Yesterday we noted a high yield bond fund that has seen its fund price (NAV) fall about 40% since early June. Higher risk bond funds follow a pattern of feast and famine – the key to investing in such funds is to identify the types of bond funds that can tank 40%, and either avoid them completely or consider a speculative investment near the bottom of a famine cycle.
The trouble is that these bond funds tend to look the best at exactly the wrong time. They have the best reviews and ratings, and the performance figures smash the competition.
But remember, for most types of bond funds, performance comes largely from just two things: the fund’s expense ratio and the quality of bonds the funds hold. A much smaller part of the performance can be attributed clever bond selecting.
Here then, dear reader, is the MAXfunds “Seven Habits of Highly Defective Bond Funds”, our step by step instructions for lousy managers to destroy their perfectly good bond fund:
1. Beat the competition by a country mile by loading up on thinly traded, low or no grade debt.
2. Watch gobs of money flood your aggressive bond fund, because the “impressive long term record” is assumed to be the result of your brilliant bond picking.
3. Join other deluded bond investors and bid up the junky debt to near safe debt yields.
4. Express shock as a scary event happen “out of nowhere” that makes investors reconsider the safety of their higher risk debt positions. Note how “these are truly unprecedented times”. Yes, who would have thunk it might be hard to sell no-money-down, no-doc, interest-only, subprime debt when foreclosures climb?
5. Pull a “Heartland” (in October 2000, Heartland High-Yield Municipal Bond Fund plummeted 69% in one day) and pretend or guess that the no-market-price bonds are worth a little bit more than they probably are to preserve the fund price and try to trick investors to staying put till the mayhem passes.
6. Watch in horror as your fund’s shareholders could care less that your bond fund is down only 10% and not 20%, and sell anyway.
7. Panic sell thinly traded bonds with the rest of the herd and send your fund price down even more as the bids for your bonds quickly evaporates when you try to move your big stakes.
Yesterday we noted a high yield bond fund that has seen its fund price (NAV) fall about 40% since early June. Higher risk bond funds follow a pattern of feast and famine – the key to investing in such funds is to identify the types of bond funds that can tank 40%, and either avoid them completely or consider a speculative investment near the bottom of a famine cycle.
The trouble is that these bond funds tend to look the best at exactly the wrong time. They have the best reviews and ratings, and the performance figures smash the competition.
But remember, for most types of bond funds, performance comes largely from just two things: the fund’s expense ratio and the quality of bonds the funds hold. A much smaller part of the performance can be attributed clever bond selecting.
Here then, dear reader, is the MAXfunds “Seven Habits of Highly Defective Bond Funds”, our step by step instructions for lousy managers to destroy their perfectly good bond fund:
1. Beat the competition by a country mile by loading up on thinly traded, low or no grade debt.
2. Watch gobs of money flood your aggressive bond fund, because the “impressive long term record” is assumed to be the result of your brilliant bond picking.
3. Join other deluded bond investors and bid up the junky debt to near safe debt yields.
4. Express shock as a scary event happen “out of nowhere” that makes investors reconsider the safety of their higher risk debt positions. Note how “these are truly unprecedented times”. Yes, who would have thunk it might be hard to sell no-money-down, no-doc, interest-only, subprime debt when foreclosures climb?
5. Pull a “Heartland” (in October 2000, Heartland High-Yield Municipal Bond Fund plummeted 69% in one day) and pretend or guess that the no-market-price bonds are worth a little bit more than they probably are to preserve the fund price and try to trick investors to staying put till the mayhem passes.
6. Watch in horror as your fund’s shareholders could care less that your bond fund is down only 10% and not 20%, and sell anyway.
7. Panic sell thinly traded bonds with the rest of the herd and send your fund price down even more as the bids for your bonds quickly evaporates when you try to move your big stakes.