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Post by racqueteer on Jan 11, 2024 12:53:39 GMT
We're getting down in the weeds more than I intended... Look, one can predict whatever one wishes; I'm looking for the reasoning behind the prediction. I'm also a simple guy (well, basically); I don't claim any great knowledge of financial terms or understandings, but logic I understand. The S&P averages an almost 10% return over extended periods, so one would expect the return each year to be about 10%. We agree on that, I think. If we miss the average, the likelihood is still close to that figure most years. This year, this month? Who knows? I believe that when you invest money, it acts as a type of loan of funds which will return something in the future. You're paid something for extending the loan (interest), and the value of that invested money is then linked to the asset's future value. The total value of your asset is then the sum of those two things: interest on your loan plus current principal value. It seems to me that there is no way to accomplish your bet under normal circumstances, so you're counting on a flat period for the S&P. Why? I get that tech has expectations attached which may have become stretched (though AI makes it a new ballgame in many respects), but many other areas have demonstrably underperformed and could certainly take up the slack in performance. Clearly, you feel that won't happen. Why? You've just explained why you think PDI's value will increase (thank you), but that seems predicated on interest rates rising. Current thinking is that the opposite is going to occur. So shouldn't PDI's value drop? My feeling, then, is that your bet relies on the S&P doing poorly for 5 years, while PDI's TR at least holds or rises. Why would it do that?
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Post by fishingrod on Jan 11, 2024 13:40:19 GMT
racqueteer , Not R48 and not trying to be argumentative, "If we miss the average, the likelihood is still close to that figure most years." The returns for the SP500 vary wildly year to year. It rarely returns the "average" 10%. It goes from returns of 30% to returns of -10% all the time. So I don't see an average return each year that sticks even close to the average 10%.
Also on PDI, If interest rates do fall significantly this year it will be good for PDI not bad. The bonds that they do hold right now would be valued higher than the new bonds that would be paying less. Therefore a rise in NAV.
I don't really have a prediction myself. Too many variables.
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Post by FD1000 on Jan 11, 2024 14:14:09 GMT
The biggest problem with PDI vs SPY in the next 5 years. 1) R48 stated the above at the end of 2022, more than a year ago. You can't move the goal post. 2) On Nov 1st 2023, I rang the bell for bonds( big-bang-investors.proboards.com/thread/1959?page=8) and stocks( big-bang-investors.proboards.com/post/43353). Basically, the Fed blinked since that day = a very good chance rates will not go up and start to go down in 2024 3) We finally discuss TR, the only thing that matters 4) If I look at the above, bonds are going to have a better performance in the next several years, that could be really good only for 2-3 years when rates go down quickly. 5) SPY valuation looks high, but we know valuation can't predict future performance 6) I love to look at everything. SPY is "expensive" but RSP(equal SP500) and LC value are much cheaper. I never confine myself only to one choice. 7) Every investment must look at risk/volatility, we already know that both stocks+CEFs have high volatility and sometimes CEFs have high SD/Risk than stocks. With that in mind I prefer to invest in stocks + bond OEFs. There is no need for CEFs. 8) If I must predict, PDI can do better than SPY by the end of 2027(the original bet) from here, which is less than 4 years. We will see about the original net. R48 keep forgetting his bets over the years = Wellesley will not do well in the next several years which was made about 10 years ago, not 5 years ago. 9) But why bet on 5 years, why not 1 year or 10+ years? 10) There are more posts about PDI than any other CEFs, it is based on its previous performance until 2018. There are many other choices. 11) One thing I'm sure, PDI will do better in the next 4 years than the last 5 years. It's easy to beat poor performance.
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Post by racqueteer on Jan 11, 2024 15:28:03 GMT
Thanks for the replies, guys. I may be misconstruing what R48 is saying, and that may be leading to my misunderstanding his argument.
Here's what makes sense to me:
Most yearly TRs for the S&P fall between -10% and +30%; so while there can be fairly wide variation, an expectation of something in the 10% range is not unreasonable; might be more or less.
With rates expected to fall - eventually - it's not unreasonable for PDI to appreciate during that fall. That is, however, coming from a low interest rate level to begin with. Clearly, a tailwind, but how big?
R48's bet hinges on three things (imo):
1) The aforementioned rate decrease occurring in a timely fashion. 2) This resulting in a significant increase in PDI's price. 3) The market being at least flat.
That's a lot of moving parts! I personally suspect that while in this year (more than a year after the fact), that is reasonable; it's not going to be the case for the next three plus years. Firstly, I suspect that AI has introduced a new consideration which will continue to support the MAG7. Secondly, I suspect that the areas which have underperformed are quite likely to bounce back in the coming years. So... While I fully expect PDI to do better, I'm not sure it's going to match or exceed the S&P this year; much less over a five-year period in which the S&P already has a significant lead!
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Post by retiredat48 on Jan 11, 2024 16:37:26 GMT
If we are going to break this into a separate discussion, then my previous posts that started this discussion, should be included. My posts were:
What you are missing is your bold assumption S&P500 will return 10% a year or more.
S&P now dominated by the magnificent seven. To me, more likely is that the Mag 7 will be FLAT after next five years, thus the S&P having poor performance. Mag seven may be even down after five more years. Doesn't anyone sense this car is running out of gas...and history says stock sectors do not go to the moon, forever!!
The savior for the mag 7 may be Artificial Intelligence theme, and why I continue to have a large holding in FSPTX.
BTW I lived with a flat market, Dow 1000 in 1966 to Dow 1000, 1981...about a decade and a half. Sure can happen.
BTW#2...a decade after the 2001 high tech meltdown, high tech (mag 7) was a laggard for a decade.
BTW #3...during the great DEPRESSION, bonds/fixed income actually fared quite well. So I expect PDI with high starting yields currently to be near the top of the class going forward.
Place your bets now.
R48
Note the thread is about PDI; I have been on-topic and see no need to shut anything down.
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Post by retiredat48 on Jan 11, 2024 16:39:27 GMT
And I posted:
R48: "What you are missing is your bold assumption S&P500 will return 10% a year or more."
Rac: Firstly, I made no such assumption, bold or otherwise, which matches the statement you have attributing to me. That statement logically results in the S&P returning more than 10% on average and never having a down year!?
R48 reply: Rac, I didn't mean to be argumentative, but I re-read your sentence several times and what else does this sentence mean: "To beat the S&P, you have to dependably average an approximate TR on investment of 10% a year." I offered a bet, which is forward going. You suggested that to beat the S&P you need to beat 10% a year on average. So you are predicting or stating the S&P500 will do 10% each year on average for the next five years.
Rac: What I said was: "dependably average an approximate TR on investment of 10% a year". Those two statements are not remotely the same. Secondly, an "assumption" doesn't require evidence, and yet we have a great many decades of evidence that support my statement. Might it not come true during the coming decade? Well, of course; just as your guess might not. I presented irrefutable data, however; where is yours?
R48 reply: I don't get this. I presented evidence of flat markets, such as Dow 1000 to Dow 1000 for 16 years. So obviously the S&P can or might be flat the next five years!! Yes, the S&P has a historic average to it, but we are now at a high. And the bulk of the S&P500, dominated mag 7, is at a very, very high. I provided evidence (2001 to 2009) of how the mag 7 was very laggard in the past.
Raq: Thirdly, I'm still not seeing any logical way to generate a 10%, dependable, even best case, average TR, when interest rates are sub-10% for any kind of dependable loan of funds.
R48 reply: Let me explain. PDI owns mortgages among other things. With rates doubling, mortgages on a "mark to market" basis are way down...deeply discounted. Thus the PDI NAV decline. HOWEVER, the mortgage holder cannot pay off with a discount; they must pay face value. This is a built in cap gain for PDI. Alternatively, PDI can sell the depressed price mortgage now and buy new ones at double the old mortgage rate. This will result in a rising yield/dividend/distribution. More income. Coupled with the leverage, one sees how the 14% current yield (fixed dividend) can not only be continued but perhaps grows as well.
steelpony10: "Current 14% distributions until they get changed would beat the 1.5% yields of say VOO."
Raq: Which is irrelevant to this discussion, since neither "distributions" nor "yields" equate to TR. One can arbitrarily establish either of these values at any level one desires, but TR is what it is.
R48 reply...I don't understand this also Raq. Distributions are clearly part of "total return", no?? The PDI dividends today are what they are (and BTW no cuts in past year). This will be received regardless of PDI price, until management lowers or raises them. They are simply part of total return. I actually expect from my high yield funds to get a yield MINUS nav price declines. Such as, PDI returns 14% a year, the price will likely decline by 2% a year, or an average annual return of 12%, thus beating the S&P.
R48
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Post by retiredat48 on Jan 11, 2024 16:39:58 GMT
I'm off to LA Fitness...will reply later.
R48
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Post by FD1000 on Jan 11, 2024 17:17:54 GMT
Raq, I agree about all.
R48, Just because you showed flat market for many years in a specific period in the past, it doesn't mean it will happen from now + markets are much faster. As a trader, I can't make decisions based on 4-5 years in advance. For someone who is mostly buy and hold, the SP500 (OR VTI) should be her largest holding forever. Does a typical investor need a CEFs? no. Most books/articles/experts don't even mention CEFs, how can it be that Bogle, Buffett, and Benjamin Graham missed a great idea like CEFs.
BTW, I think typical bond OEFs can make 5-6%. A good multi bond fund maybe at the top or more, PDI should do more...and a good trader can match it with lower SD/risk.
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Post by racqueteer on Jan 11, 2024 20:04:52 GMT
I'm off to LA Fitness...will reply later. R48 And that's fine. Since we had difficulty understanding each other in the previous discussion, I hadn't thought rehashing those posts would contribute anything; which is why I didn't include them. Anyway, if we can focus on the content of my first two messages here, I think we stand a better chance of clarifying the issue.
At the moment, and for a trade, it looks as if PDI might very well outperform the S&P; so long as the S&P is sideways to down and the consensus is that rates will drop. The inflation numbers might end up delaying those cuts, however. We'll have to see how all this shakes out.
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Post by habsui on Jan 11, 2024 20:43:08 GMT
Not sure about the "bet" (R48 seems to be betting only with himself, so he will win), simply, I would expect the SP500 not to return much more than 6% per year over the next five years. Also, one can lock in bond rates of 6% for 5 years now, plus some leverage, and voila..
Cheers.
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Post by richardsok on Jan 11, 2024 21:58:45 GMT
Raq, I agree about all. R48, Just because you showed flat market for many years in a specific period in the past, it doesn't mean it will happen from now + markets are much faster. As a trader, I can't make decisions based on 4-5 years in advance. For someone who is mostly buy and hold, the SP500 (OR VTI) should be her largest holding forever. Does a typical investor need a CEFs? no. Most books/articles/experts don't even mention CEFs, how can it be that Bogle, Buffett, and Benjamin Graham missed a great idea like CEFs. BTW, I think typical bond OEFs can make 5-6%. A good multi bond fund maybe at the top or more, PDI should do more...and a good trader can match it with lower SD/risk. It's been my understanding that most CEFs were too small for big boys like Buffet or Bogle to get involved. To buy enough to potentially 'move the needle' on a big account would cause a spike in the buy price -- interfering with what the large scale investor was trying to accomplish.
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Post by FD1000 on Jan 11, 2024 22:13:13 GMT
Richard, That makes sense for big accounts, but most investors have smaller accounts than $500K. Hence, the CEF advice should be in every generic book/article/opinion.
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Post by retiredat48 on Jan 12, 2024 0:38:25 GMT
racqueteer , fishingrod , FD1000 , retiredat48 , habsui , richardsok , The reason for offering a "BET" is not that I am conclusively saying this will be the definite outcome. The reason is: We have been having some posters criticize holding CEFs, especially PDI, using cherry-picked back dating starting dates for comparison, and labeling investors fools for owning same. Doesn't matter that most forum posters did not heavily weight PDI when it got to more than 30% premium; most were holding PCI at around 0% premium. Yet, the criticism continued. But we don't invest looking backwards; it is what will happen going forward that counts. By actually BETTING on same, it focuses the mind. Put up or shut-up so to speak. The scarcity of bettors shows there is not that much conviction PDI will be poor going forward. This same bet was offered on the Fido Forum...no takers (even though some harsh critics exist). I will answer racqueteer's two questions tomorrow in more detail. I see it differently and will explain why. For example,. rac thinks rates need to fall to have better PDI total return. IMO this is backwards. RATES NEED TO KEEP RISING TO PROVIDE ENHANCED FIXED INCOME TOTAL RETURNS, for most bond funds. I'll explain why. Standby. R48
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Post by Broozer on Jan 12, 2024 1:06:42 GMT
Raq, I agree about all. R48, Just because you showed flat market for many years in a specific period in the past, it doesn't mean it will happen from now + markets are much faster. As a trader, I can't make decisions based on 4-5 years in advance. For someone who is mostly buy and hold, the SP500 (OR VTI) should be her largest holding forever. Does a typical investor need a CEFs? no. Most books/articles/experts don't even mention CEFs, how can it be that Bogle, Buffett, and Benjamin Graham missed a great idea like CEFs. BTW, I think typical bond OEFs can make 5-6%. A good multi bond fund maybe at the top or more, PDI should do more...and a good trader can match it with lower SD/risk. That's true, they don't and I've often wondered about that, but there are some books devoted to just CEFs as everyone here probably knows. I assume CEFs are usually ignored by most publications because of the price volatility, making them "too risky for most investors." They're only "too risky" if one (most people) is obsessed over asset prices/portfolio values every day/week/month. Some of us retirees don't obsess over that, we just take the money every month and run.
If interest rates go up and your bond fund drops in value, who cares? Your income from it will go up after a while, and if you re-invest it, you're buying cheaper shares. I did that all last year with PDI and will continue doing that unless or until I need if for RMDs.
Although I don't see it anymore, Schwab used to have a big warning about investing in CEFs when you went to research them. Roughly, from memory, it said something like: "CEFs are extremely risky and are only suitable for active trading . . . " or something.
What am I missing?
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Post by FD1000 on Jan 12, 2024 5:10:56 GMT
R48, Again, I didn't criticize CEFs before 2019, I started doing this in 2019, just as I criticized VALUE, EM, and SC since 2010, and I did the same in 2000-10 about SPY when it lost money for 10 years(at that time I posted about FAIRX,OAKBX,SGIIX at the Boglehead site and they kicked me out). This is based on what markets have been doing at that time. Remember, I have never been diversified since I started investing in 1995. Broozer, CEFs are ignored because stocks, and especially the SP500/VTI are a great, cheap ER, best generic investment for decades and recommended by giants like Bogle, Buffet, and explained by Malkiel in his book Random Walk down Wall St book( www.amazon.com/Random-Walk-Down-Wall-Street/dp/0393330338). You can read about the concept for free at ( smartasset.com/financial-advisor/a-random-walk-down-wall-street). When I immigrated to this country I understood that in order for me to make more money I can either be entrepreneur or join the best entrepreneurs in the world and own stocks. I also realized that 1) I don't want to be entrepreneur and sacrifice my family 2) works many hours 3) The rate of success is low 4) I could find a good job in IT. Buying US stocks is the easiest way to make money in this country. CEFs investment is older than OEFs but IMO should not be held by most, they are better as trading vehicles. But, if you are a good trader, you can make a lot more in stocks. So why own bond OEFs? because they are usually (forget 2022) a ballast for stocks with lower SD/risk. The high income CEFs should not confused with the two basic investment concepts that count. Total return includes everything which is why only income is not the correct choice. The second concept is SD/risk and why many research/papers/books/articles discuss risk-adjusted performance. Why not CEFs? I wrote a whole thread about them, see ( fd1000.freeforums.net/thread/6/higher-income-stocks-cefs-superior) So, do I like PDI for the next 4 years? Are you a good trader? go ahead and make your bet, but wait, a good trader takes big bets when he/she thinks she is right, I'm talking at least 20+%. A good trader invests with the markets = "the trend is your friend". More, suppose rates are going down, TLT/EDV would do more than PDI, actually PTY could do more. Why I criticize PDI so much? because it is managed by the best FI team in the world and investors thought these guys can keep generating the same risk-adjusted performance, and kept holding it and refuse to acknowledge its poor performance, while the easiest holding in the world SPY made 5+ time more in 5 years. I'm not talking about some random, narrow index. BTW, I also have been reading about CEFs on seekingalpha.com/ by the pros. These guys did poorly in the last 5 years and they trade all the time, and charge their clients money.
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Post by racqueteer on Jan 12, 2024 13:22:42 GMT
Guys, just a reminder that this thread was opened, not to praise or denigrate PDI, but simply to focus on the contention that PDI would outperform the S&P over a five-year period starting a little over a year ago. Please don't take this adrift until R48 and I have sorted out his prediction. All I'm trying to do here is to understand his reasoning. I owned PDI during the stretch following its great buy of distressed assets (which weren't) and PCI during the period where there was an arbitrage with PDI of sorts to exploit; so I have no issue with either of them as trading vehicles.
If rates are going to fall, then TLT might be a better trade. I was doing that for a while. If rates rise, and your turnover is short, something that can 'float' is worthwhile; I have been using USFR for that. I'm trying to get my head around rising rates benefiting PDI as R48 suggest will be the case. I'm not sure how much benefit that has been for PDI during the recent period of rising rates?
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Post by mnfish on Jan 12, 2024 14:27:35 GMT
From PIMCO CEF Annual Report June 2023
“For instance, a portion of a Fund’s monthly distributions may be sourced from paired swap transactions utilized to produce current distributable ordinary income for tax purposes on the initial leg, with a substantial possibility that a Fund will later realize a corresponding capital loss and potential decline in its NAV with respect to the forward leg (to the extent there are not corresponding offsetting capital gains being generated from other sources).”
How much is the decline in NAV is due to "there are not corresponding offsetting capital gains being generated from other sources).” or is it all due to higher interest rates.?
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Post by Broozer on Jan 12, 2024 14:58:28 GMT
Broozer, CEFs are ignored because stocks, and especially the SP500/VTI are a great, cheap ER, best generic investment for decades and recommended by giants like Bogle, Buffet, and explained by Malkiel in his book Random Walk down Wall St book( www.amazon.com/Random-Walk-Down-Wall-Street/dp/0393330338). You can read about the concept for free at ( smartasset.com/financial-advisor/a-random-walk-down-wall-street). When I immigrated to this country I understood that in order for me to make more money I can either be entrepreneur or join the best entrepreneurs in the world and own stocks. I also realized that 1) I don't want to be entrepreneur and sacrifice my family 2) works many hours 3) The rate of success is low 4) I could find a good job in IT. Buying US stocks is the easiest way to make money in this country. FD: I've read Random and most of the classic books. During the accumulation stage yes, I was in stock funds. But I'm retired now and am done focusing on accumulation and more interested in income, with growth being secondary. I was never, and am not now, a trader.
I was self-employed and took investing very seriously, as it would be my only retirement income aside from SS, and I still take it very seriously. As an aside, I have more income now than I ever did while working, and not by a little bit.
I bought a small amount of PCI in July 2019, and still have it as PDI -- no regrets. It was a good lesson during the Covid Bear -- the NAV dropped like a rock, bypassing SPY, yet it just kept pumping out the same monthly income.
I went through the 2003 bear, but don't remember that much about it. But the 2008 bear, when I held my nose and kept buying every month, selling nothing throughout, taught me that asset accumulation was more important than what flighty arbitrary price they may have at any particular moment.
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Post by racqueteer on Jan 12, 2024 15:06:10 GMT
Good question, mnfish . One of the problems for guys like me who want to understand the reasoning is the whole 'black box' thing we have going on with stuff like PDI. That plus the, "Here, we're going to give you this amount every month, but you can trust us to actually earn this for you - somehow" thing. It seems like a great place to trade (at times), but I don't truly understand how it operates. That's on me, but it makes me uncomfortable, and I don't like the feeling.
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Post by anitya on Jan 12, 2024 19:30:39 GMT
racqueteer , I try to read all your posts. Reading them, it seems to me there are 4 variables you guys are trying to grapple with on how markets might react to between now and end of 2027. (1) Direction of belly of the curve - presumably, PDI’s book (2) Direction of short term rates - leverage costs (3) CPI in the short term and long run expectation (4) Success of generative AI (we are still in a fake it until you make it stage) Not sure who runs the polls around here. Why not run a poll on the above (and anything else that should be in)? Eager to see the conclusions drawn at the end of this thread and the supporting assumptions and arguments.
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Post by Broozer on Jan 12, 2024 20:04:01 GMT
Good question, mnfish . One of the problems for guys like me who want to understand the reasoning is the whole 'black box' thing we have going on with stuff like PDI. That plus the, "Here, we're going to give you this amount every month, but you can trust us to actually earn this for you - somehow" thing. It seems like a great place to trade (at times), but I don't truly understand how it operates. That's on me, but it makes me uncomfortable, and I don't like the feeling. Yep, on all your points. I vaguely remember reading the CEF area on Mstar before they destroyed the forum. Then in July 2019 I bought PCI, only amounting to about 6% of my portfolio, to test it out while I was still working. No matter what happened, it wouldn't change my life either way. As noted in my previous post, the bottom dropped out in 2020, but I was still working so every month's payout was re-invested.
So now, almost 5 years later, I have learned more about how they work, although I still only have a very superficial level of knowledge. But, enough confidence in them to add more, as I now have three beside PDI and they make up about 32% of my PF.
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Post by retiredat48 on Jan 13, 2024 15:20:07 GMT
Broozer ,...wow, broozer. Interesting...up to 32% of holdings. R48
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Post by racqueteer on Jan 13, 2024 16:03:15 GMT
R48... Are you still planning on responding about the reasoning behind your bet? Not meaning to rush you, but it has been quiet for a while with respect to my questions, and my points of confusion remain unresolved. You briefly alluded to the 12% dividend; which is certainly helpful if it's being earned (price not falling). To me, the issue is: How do you safely earn that dividend with safe rates around 5%, or, alternatively, how do you get price gains to compensate if you think rates rise rather than fall? Again let me emphasize; this isn't some kind of 'gotcha' exercise; I'm just trying to follow the logic.
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Post by retiredat48 on Jan 13, 2024 16:19:47 GMT
racqueteer , fishingrod , FD1000 , retiredat48 , habsui , richardsok , Broozer , mnfish , anitya , OK, some more on why RISING RATES (not falling rates) will be BENEFICIAL to bond funds including PDI. Quick and fast rising rates (from zero) are not beneficial to bond funds. We just recovered from a historical fed venture to zero percent rates for more than a decade, and quick rising rates, where best was to be out of bond funds. A thing called "convexity" also can play havoc on portfolios with very low rates; NAV price declines are accentuated--not discussed here now). Presently we have returned to a historically set of interest rates typical of the bond market. First point. I looked up for PIMIX bond fund, and got this from M*: average weighted price of 90. (PDI is 81). This means bonds in PIMIX are selling mark-to-market at below par of 100. So for each bond PIMIX bought for $1000, the current value is $900. Yield is around 7% at current market price for pimix. So let's say rates go up by 1% across the board. Fund managers have two choices. They can hold each bond to maturity, about 6 years, at which time they get back (barring default) the full principal value of $1000. Thus there is a built in capital gain in both PIMIX and PDI. OR, second option, the one usually taken, is the fund manager sells off the $900 value bond today, and reinvests it buying longer duration ones with the new, higher rate. THIS IMMEDIATELY INCREASES THE EARNED INCOME FOR THE FUND...thus enabling a rising dividend to be paid. Note also that if a fund has a goal of lets say intermediate term bond fund, then as older bonds mature, they become shorter term, and act like shorter term, and are usually sold off. So rollover is happening a lot. The fund managers act like bond-ladders. The new added income eventually offsets any decline in NAV going on for underlying bonds. In the long run, slowly rising rates helps more than slowly falling rates. Consider PDI currently at 14% yield on price. The real concern was PIMCO may lower its cash payout/dividend. I thought this was likely in Q4. Didn't happen. If pimco can keep rolling over current bonds into higher coupon ones, they can increase cash input...net investment income. But hey, even just maintaining the current cash payout would be an achievement. Because with a 14% yield and stable dividend (has not been cut to date), investors will realize the good investment aspects and buy up the fund/bonds, raising the price, and lowering the yield. So, a current 14% yield PLUS cap gains can do better than a 10% CAGR going forward. Remember, bond yields usually change slowly. It took 33 years to go from 14% yield down to 2% yields. It is this slowness that allows bond managers such as PIMCO or Jeff Gundlach of Doubleline to do their pro magic/advantage. Now let's discuss the yield curve...now inverted. If we get to a normal yield curve, where long term rates are higher than short, it will be beneficial...just like net investment income is beneficial to banks having rising yields/lower short term costs. The way to get yield curve back to normal is for short term rates to fall (fed controlled) and longer term rates rise. This will happen some day. Both are good for PDI. Lower short term rates reduce borrowing costs to leverage. Higher long term rates is what they rollover bonds into, increasing cash returns/income. Fed expectations are to lower short term rates this year. So PDI owned (among other things) some 3% mortgage instruments and rates went to 7%. PDI had to mark-to-market such bonds at a decline/loss. Par 81. But as discussed before, the mortgagee folks can only pay off at 100%, no discount...so a built in cap gain. Or pimco can sell of the instrument and invest in 7% mortgages greatly increasing cash returns. If short term rates fall this year as projected by fed, short borrowing costs will fall. So pimco will leverage the new 7%, getting perhaps 10+% net return in the normal world. Borrow short/invest long...with a normal slope yield curve. All happy in CEF world. BTW note PDI is quietly rising...and rising, in share price last quarter. Hmmm. For rac, who is engineering/math based, best to test things is to take them to extreme limits. OK, rates in the future fall to zero across the board. Bad for bond funds because, while you have cap gains, you now earn 0% going forward annually. A bad fixed income product. Let's take rates to 14% (has happened in the past). PIMCO will keep rolling over all their bond funds till eventually the fund achieves a 14% equivalent return...great for bond holders and total return. And by the "bond rule of thumb" you the investor do not lose along this path if you keep reinvesting the dividends and hold to duration. And each year is a new set of yields/durations if one is buy and hold investor. Yes, I see a normal path for PDI to easily achieve a 10% CAGR going forward for next five years; I expect higher. Comments/questions requested. I am not a bond expert! R48
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Post by FD1000 on Jan 13, 2024 21:15:13 GMT
R48, PDI has more tools than typical bond funds, even PIMIX and why it depends more on the management. 2 examples PDI management can select the leverage size and it did, and can even short. Again, the size of the income is only part of TR. PDI income increased in 2022 because mathematically when the NAV goes down income in % goes up...and PDI still lost a high %. This shows that TR rules. Basically, any discussion must include TR. BTW, when the Fed promised at the beginning of 2022 to raise rates rapidly, why the best FI team in the world didn't take drastic measurements to eliminate(or at least to curb it by a lot) the meltdown? PMORX made 6+% in 2022 and invests mainly in MBS.
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Post by racqueteer on Jan 13, 2024 22:22:43 GMT
Thank you for taking the time to expand on your thinking. Here's what bothers me:
1. Over a three-year period, PDI fell 20% behind the S&P in TR. 2. Reduce that to two years, and we're only 5% behind; a good year for PDI relative to the S&P.
Now we're into the starting point for your 'bet'. From the previous year, things look pretty good...
3. Take it to one year and PDI loses ground by about 5%; not a particularly good year and going the wrong way.
4. Looking at only the current year, PDI has gained 6.3% of ground in about ten days. What accounts for that remarkable move? There wasn't an interest rate change.
From that small sample, I can't see a clear relationship to rate changes. I also suspect/fear that the FED may reduce rates rather than raising as you would seem to prefer. In all this, the only really encouraging data seems to derive from the last ten trading days. Thoughts?
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Post by racqueteer on Jan 13, 2024 22:23:29 GMT
Last one:
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Post by anitya on Jan 14, 2024 2:07:57 GMT
racqueteer , " PDI owned (among other things) some 3% mortgage instruments and rates went to 7%. ...Pimco can sell of the instrument and invest in 7% mortgages greatly increasing cash returns. If short term rates fall this year as projected by fed, short borrowing costs will fall. So pimco will leverage the new 7%, getting perhaps 10+% net return in the normal world. Borrow short/invest long...with a normal slope yield curve." Just staying with the text in blue, if rates went to 7% quickly on the instruments one bought when the rates were at 3%, presumably those instruments current YTM is 7% (reflecting lowered prices of those instruments). There is no reason to sell to get the 7%, you are already getting 7% on the current market price. If you sell and buy the same or similar instrument, all you have done is incur transaction costs. The only way to get ahead in a sell-buy activity is to buy something else that is mispriced but not just sell and buy the same or similar thing. Mispricing is always one's capacity to identify something ahead of the collective market identifying (a la active management getting it right!). As to the text in black, if you already know that is how things will unfold, make bigger bets on that theme by buying mREIT funds like NLY, AGNC, etc. or buy companies (stock) involved heavily into fractional reserve banking (BAC, WFC, etc. or KBE / KRE) why waste your time on PDI. Finally, I see the chart comparisons. I think it is better to include NAV charts than price charts to evaluate performance. Generally, the manager has no control over premiums and discounts - their portfolio management skill shows in the NAV. I should not really mention the following lest I side track the thread: I still can not get over the fact that we are comparing an actively managed fund against a passive index, even if our comparison of fixed income assets against equity assets is not extreme. Among the variables used to evaluate, if one were to include the active management variable, PDI should have cut its dividend at the beginning of 2022 and stem the NAV erosion. It just showed how beta ate alpha. I am not against active management but increasingly believe it is better for the investor to take over the tactical aspect of active management than leave it to the fund manager.
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Post by FD1000 on Jan 14, 2024 14:58:40 GMT
Racq: Now we're into the starting point for your 'bet'. From the previous year, things look pretty good... FD: The bet started already in 11/03/2022, see below . BTW, I like to point out, the SP500 lost money over 10 years in 2000-2010, see ( schrts.co/sSpxKTXr). Indexes for total bond, SC, Value, and International beat it. So, for shorter-term (months-years) 1-2 categories can do much better than others. Anitya: Finally, I see the chart comparisons. I think it is better to include NAV charts than price charts to evaluate performance. Generally, the manager has no control over premiums and discounts - their portfolio management skill shows in the NAV. FD: NAV for CEFs is a good tool for trading, valuation but the simple fact is that investors trade and make money based on the price = TR. Anitya: I still can not get over the fact that we are comparing an actively managed fund against a passive index, even if our comparison of fixed income assets against equity assets is not extreme. FD: I have been saying for a long time that it's a good idea to compare hybrid(wide range of funds/categories) using risk-adjusted performance. I would not compare a "pure" index, think SPY vs BND. It is reasonable idea when you look at managed funds, and other flexible/hybrid. Leveraged FI CEFs are definitely hybrid with SD similar to stocks. While stocks are less influenced by interest rates, Leveraged FI CEFs are. Examples: PIMIX vs SPY in 2010-2013( schrts.co/KWIxWfAb). PRWCX vs SPY for 30 years ( schrts.co/RZtxiaBs). Anitya: I am not against active management but increasingly believe it is better for the investor to take over the tactical aspect of active management than leave it to the fund manage FD: +1
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Post by racqueteer on Jan 14, 2024 15:27:16 GMT
R48: "First point. I looked up for PIMIX bond fund, and got this from M*: average weighted price of 90. (PDI is 81). This means bonds in PIMIX are selling mark-to-market at below par of 100. So for each bond PIMIX bought for $1000, the current value is $900. Yield is around 7% at current market price for pimix.
So let's say rates go up by 1% across the board. Fund managers have two choices. They can hold each bond to maturity, about 6 years, at which time they get back (barring default) the full principal value of $1000. Thus there is a built in capital gain in both PIMIX and PDI."
Me: Ok, on EXISTING holdings, you have a built-in capital gain, but they pay less interest. The total value of that asset is the sum of those two things at maturity.
R48: "OR, second option, the one usually taken, is the fund manager sells off the $900 value bond today, and reinvests it buying longer duration ones with the new, higher rate. THIS IMMEDIATELY INCREASES THE EARNED INCOME FOR THE FUND...thus enabling a rising dividend to be paid. Note also that if a fund has a goal of lets say intermediate term bond fund, then as older bonds mature, they become shorter term, and act like shorter term, and are usually sold off. So rollover is happening a lot. The fund managers act like bond-ladders."
Me: Ok, so you sell older holdings for less than face, and you buy fewer assets, at face, but which pay greater interest. So you traded capital gain for interest. That sounds a bit like a wash sale to me. What am I missing?
R48: "Now let's discuss the yield curve...now inverted. If we get to a normal yield curve, where long term rates are higher than short, it will be beneficial...just like net investment income is beneficial to banks having rising yields/lower short term costs. The way to get yield curve back to normal is for short term rates to fall (fed controlled) and longer term rates rise. This will happen some day. Both are good for PDI. Lower short term rates reduce borrowing costs to leverage. Higher long term rates is what they rollover bonds into, increasing cash returns/income. Fed expectations are to lower short term rates this year."
Me: Ok, If, in the future, we get reduced short-term rates, and increased or static long-term rates, that would increase the sale value of existing short-term assets (falling rates); while decreasing the sale value of existing long-term assets (rising rates - or - nothing if the long-rates don't have to rise). Anyway, the value of short-term assets should rise. Does PDI own much in the way of short-term assets? Enough to move the needle over a bit more than three years now?
R48: "So PDI owned (among other things) some 3% mortgage instruments and rates went to 7%. PDI had to mark-to-market such bonds at a decline/loss. Par 81. But as discussed before, the mortgagee folks can only pay off at 100%, no discount...so a built in cap gain. Or pimco can sell of the instrument and invest in 7% mortgages greatly increasing cash returns. If short term rates fall this year as projected by fed, short borrowing costs will fall. So pimco will leverage the new 7%, getting perhaps 10+% net return in the normal world. Borrow short/invest long...with a normal slope yield curve."
Me: Ok, so PDI can certainly sell off the 3% instruments and buy an equivalent value in 7% instruments for that same money. That will, of course, be a smaller number of shares, but each one providing more income - at the coast of capital gain. Again, that sounds a bit like a wash sale.
R48: "For rac, who is engineering/math based, best to test things is to take them to extreme limits. OK, rates in the future fall to zero across the board. Bad for bond funds because, while you have cap gains, you now earn 0% going forward annually. A bad fixed income product."
Me: In terms of income perhaps, but you do better selling the asset (intrinsic value, shall we say).
R48: "Let's take rates to 14% (has happened in the past). PIMCO will keep rolling over all their bond funds till eventually the fund achieves a 14% equivalent return...great for bond holders and total return."
Me: Ok, but each time, you DO purchase less shares of the higher rate assets; so while the rate rises, does the total payout?
Ultimately, the question is: What is it worth to the investor to purchase shares? It seems to me that the above is merely swapping one type of asset for an equally-valued asset with different characteristics. The issue is really: What can I invest in which will give me a TR exceeding that which I can get in the S&P? If rates don't move, or move significantly, I'm not sure how that is accomplished in the time which remains?
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