As I have pointed out before an actively managed bond fund, particularly a “go anywhere” fund is a particularly bad choice for the bond portion of an asset allocation. The bond portion of a portfolio should be designed as a low risk counterweight to the equity portion of the portfolio. As such it should be largely invested in short term high quality bonds and TIPs (treasury inflation protected securities). It is important at all times to have transparency in one’s portfolio holdings and bonds are no different. Yet when investing in a “go anywhere “bond fund one is essentially betting on a genius who will exercise security selection and market timing in the fixed income area. As a consequence your monies are not really allocated to the fixed income asset class in a manner comparable to an investor that holds an etf or bond fund indexed to short term treasuries(or another specific slice of the bond market). The real asset class for the investors in the bond funds described below is “investments by bond market guru”. Since past performance is not predictor of future results and the investor never knows in real time what the bond fund manager owns it is impossible to know how the bond portion of your portfolio will perform.
This article from the WSJ illustrates the problem (my bolds)
Bond Funds' Increased Risk
May Stop Paying Off
By DIYA GULLAPALLI
June 7, 2008; Page B1
Some bond-fund managers have been posting strong results this year by rapidly taking on more risk -- an approach that could prove ill-timed as many pockets of the credit markets continue showing signs of strain.
Navigating the credit markets' darkest time lately has been especially challenging. But managers of bond-focused mutual funds like Pioneer Strategic Income Fund's Ken Taubes, Pimco Total Return Fund's Bill Gross and T. Rowe Price New Income Fund's Daniel Shackelford have beaten a key bond benchmark this year. And despite some past stumbles, they have posted good long-term records.
Many managers' thus-far successful recent strategy: They stayed parked in safe Treasurys last year and this past winter, then in March felt the danger had ebbed and moved into more-dicey holdings -- such as mortgage-backed securities, junk bonds and financial-company debt. Of course, these bets may fail, and there are hints that storms may recur. Treasurys rallied Friday amid a stock-market pullback and surges in oil prices and unemployment.
Unlike funds dedicated to one category, like high-yield or municipal bonds, these managers lead so-called go-anywhere funds, which have the advantage of flexibility. If one sector is falling, they can get out with impunity and zip into something more promising. The downside is that their bold calls may be wrong.
Thus far this year, Mr. Taubes's fund has posted a decent 2.18% total return, which is one percentage point ahead of the bond world's favorite yardstick, the Lehman Brothers U.S. Aggregate index, and 1.56 points better than his multisector bond category. Mr. Gross's fund is up 2.64% and Mr. Shackelford's, 1.55%. Over five years, all three funds handily beat the benchmark.
Less-successful go-anywhere bond funds either stayed heavily weighted in Treasurys or were in mortgage bonds that have declined and were pummeled. They have ended up trailing the Lehman index, a badge of dishonor…..
In a shift that is typical of this year's performance leaders, Mr. Taubes at the $1.4 billion Pioneer bond fund has almost completely eliminated his Treasury position in recent months to one of the lowest stakes in years. His thinking has been that "you can throw a dart and find attractive buys anywhere in the fixed-income market besides Treasurys," he says……..
But financial holdings have delivered mixed results. Some of Mr. Gross's fund's Wachovia Corp. bond holdings have declined in recent days. The reason: lingering concerns about further financial-company write-downs.
With junk bonds, the climate looks promising. The Lipper High Current Yield Bond Index is up 4.4% this quarter, much more than any other taxable-bond category.
Nevertheless, some ominous signs have cropped up. Mr. Gross's $128 billion fund and Mr. Shackelford's $8 billion fund have flagged in recent days. The managers say the declines are just short-term blips for an otherwise intact thesis.
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URL for this article:
http://online.wsj.com/article/SB121280030295853963.html
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