Monday, March 24, 2008

Madame-X: Bond Funds

There are two bond funds in the portfolio: CGFIX and FTHRX. Neither is particularly good, nor particularly bad. Both have been near the middle of the rankings of funds in that category on any time scale we can see. That means they have generally underperformed the market, particularly in recent years. Still, they have mostly had positive returns and are not the cause of any losses in the account. Some key statistics:

Both funds are evaluated against the Lehman Aggregate US Bond Index. This makes the Credit Suisse fund look good as it is in international bonds which have done better than US bonds. It has ranked better than 66% of international bond funds in the last year, 54% in the last 3 years and 39% in the last 5 - so it's not as good as its supposedly index beating performance might make you think.

The Fidelity fund is very much in the middle of the pack of US bond funds. It has underperformed the index by almost two percentage points in the last year and by 0.63 to 1.18% in previous periods. Given that the expense ratio is 0.44% this would seem to indicate that the manager have negative skill - they don't add value but subtract it. However, beta which is an indicator of how much the fund moves given a 1% move in the index, shows that they are taking less than market risk. This makes sense as the aggregate index includes long term bonds too which have higher risk and return. So maybe here the benchmark isn't so appropriate either. Still, for the three and five year periods alpha - the risk adjusted excess return - is more negative than would be warranted by just the expense ratio. The performance of the fund also seems to have fallen off over time as seen by a declining alpha. The Sharpe ratio is a risk-adjusted measure of how much returns exceed the risk-free interest rate. A negative number means you would have done better putting your money into 90 day US government treasury bills. This is the case for the last three years for this fund.

Bottom line is the Fidelity fund is not too hot. You could do better investing in an indexed bond fund or an ETF like AGG if available. But this may not be an option. Fidelity have a couple of treasury bond index funds. These don't cover the corporate bond universe where there may be opportunities going forward as corporate interest rate spreads hopefully fall. Switching some of this fund across those three might make sense, though raise the ire of commenters who say you already have too many funds :)

I have fewer constructive comments to make about the Credit Suisse Fund. It has quite a high expense ratio but ranks slightly better among its peers than the Fidelity fund. There are very few international bond ETFs, but lots of closed end funds. Maybe readers have some suggestions? Are there any bond funds that really add value? Or is indexing the way to go here?

What about PIMCO? This fund has beaten its benchmark despite a 0.95% expense ratio. You'd want to avoid the sales load (up to 3.75%) though!

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