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Author: Hawkwin Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75383  
Subject: Re: If I Were to Take Over from FA... Date: 3/14/2014 5:14 PM
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but if the bonds are held to maturity (and that is what I understand is their practice), there will be no principle loss -- only the loss of 1% return for the average 5.96 years - or less than $10 per bond.

There will be no principle loss if you assume they purchased the bonds at par, and not at a premium.

This fund has an annual turnover rate of 35%. I doubt that turnover occurs only with the stock but it is possible. Also, having viewed the prospectus, I don't see any language that suggests the managers have either a goal of holding to maturity or a restriction requiring such.

Perhaps I am misreading what you state about duration. To create a common reference point...

From the Wellington Prospectus:

Duration. A measure of the sensitivity of bond—and bond fund—prices to interest rate movements. For example, if a bond has a duration of two years, its price would fall by approximately 2% when interest rates rose by 1%. On the other hand, the bond’s price would rise by approximately 2% when interest rates fell by 1%.

So Wellington will lose 6% of bond value for every 1% increase in rates. Now if rates went up ONLY 1% over that six years, I would agree with you, no big deal. But if they go up 1% every year for the next six years...

I don't see the Fed letting that happen but I am still staying away from any bond exposure where the average duration is more than the yield. Not a fan of interest rate risk that is more than the total annual income. Just my personal position. The ave coupon is 3.97%.
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