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|Subject: Re: Bonds vs Bond Funds--Again||Date: 12/31/2009 11:56 AM|
|Author: jackcrow||Number: 29625 of 35992|
dan et al.,
What we are seeing is that there are differences in the costs and in management styles between manged bond funds, index funds and holding individual bonds.
As I stated in a previous post TOR within a fund is mostly noise if the management fees are reasonable compared to performance. It really doesn't matter if the fund is a CEF, open managed fund or an index fund, the holder of the fund doesn't experience the turn over directly what they experience directly are the management fees. Where TOR might be useful is if it suddenly varies from its norm, within each type of fund the shift may signal something different.
Bond funds are also restricted by their own management criteria just as stock funds are. A fund that is suppose to be a "tech fund" isn't investing in Financials. A bond fund also must adhere to its published definitions, if its short it holds short assets, if its medium it holds medium assets if its long it holds long assets. All of these criteria force trading within the funds and thus create significant turn over.
If costs are managed the primary difference between the two concepts is how the held asset behaves over time. A bond fund does not behave like a portfolio of bonds held to maturity. A bond fund behaves more like holding stock in company who's industry is bonds. When the bond market is doing well bond funds will follow and also do well, the inverse is equally true. There really is very little difference between having a high demand for bonds driving the price up and selling other high demand widgets which can then can also demand a price premium. If people want iPod touches or iphones APPL stock rises, if people stop wanting the products the stock price will follow.
Looking at BND last night there were only 14 days last year where the fund could be bought at a value, below NAV, price. For someone who follows the fund and value shops they had an opportunity. The casual DCA'r bought at a premium during most of the year, this is neither good nor bad it simply is something about the behavior of the tool that needs to be recognized and accounted for.
If someone was mechanically buying individual bonds to fill their ladder they probably would have experienced similar pricing. If someone was value shopping for individual bonds they probably had a longer window and would have had to invest the time and skill set to find the value priced bonds. The situations between the two assets are very similar.
That leaves two variables, managing costs and managing your risks. Managing cost is a pretty straight forward math exercise. Managing risks for each varies significantly because bond funds and individual bonds behave differently. NAV moves, face value does not.
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