My Bond Fund: Q3 2005 YTD review
Has my bond fund continued to outperform a broadly diversified bond index? How is my fund doing when compared to individual bonds? What, if anything, am I giving up in tax efficiency for being in an actively managed vs. passively managed index fund?
For this post, I used Morningstar's "fund compare" tool to review YTD return and tax efficiency for my bond fund. Results for Vanguard's Total Bond Market Index Fund (VBMFX) have also been included -- serving as my benchmark.
My fund
PIMCO All Asset Fund (PAAIX) -- open to new investors
PAAIX is unusual in that it is a fund of funds. While primarily in bonds, this fund also incorporates some equity and alternative investments, and alternative investment strategies. Please don't invest in anything you do not understand. Click to learn how -- as an individual investor -- I got institutional pricing.
The benchmark
Vanguard Total Bond Market Index Fund (VBMFX) has been used as the benchmark. This fund seeks to track the performance of a broad, market-weighted bond index.
Morningstar's results and my comments follow.
Return: My bond fund compared with the benchmark
My comments
- My fund beat the benchmark for the first nine months of the year:
- - PIMCO All Asset = 5.94% YTD
- - The benchmark = 1.81% YTD
- For 1-year returns, PIMCO beat the benchmark by a wide margin (10.81% vs. 2.77%)
- For 3-year returns, PIMCO beat the benchmark by a wide margin (13.37% vs. 3.84%)
- What about individual bonds? High quality 10-year corporates have been paying around 5%. Assuming a buy and hold strategy, PIMCO may be an attractive alternative for a portion of the money currently allocated to my fixed income ladder.
Tax cost ratio: My bond fund compared with the benchmark
My comments
- For 3-year tax cost ratio**, my fund has a slightly higher number than the benchmark. But my fund still outperforms -- by a wide margin -- the benchmark in total after tax return.
** Tax cost ratio represents the percentage-point reduction in an annualized return that results from income taxes. The calculation assumes investors pay the maximum federal rate on capital gains and ordinary income. A smaller number means LESS taxes.
Caveat
- Over long periods of time, index funds have outperformed approximately 90% of managed funds. Long term investors should give strong consideration to index funds. Learn more about actively vs. passively managed funds by reading the index fund debate.
- The benchmark in this comparison represents a broad, market-weighted bond index. Investors may also choose to hold more narrowly focused index funds -- of which, some have outperformed the broad index.
Related links
- My Balanced Fund: Q3 2005 YTD review
- My International Funds: Q3 2005 YTD review
- Don't miss this popular series: The index fund debate
- Learn how you may be able to lower costs when purchasing mutual funds
- See how my retirement plan withstands the test of time
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Just hit Morningstar to check 2005 annual returns for my four funds. As you are likely aware, last year's return for Dow Jones Industrials and even the broader S&P 500 were uninspiring; finishing down 0.6% and up 3% respectively. Vanguard's Total Int'l index was up ... Read
Has my balanced fund continued to outperform a broadly diversified balanced index fund? What, if anything, am I giving up in tax efficiency for being in an actively managed vs. passively managed index fund? For this post, I used Morningstar's "fund compare" tool to review ... Read
Have my international funds continued to outperform a broadly diversified international stock index? What, if anything, am I giving up in tax efficiency for being in actively managed vs. passively managed index funds? For this post, I used Morningstar's "fund compare" tool to review YTD ... Read
While my current plan and asset allocation are on solid ground, I wondered what will happen as I continue to increase the allocation to equities in my portfolio (which I am doing via dollar cost averaging). So in this test, I compare my current asset ... Read
You're still not comparing apples to apples 1stMill. As you pointed out, your fund holds more than just bonds, so of course it out-performed bond-only benchmarks. Likewise, comparing your fund to the Dow, Wilshire, and S&P 500 is beyond irrelevent. Not that I've got a problem with PIMCO; I've got a good amount in PIMCO Real Return and PIMCO Total Return through my 401(k).
I agree with DQ. The fund has outperformed by taking on greater risk. It equally likely that in the future it may underperform by similiar margins.
I'm partial to Pimco myself, holding a significant amount of their commodity fund...
JC
Hi Deep Quant,
I don't agree: I'm not trying to compare apples to apples. Rather, I want investments that make money, while minimizing risk. So, understanding how one investment fairs in relation to the alternatives is relevant.
BTW, All Asset is primarily bonds. What would you suggest be used for the comparison?
Hi JC,
Good to hear from you again.
How closely have you looked at this fund?
All Asset allocates among 14 PIMCO sub-funds (mostly bonds). Much of the value-add is explained by tactical asset allocation. While some of the value-add comes from esoteric stuff like "lead/lag relationship and return patterns of asset classes." And yes, broader asset classes do explain part of the added return. But, many investors use broader asset classes to reduce risk, do they not?
JC, isnt this similar to what you are doing with your (sophisticated) asset allocation model?
Another perspective...
The DJ Wilshire 5000 returned 2.7% YTD. Vanguards Total Bond Market Index Fund has returned 1.81% YTD. PIMCO All Asset has returned 5.94% YTD - higher than the two broad indexes COMBINED. It also performed well over a three-year period.
The bottom of page one in this link is PIMCO's explanation for their value add...
http://www.pimco-funds.com/ff_reports/All%20Asset%20Institutional%20-%20FFS.pdf
I'm certain that everyone who reads this excellent blog is trying to find investments that make money, but nevertheless comparing good investments to irrelevent benchmarks is a pointless exercise. For help determining a relevant benchmark for your PIMCO All Asset you may want to try using the benchmark PIMCO uses to compare this funds performance against: the Lehman Brothers US TIPS 1-10 Year Index; I would recommend blending this Index slightly with an equity index relevant to whatever equity portion they have in this fund for an even more accurate pricing.
Regardless the point here is that there is no reason to compare individual investments to benchmarks they have nothing in common with. For example one of my invidual stocks, Hewlett Packard, is up 38% or so on the year. Wow it's trouncing the Vanguard Bond Index isn't it! Maybe I should have put all my money in that one stock. But you see that would be stupid, just about as stupid as comparing investments to irrelevant benchmarks.
Thanks. Point taken -- I have removed the reference to US stock markets from all posts in this series. I will also try to highlight PIMCO's benchmarks in future posts. I reserve the right to also include other benchmarks (like Vanguard's index funds), because I find them helpful for planning purposes.
Asset allocation is like baking a cake. Often we're so focused on the ingredients that make up our portfolios that we miss the forest for the trees (sorry for the mixed analogy!)
It's not about the individual flour, eggs, butter & sugar! It's how the ingredients mix together to create a final product. (One that uses diversification and rebalancing to increase returns and lower risk). Remember 90+% of one's total return is decided by asset allocation, not investment picks.
I gave the Pimco fund a short glance. And again I have to agree with DQ. Vanguard Balanced is not an appropriate benchmark. The Vanguard fund is 40% bonds of a longer maturity than the Pimco fund which has a significant position in cash equivalents and bonds of shorter duration. If we could pick and choose the benchmarks to compare our funds against, we could all brag about how great our funds are doing! (Isn't this what mutual fund advertisements do in Money Magazine?)
I've said before that as far as active management goes, I think Dodge & Cox is a good shop. You can certainly do far worse.
Also, I don't know how "sophisticated" my asset allocation is. Once I decided on my stock/bond, domestic/international, growth/value, developed/emerging mixes, it's a fairly static formula. About as exciting as watching paint dry. That's the way I like it.
Cheers,
JC
JC,
Your point about "90+% of one's total return is decided by asset allocation, not investment picks," is very important. It is also key to why I like All Asset.
Robert Arnott -- Chairman of Research Affiliates -- serves as the Funds Sub-Advisor. He does not pick the bonds (or other individual investments), rather, he directs asset allocation. [To your food analogy, Mr. Arnott acts as the chef.]
As far as allocation, this from PIMCO's 06/30/2005 investment report:
- Fixed income (of a wide variety) = 77.7%
- Equities = 6.6%
- Commodities = 7.9%
- REITS = 7.8%
Thanks for your comments.
Can someone please try to backup the 90+% asset alloc number. This doesn't really make much sense to me.
For instance, if your time window is 30 years how is asset allocation going to outperform a well diversified basket of higher risk investment vehicles. It would seem that in that case asset alloc is responsible for 100% of an underperforming portfolio. I am sure those responding are aware that asset alloc and diversification have nothing in common, so please focus on asset alloc.
Please explain how one arrives at the 90+% number.
Thanks.
The 90% does not advocate one allocation over another. It just refers to the fact that your CHOICE OF INVESTMENT TYPES will be the biggest determining factor in the results you will likely realize.
I am fully aware of the point that was being made. Maybe I was not explicit enough. I doubt the validity of the statement and am looking for some numbers or examples to back it up. I have heard the concept before so stating that such and such financial planner says so is not what I am interested in.
Does anyone have anyway of backing up this statement or are we all just passing around a statement and believing it without any way to verify it?
If its true great, I just need to see it, and without the numbers it just seems a bit hard to believe because if its this simple someone aught to be able to put out an asset alloc formula and say anyone follow this and your returns are 90% locked in. That would make financial planners all a complete waste of money if you can lock in 90% of your returns by a simple asset alloc formula.
Never Mind. I mis-read your response. I thought the point was being made that an asset allocation re-balancing tactic would return you 90% of the results you would get with any other asset class overtime. My mistake for mis-reading the statement.
