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Given the Fed’s persistent ZIRP, I was curious what the action for bond funds has been so far this year. The low returns weren’t surprising, but their implied volatility is. In the table below, Max, Avg, and Min have their customary meaning. 90% and 75% are based on Max. “Range” is the difference between Max and Min when each is expressed as a percentage of Avg. The data is from Morningstar's Fund Screener.

My thinking is this. As sucky as bond funds are, there are hundreds of them, all run by supposedly-competent managers who have research and trading advantages no retail investor can match. The downside to funds is shareholders who persistently buy tops and sell bottoms, making a hash of rational investing. Nonetheless, the returns achieved by funds suggest what a determined investor might achieve for her or himself. E.g., if you’re competent, you ought to be able to pull out of the market 90% of what the top manager does. If you’re reasonably good, you ought be able to pull out 75%. (If you’re merely an average investor, then buy the fund.)

For nearly a decade in this forum, I have been advocating that bond-investors consider high-yields for all the same reasons advocated by Modern Portfolio Theory: the asset-class is a diversifier; their absolute-returns are excellent; their presence in a portfolio (in judicious amounts) reduces overall risk, etc. The downside to high-yield investing isn’t the admitted risks of the asset-class, but finding enough inventory. Therefore, unless one really wants to be a high-yield specialist, most bond-investors are better served by taking a multi-sector approach, buying across the yield-curve and up and down the credit-spectrum, with a lot of emphasis put on exploring but, also, on staying out of trouble.

On average, a high-yield manager is going to beat a multi-sector manager, but with greater volatility. That, however, isn’t what the table below suggests. If you’re a bond-investor, junk has been the place to be this year on the basis of both absolute-returns and risk-adjusted reuurns.

YTD If Annualized
Max 4.67 22.4
90% 4.20 20.2
75% 3.50 16.8
Avg 2.83 13.6
Min 0.59 2.8
Range 144%

Max 3.92 18.8
90% 3.53 16.9
75% 2.94 14.1
Avg 1.65 7.9
Min -0.5 -2.4
Range 268%

Long Gov't
Max 1.82 8.7
90% 1.64 7.9
75% 1.37 6.6
Avg 0.55 2.6
Min -3.23 -15.5
Range 918%

Emg Mkt
Max 2.09 10.0
90% 1.88 9.0
75% 1.57 7.5
Avg 0.02 0.1
Min -1.7 -8.2
Range 18950%
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