Managed/Balanced (bond) Fund Vs Bond Index Fund

[yakers]

I’m going to start a new thread although I see it as a spin off of the bonds Vs Bond funds thread. Most of that thread addressed the issue of individual bonds Vs an index bond fund. But, as I see it , the issue is wider and needs to consider more alternatives to bond index funds. What about managed bond funds? What about balanced foods like Wellesley and Wellington, and PIMCO income funds, CEFs and the TSP G Fund.
I am trying to simplify my investments as I get older and DW has little interest in things financial. I also don’t want to do something stupid with bonds. Somehow it seems like Wellesley and Wellington have done well enough.
I do own some ibonds and a small amount in short term TIPS. But mainly I changed out a couple fund holdings in my tIRA & Roth IRAs from VG VBIAX Balanced to Wellesley and VG Star fund to Wellington to avoid the BND/bond indexed component. I figure this lets VG manage most of my bond portfolio. Also my largest fixed income holding is the TSP G Fund and while not perfect it certainly is pretty good, predictable and a good part of my FI part of my AA.
So one is question is what (probably managed) bond funds are good to be holding when interest rates are rising?
Bogleheads advocated a 2 or 3 fund portfolio, would be nice to have something that simple without a bond index fund.

 

[njhowie]

First, what is your AA - how much do you have in bonds to begin with? Is it significant enough that a change like this is really going to make a big potential positive difference?

Look at some of the active bond fund returns over 10+ year periods compare with bond index funds/ETFs. Does it seem to be worth a change? I think that you'll likely find that the actively managed funds perform worse. In general, the expense ratios are going to be higher, as they have more costs involved in how they operate. Also, understand that annual taxes (assuming taxable account) may be higher because of higher turnover in the fund as they are buying and selling more frequently...market timing.

At this time, any analysis of the performance of any type of bond fund is going to look pretty awful as a result of interest rate movement over the past year. Doubtful you'll see any with average annual returns greater than maybe 2%/year during the past 10 years, with most at 1% or lower, if not negative.

 

[yakers]

My current AA is 59/25/16 and I want to go to 60/40 or as far as 70/30 over time. (I was down 8.7% in 2022 'only' not so bad because of the G Fund and some preferreds)I have already ‘improved’ portofolio performance by getting rid of the BND part of VBIAX and STAR and I no longer see the reason for a bond index component but I still need a bond component.
I often play with the idea of just using Wellesley in tax favored and Wellington in taxable and just leave that for DW as good enough, I just don’t want to manage individual bonds but don’t feel bond index funds are a good idea. But what is a good idea for bonds if you don't wnat to manage indiviuial bonds and ladders?

 

[daylatedollarshort]

My current AA is 59/25/16 and I want to go to 60/40 or as far as 70/30 over time. (I was down 8.7% in 2022 'only' not so bad because of the G Fund and some preferreds)I have already ‘improved’ portofolio performance by getting rid of the BND part of VBIAX and STAR and I no longer see the reason for a bond index component but I still need a bond component.
I often play with the idea of just using Wellesley in tax favored and Wellington in taxable and just leave that for DW as good enough, I just don’t want to manage individual bonds but don’t feel bond index funds are a good idea. But what is a good idea for bonds if you don't wnat to manage indiviuial bonds and ladders?

I ladder individual CDs, Treasuries, Agencies and TIPS for our fixed income. The CDs are FDIC insured. TIPS and Treasuries are government backed. TIPS are CPI inflation protected and work somewhat like I bonds, but the yields are higher right now. Agencies unlikely to default. They all have maturity dates so your principal is protected if held to maturity. For the longer maturities, I only buy TIPS at auction and dollar cost average. There isn't really much research or time required. You can actually get more than a 4% safe withdrawal rate over 30 years these days just with a TIPS ladder:
The 4% Rule Just Became a Whole Lot Easier, https://www.advisorperspectives.com/articles/2022/10/24/the-4-rule-just-became-a-whole-lot-easier. (You don't to have as many rungs as this guy does or build it all at one time either.)

There still are still ladders to manage, but I don't have to do much research like I would if I bought corporate bonds, and the work involved is pretty minimal. I use index funds for our stock allocation.

 

[Al18]

Last year I sold my bond funds and replaced them with CD’s maturing in 6 months to 3 years. I’ve hung on to my balanced funds FBALX and FPURX.
3 years started buying some iBonds. Seems good enough for me. I’m not trying to chase every basis point of interest.

 

[pb4uski]

... But what is a good idea for bonds if you don't wnat to manage indiviuial bonds and ladders?

Perhaps a good middle road that would avoid the pitfalls of bond funds, and even managed bond funds, is a rolling ladder of target maturity bond ETFs. I think you could get pretty good coverage with 5 to 10 tickers.

Another thing worth a look are target bond ETFs. They are new to me but basically a rolling ladder of UST of a specified term, for example a rolling ladder of all 5 year USTs outstanding. They do the work for a 15 bps ER.

 

[donheff]

I'm kind of asleep at the wheel so I have no advice on bond funds generally. I have a small portion of our overall portfolio in the TSP G Fund (about 5%). I view that as a super stable fund and intend it to be used as a source of cash when everything is down. I did use it a few months back when I wanted to add about $40K in cash to current expenses. I sold some equities in taxable and bought an equivalent amount of equities in the TSP to keep things "even" overall. I would expect to return to G in the TSP after equities recover. I recognize that the math doesn't precisely work out because of the differing tax implications but, as I said, I'm asleep at the wheel.

 

[sengsational]

I have no data, but like the question, and would be interested in knowing the recent results of these "W" funds.

I haven't read these funds' operational specs, so I wonder if they're up against the same problem as bond index funds (managing bond duration). That's probably about the same, but it seems to me that the holders of those funds are less likely to "run for the hills", thus less pressure to sell bonds before maturity. I think it's that "maintaining duration during outflows" that's the problem, plucking off some short, some medium, some long, that hurts in the rising interest rate environment. So if there fewer people trying to bail, less pressure there. Just a theory.

 

[pb4uski]

... Another thing worth a look are target bond ETFs. They are new to me but basically a rolling ladder of UST of a specified term, for example a rolling ladder of all 5 year USTs outstanding. They do the work for a 15 bps ER.

Found more on this and it is different than I thought. They buy/roll into the most current two year UST at auction and sell all of the prior months issuance. Seems a little gimmicky but I need to ponder if it might be useful.

... This week, F/m Investments, a $4 billion boutique investment advisor, launched the*US Treasury 10 Year exchange-traded fund (UTEN),*US Treasury 2 Year ETF*(UTWO), and*US Treasury 3 Month Bill ETF*(TBIL). The three new funds each hold only the most current—or the so-called “on the run”—issue of the benchmark 10-year, two-year, and three-month Treasury notes, respectively. The holding will be automatically rolled over to the next current bond when it’s issued....

https://www.marketwatch.com/articles/single-treasury-bond-etf-funds-51660337288?mod=mw_quote_news

 

[COcheesehead]

Last year I sold my bond funds and replaced them with CD’s maturing in 6 months to 3 years. I’ve hung on to my balanced funds FBALX and FPURX.
3 years started buying some iBonds. Seems good enough for me. I’m not trying to chase every basis point of interest.

I used Puritan FPURX as a core holding for years and I just sold all of it. I made money on it for sure, but the distribution yield has fallen to the low 2% range.
I flipped the funds into mid to low 5% yield investments in treasuries, taxable munis and the rest went into other current equity positions.

I look at balanced funds as being similar to bond funds. They hold a bunch of low yielding debt and things will only get worse if rates continue to rise.

 

[target2019]

At the beginning of 2022 I tired of bond predicting in my SEP, and exchanged 100K VBTLX (VBMFX) for VWIAX (VWINX). Overall it did not change our asset allocation, as moves were made elsewhere to rebalance overall, and maintain a 50/50 portfolio overall.

Here are the results:

https://www.portfoliovisualizer.com...&symbol3=VWELX&symbol4=VTSMX&allocation4_1=35

I figured Wellesley Management would do better.

They've done $4,700 better in this scenario.

Based on a thousand posts about Wellesley, my opinion is that it is superior to what you can do with Total Stock and Total Bond.

But that is just opinion, right?

 

[Jimonlimon]

My 401k is through Nationwide and we only have a few options- mostly target date funds, one bond fund, and one bond index fund. For the past decade during downturns they seem to lose money at about 1/2 to 2/3 the rate of stock index losses; during upturns they gain at about 1/3 the rate of stock index gains.

The managed fund (Blackrock and Amundi Pioneer) has done better than the index in downturns and worse in upturns.

I'm planning to dump the 30% of my portfolio currently in bond and target date funds and put it into CD's earning 4.6-5% since I plan to draw all of this out in the next 5 years. Although I may miss out on gains I'll also miss out on losses.

 

[pb4uski]

I used Puritan FPURX as a core holding for years and I just sold all of it. I made money on it for sure, but the distribution yield has fallen to the low 2% range.

I flipped the funds into mid to low 5% yield investments in treasuries, taxable munis and the rest went into other current equity positions.



I look at balanced funds as being similar to bond funds. They hold a bunch of low yielding debt and things will only get worse if rates continue to rise.

Yeah, as many things come and go, I think bond funds and ETFs, active or passive are not a great place to be in this environment. I think that even if you sold all and plunked the proceeds in a 6/12/18/24 month ladder that you'll come out ahead of the bond fund/ETF.

 

[Phroig]

Managed bond funds have significantly higher expense ratios, but more flexibility than bond index funds. The flexibility (e.g., with portfolio duration) is probably important now, but the index funds should be fine when we get to stable rates.
Wellesley and Wellington are excellent funds if you want to “set it and forget it”. Vanguard also has a pretty good tax-managed balanced fund, if that makes more sense based on your tax rate.

 

[pb4uski]

Yeah, as many things come and go, I think bond funds and ETFs, active or passive are not a great place to be in this environment. I think that even if you sold all and plunked the proceeds in a 6/12/18/24 month ladder that you'll come out ahead of the bond fund/ETF.

An interesting ETF might be TFLO, iShares Treasury Floating Rate Bond ETF.

No interest rate risk because it is US government floating rate notes, current portfolio coupon is 4.85% and ER is 0.15% so net coupon is 4.60%... distribution yield is about 4.2%. I would expect that 4.2% distribution yield will drift up towards the 4.60% net coupon over time.

Might be a bit early to get into given that MMF yields are a bit higher but perhaps worth watching.

 

[walkinwood]

An active bond fund where the manager has the freedom to swing the fund from short-term to long-term and anything in between depending on their reading of the future course of interest rates may be valuable if you can trust the manager to be right most of the time.


Of course, being right most of the time isn't easy. IIRC, there were calls for selling bond funds a few years ago. Those that didn't sell got good returns in 2019 & 2020.



Obviously, it has to be a no-load fund with a low expense ratio.

 

[COcheesehead]

There are do anything, multi sector bond funds out there, but they are still susceptible to all the issues any bond fund has.

This is the best performing no load one YTD.