If you poke around at the Morningstar website, you’ll discover they put 200 bond funds into a category they call multi-sector. If you look at the holdings of those funds, you’ll discover that they are buying “across the yield-curve and across the credit-spectrum”. In other words, they don’t hold themselves to strict credit or maturity allocations. But, also, they don’t depart too much from one another, either. Years ago, their example was my inspiration. If flexibility were good enough for professional bond managers, the same should be true for an amateur like myself. Buy what makes sense to buy in terms of yield-achieved for risks-accepted. If you dig into any of the funds, you’ll see that Morningstar benchmarks it against category averages for credit-weight and maturity, which is typically BB and about 8 years. But, as always, averages hide the interesting details. So I’ve reproduced below what Morningstar thinks is the typical credit-profile of a multi-sector bond fund, plus examples from three of the major bond fund families, and, lastly, my own all-bond portfolio. (PIMCO’s offerings in the multi-sector area are too new to have much data as yet.) M* Cat Avg Columbia Federated Loomis Avg of 3 Mine AAA 33% 24% 17% 14% 18% 3.5% AA 7% 2% 3% 7% 4% 16.3% A 10% 5% 1% 10% 5% 10.7% BBB 21% 17% 0% 23% 13% 18.1% Totals 71% 48% 22% 54% 41% 48.6% BB 13% 18% 30% 12% 20% 15.6% B 14% 26% 47% 14% 29% 16.8% below B 3% 6% 0% 4% 3% 6.6% NR -1% 2% 0% 17% 6% 12.4% Totals 29% 52% 77% 47% 59% 51.4% By the weightings above, you can see that I’m seriously underweighted in the top credit tier. The reason I’d offer is that this tranche has been obscenely expensive for a very long time, due to the Federal Reserve’s Zero Interest Rate Policy (ZIRP) and the flood of scared money that has moved into the bond market due to crashes in the equity markets. OTOH, my split between invest-grade and spec-grade closely matches those of Columbia and Loomis Sayles, both of which are sensible, low-risk bond shops. (Federated runs a notoriously risky fund shop, and I would avoid their weightings, stocks and bonds alike.) Now we come to the heart of the heart of reasons to own bonds. Bonds are puts. Maturity is promised. That doesn’t mean that interest will be paid and principal returned without fail. But the odds can be gamed and expectations can be discounted more easily than they can for equities. Thus, if you’re a lazy investor who seeks only modest returns, bonds can be a good way go. E.g., if your personally-experienced rate of inflation runs in the neighborhood of 5%-6%, and if your combo Fed-state tax rate runs in the neighborhood of 30%-35%, and if your chief concern as an investor is merely the preservation of your present purchasing-power, then it’s not very hard to meet your objective with bonds provided you do buy “across the yield-curve and across the credit-spectrum”. Otherwise, you are accepting more inflation-risk than your avoidance of credit-risk can overcome. So that’s the key to achieving the modest goal of a real-rate of return. You’ve gotta put enough of the risky stuff into your portfolio to achieve the average pre-tax, pre-inflation return of 8%-9% you need, but not so much junk that you blow up the whole account. So that’s the key, enough of the sure stuff to offset the inevitable grief that comes with the unsure stuff, and vice-versa, so that the portfolio is “robust” to nasty surprises, like persistently low interest-rates and increasingly inflation. My CY My YTM My P/L Comment AAA 0.0% 7.1% 34.5% the zeros skew CY and P/L AA 6.1% 7.8% 9.0% A 6.3% 8.2% 11.9% BBB 7.0% 9.7% 10.3% BB 7.6% 9.1% 0.0% B 8.4% 10.3% 3.6% below B 9.5% 10.9% -3.0% NR 6.8% 8.8% -2.9% by performance, a rating of A-/BBB+ could be implied for this tranche. Comments: This is a mostly efficient portfolio. With the single exception of my double-BBs, there is a linear relationship between implied credit-risk and possibly-achieved return for each tranche. "P/L" is the difference between entry-price versus present, mark-to-market price, and the numbers reported are noise, not meaningful information. E.g., on individual positions, some of the gains are in excess of 100%. But that merely reflects a "time-premium" that will erode as interest-rates rise and/or the bond approaches maturity. For sure, I'd like to be "in-the-money" on every position. But that's an unrealistic expectation, because "Prices fluctuate." So a lazy investor like myself scrambles to buy what should be bought, when it should be bought, and then hunkers down for the long haul. At last count, the portfolio consisted of 286 positions spread across about 180 unique issuers with a face value in the neighborhood of $750k, or merely a mid-sized project as fixed-income portfolios go. In other words, not so big as to be unmanageable, but big enough to be able to dampen (through issuer and industry diversification) the risks that have to be accepted in order to survive in the bond game. Charlie
M* Cat Avg Columbia Federated Loomis Avg of 3 Mine AAA 33% 24% 17% 14% 18% 3.5% AA 7% 2% 3% 7% 4% 16.3% A 10% 5% 1% 10% 5% 10.7% BBB 21% 17% 0% 23% 13% 18.1% Totals 71% 48% 22% 54% 41% 48.6% BB 13% 18% 30% 12% 20% 15.6% B 14% 26% 47% 14% 29% 16.8% below B 3% 6% 0% 4% 3% 6.6% NR -1% 2% 0% 17% 6% 12.4% Totals 29% 52% 77% 47% 59% 51.4%
My CY My YTM My P/L Comment AAA 0.0% 7.1% 34.5% the zeros skew CY and P/L AA 6.1% 7.8% 9.0% A 6.3% 8.2% 11.9% BBB 7.0% 9.7% 10.3% BB 7.6% 9.1% 0.0% B 8.4% 10.3% 3.6% below B 9.5% 10.9% -3.0% NR 6.8% 8.8% -2.9% by performance, a rating of A-/BBB+ could be implied for this tranche.
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