perhaps you have a lot of cash.

 

[audreyh1]

Sometimes it works out that way when rebalancing.

I usually have at least 5% cash in my portfolio asset allocation and yes that can help in this unusual scenario.

 

[Phroig]

When bond fund mutual fund managers are forced to make large redemptions in order to meet sales demand how does that effect total return..I know it results in lower share price but for long term investors that stay in how does it effect long term total return? Does it reduce the end of year capital gain?

If the bonds in the portfolio are not liquid, they may sell for significantly less than their listed values, especially if the forced selling coincides with market upheaval.

 

[OldShooter]

If the bonds in the portfolio are not liquid, they may sell for significantly less than their listed values, especially if the forced selling coincides with market upheaval.

Yes, I have read a couple of articles warning that bond portfolio managers must, under pressure, sell based on spreads and liquidity, which tends toward selling govvies and large corporate issues. Small corporate issues may be completely illiquid or have such large spreads that selling is expensive. So the composition of the portfolio starts to be distorted.

 

[sengsational]

Yes, I have read a couple of articles warning that bond portfolio managers must, under pressure, sell based on spreads and liquidity, which tends toward selling govvies and large corporate issues. Small corporate issues may be completely illiquid or have such large spreads that selling is expensive. So the composition of the portfolio starts to be distorted.

I must admit that I got the idea that bond funds were not as "good" as individual bonds early in my investing life, from a person I trusted, and haven't really revisited the idea in-depth. I always imagined that these same bond issues that the fund managers had to sell in the flight to cash would eventually get added back to the fund portfolio, but at a higher price than they were originally purchased. So if you imagine a fund where there was no forced sale, the sum total cost of the bonds would be lower than the same fund portfolio where a portion of the bonds made this round-trip.

I don't think this is a huge factor, though. Fund expenses, in some cases, probably dwarf this effect.

 

[Montecfo]

i don't think it is a question of whether funds or individual bonds are better or worse, they just have different characteristics. You will make that choice based upon which you value most.

 

[Out-to-Lunch]

So if you imagine a fund where there was no forced sale, the sum total cost of the bonds would be lower than the same fund portfolio where a portion of the bonds made this round-trip.

But again, this ignores the cash inflows and outflows to that fund, as I pointed out in the other thread lawman started on this topic: https://www.early-retirement.org/forums/f28/lets-talk-bond-funds-113113-2.html#post2738062

I concede that my simple-minded discussion of this ignores spreads.

 

[OldShooter]

... I don't think this is a huge factor, though. Fund expenses, in some cases, probably dwarf this effect.

I am not a bond fund guy either. I read threads like this for education.

Re impact, though, I don’t know. I pay much more attention to equity funds and there I have read that the market impact cost for stock-picker funds might be 1-2% -- equal to or larger than the expense ratio. Cause is normal market action when big blocks come along plus front-runners who make whale-watching their business. How that relates to bond funds I have no idea.

 

[all4j]

The share price doesn't change & that may be the source of confusion. As for how it reflects total return, year end cap gain, etc -- it depends.

 

[foxfirev5]

When both stocks and bonds are depressed, I guess you sell the less depressed one to buy the other.

Or perhaps you have a lot of cash.

Recently I dipped my toe back in the bond fund waters for simplicity. But rather than jump right in I bought a small amount of several funds. However my tracking funds are doing slightly worse than just selling select individual treasuries to rebalance (market timing by own made up rules ie IPS). For me it's back to about 5% cash and the rest of fixed in the ever growing CD/Treas/I Bond/TIPS ladder.
FWIW 50/50 allocation