YTD, the best of the multi-sector bond funds have returned a whopping 19%. That’s serious money. According to Morningstar, the YTD average for the asset-class is a 9.38%, which is also serious money. The initial investment-minimum for PONDX is a mere $1,000, or roughly the price of a single bond. But to find corporate bonds offering 9.38% YTD (or 10.5% annualized), you’d have to be trolling in the triple-CCCs, and likely you’d get yourself into trouble. How can PIMCO be making the kind of money they are with their bond funds? Because they aren’t ‘investing’ in bonds. They’re 'trading' them, which is a tough gig to do well. So, let’s step back for a moment and think about strategy. By and large, investing in bonds using a value approach is relatively simple. If you can buy your own bell peppers and broccoli at the grocery store, you know enough to buy your own individual bonds through a broker. The process is no different. And having bought them, you can mostly forget about them and do as well on your returns as the fundies. But trading bonds is a tough gig, due to factors like spreads, and it’s an expertise that’s tough to acquire. So the smart division of labor is to do your own bond-investing, but to let others do your fixed-income trading for you. Gary Schilling was a panelist on a recent investing forum hosted by Mauldin Economics, and he argues that interest-rates on the long bond are headed lower, meaning, the fixed-income trading that PIMCO is doing on behalf of its shareholders still has legs, whereas to buy bonds as an individual investor with the intention of holding them to maturity is to buy very near the top of the market, and, because rates will likely go back up before they mature, holding debt offering 3.5-4% is to choose to lose your purchasing-power. Whereas, buying those same 3.5-4% bonds and then flipping them went rates go to 2% can offer serious gains. In other words, as late in the stage of things as it is, I think it’s time to take a fresh look at bond funds and to begin averaging some money into the asset-class, because continuing to troll the bond offering lists with the hopes of being able to buy and hold is has become an increasingly futile endeavor. Charlie
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