Bogleheads View topic - High Yield bond funds - performance vs management fees

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High Yield bond funds - performance vs management fees

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High Yield bond funds - performance vs management fees

by Kenmore Bob

Posted: Tue Jun 28, 2011 5:09 pm

I have about $21K invested in Vanguard High-Yield Corporate Fund and another $27K in the Federated High-Income Bond Fund.
Im trying to simplify my holdings by selling one of these funds and investing in the other.
Both funds got started in the late 70s and both have about the same lifetime total return, 8.88 for Vanguard and 8.89 for Federated.
However, if you look at their recent returns for 1 yr, 5 yr and 10yr, Vanguard has 12.37, 6.74 and 6.34, while Federated has 13.42,
8.14 and 7.57.
Federateds performance is almost justified by its larger management fee of 1.25%, while Vanguards is only .25%.
Ive always heard that lower management fees trumps performance, but wonder about this case. Does the nature of high-yield funds
require more active management and hence higher fees?

Re: High Yield bond funds - performance vs management fees

by YDNAL

Posted: Tue Jun 28, 2011 5:14 pm

Kenmore Bob wrote:

I have about $21K invested in Vanguard High-Yield Corporate Fund and another $27K in the Federated High-Income Bond
Fund.
Im trying to simplify my holdings by selling one of these funds and investing in the other.
Both funds got started in the late 70s and both have about the same lifetime total return, 8.88 for Vanguard and 8.89
for Federated.
However, if you look at their recent returns for 1 yr, 5 yr and 10yr, Vanguard has 12.37, 6.74 and 6.34, while Federated

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Bogleheads View topic - High Yield bond funds - performance vs management fees

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has 13.42, 8.14 and 7.57.

Look under the hood of each fund and you will see a high correlation between yield (performance) and risk (junk). Personally, I would
take risk on the Equity side (not Bond) of the equation.
I'll help you get started... this is Federated High-Income Bond C FHICX
Morningstar wrote:
Type % Bonds
AAA 0.00
AA 0.00
A 0.00
BBB 1.99
BB 27.18
B 50.21
Below B 19.97
Not Rated 0.66

http://portfolios.morningstar.com/fund/ ... ture=en-US

by Sidney

Posted: Tue Jun 28, 2011 5:19 pm

If you compare the two funds on duration and credit quality you will probably find the reason for the difference.
According to their own web site, Federated is almost 1/3 CCC-rated bonds.
http://www.federatedinvestors.com/FII/m ... basketid=2

by livesoft

Posted: Tue Jun 28, 2011 5:31 pm

Another metric that might be useful for comparison is how much each dropped (i.e. didn't perform) over selected time periods. It's not
always about the upside; sometimes it's about the downside.

few thoughts for you

by larryswedroe

Posted: Tue Jun 28, 2011 6:28 pm

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Most funds on the bond side with higher expenses know that to overcome their higher expenses they simply must take more risk, this
is thus a bad trade off.
Second, IMO both funds should be sold for variety of reasons, which I have written about many times, including in my bond book and
my alternative investment book
The biggest problem with high yield is that it has equity like risk which unless you account for (by adjusting your AA to account for it)
means you are taking too much risk and simply fooling yourself.
Second, there are two parts to the bond return, Treasury yield changes and credit risk. The former which determines most of the
return in long term, you can get that risk much cheaper by buying say CDs or Treasuries for free. Thus all the costs of high yield are
really borne by the credit risk side, making this a terrible bet IMO.
Third, the credit risk is mostly equity like risk, which is much better taken on the equity side (certainly cheaper than with a high yield
fund like Federated) because you get returns in more tax efficient manner and you can diversify the risks much more--the portfolios
we build have about 12,000 stocks all around the world, much more than any bond fund.
Fourth the risks of high yield tend to show up at the wrong time--dragging you down because too much shows up. And the funds
typically are forced to sell into illiquid markets to meet redemptions, and incurring large market impact costs.
Fifth, they have call risk which is bad asymmetric bet and risks show up at wrong time.
Sixth no evidence that you get good risk adjusted returns accept with fallen angels (due to no or minimized call risk).
So if need more risk in portfolio, simply tilt more to size and value and you get a MUCH more efficient result.
I hope this helps
This is just IMO a bad asset class for individuals.

Thank you, all, for your advice

by Kenmore Bob

Posted: Sat Jul 02, 2011 5:05 pm

I understand your warnings about the various risk factors in owning these funds. I'm still puzzled as T Rowe Price just sent me their
latest Investor newsletter and they advocate an asset allocation where high-yield bonds make up 20% of the bond part of the ideal
portfolio.
I must buy one of Larry Swedroe's books - the one on bond investing.

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by moolman

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Posted: Sat Jul 02, 2011 7:34 pm

I've been reading All About Asset Allocation by Rick Ferri and he says to buy HY, so everyone has an opinion.

Re: Thank you, all, for your advice

by tibbitts

Posted: Sat Jul 02, 2011 11:10 pm

Kenmore Bob wrote:

I understand your warnings about the various risk factors in owning these funds. I'm still puzzled as T Rowe Price just
sent me their latest Investor newsletter and they advocate an asset allocation where high-yield bonds make up 20% of
the bond part of the ideal portfolio.
I must buy one of Larry Swedroe's books - the one on bond investing.

There is no reason to be puzzled. There are simply different opinions. It's like reading that one automotive expert recommends you
buy brand x car and another recommends brand y. Would that puzzle you? Does it mean that one is "wrong"? Will understanding both
experts' reasons for recommending one or the other resolve all your doubts? Sometimes you just have to settle for good enough and
move on.
Most experts will probably agree that in the end, whether you have 10-15% of your investments or something similar - which is
probably what we're talking about here (based on a typical equity/bond mix) - in some combination of junk or gnma or emerging
markets or any other "controversial" bonds, is very unlikely to be a make-or-break decision.
Paul

Re: few thoughts for you

by pteam

Posted: Sun Jul 03, 2011 12:03 am

larryswedroe wrote:
Most funds on the bond side with higher expenses know that to overcome their higher expenses they simply must take
more risk, this is thus a bad trade off.
Second, IMO both funds should be sold for variety of reasons, which I have written about many times, including in my
bond book and my alternative investment book

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The biggest problem with high yield is that it has equity like risk which unless you account for (by adjusting your AA to
account for it) means you are taking too much risk and simply fooling yourself.
Second, there are two parts to the bond return, Treasury yield changes and credit risk. The former which determines
most of the return in long term, you can get that risk much cheaper by buying say CDs or Treasuries for free. Thus all
the costs of high yield are really borne by the credit risk side, making this a terrible bet IMO.
Third, the credit risk is mostly equity like risk, which is much better taken on the equity side (certainly cheaper than
with a high yield fund like Federated) because you get returns in more tax efficient manner and you can diversify the
risks much more--the portfolios we build have about 12,000 stocks all around the world, much more than any bond
fund.
Fourth the risks of high yield tend to show up at the wrong time--dragging you down because too much shows up. And
the funds typically are forced to sell into illiquid markets to meet redemptions, and incurring large market impact
costs.
Fifth, they have call risk which is bad asymmetric bet and risks show up at wrong time.
Sixth no evidence that you get good risk adjusted returns accept with fallen angels (due to no or minimized call risk).
So if need more risk in portfolio, simply tilt more to size and value and you get a MUCH more efficient result.
I hope this helps
This is just IMO a bad asset class for individuals.

Larry, thank you for your insights.

I'm curious though as why when looking at the stats. Vanguard High yield bond fund has out performed Vanguard total stock market
index over a 3 year period (by a large margin 9.30% vs 3.69% per year), 5 year period (6.74% vs 3.13% per year, More than double the
amount), 10 year period (6.34% vs 4.44% annually, more than 40% more return) , and it beat the S&P 500 all the way back to 1997. It
did this with condisderably less risk. Sure it dropped in 2008, but much less than stocks did.

by afan

Posted: Mon Jul 04, 2011 1:36 pm

Federated vs Vanguard high yield, great illustration of an efficient market. As others have pointed out, they have different mixes of
bonds, with the Federated assuming more credit risk. They have nearly identical risk adjusted returns (Sharpe ratios), including

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expenses, but ignoring loads.

If you are comfortable with the higher risk, you get slightly higher returns. To do this, you accept a bumpier ride, and a greater
chance of a major decline. For me, not worth it, and definitely not worth the expenses and load. You can beat the higher expenses
and loads by increasing your allocation to this asset within a no load, low expense fund. You would then keep that money otherwise
paid for the Federated fund, and get the same overall portfolio volatility.
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