Core bond fund which lost -40% in 12 months (2008-9) rates five stars today

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Core bond fund which lost -40% in 12 months (2008-9) rates five stars today

Post by nisiprius »

Let me state up front: a) the fund is in new hands (Invesco, not Oppenheimer), b) Morningstar star ratings emphasize the last three years and only look back ten years, c) the -40% loss happened more than ten years ago. There's no reason to doubt that Morningstar is following its star rating methodology correctly.

What brought it to mind is that it is Thanksgiving day, and a Facebook friend posted a cartoon of a turkey looking at a weather forecast saying "Thursday's temp 350°" and thinking "that can't be right."

Which called to mind Nassim Nicholas' Taleb's illustration of the risks of extrapolation:

Image

Which called to mind the real-world performance of OPIGX, the Oppenheimer Core Bond Fund, offered in 401(k) plans as an ordinary bond fund suitable for ordinary retirement savers, which did this

Image

while core bond funds from Vanguard, Fidelity, etc. stayed close to the green index line.

I was startled to find that Morningstar considers OPIGX to be a five star fund

Image

because the loss happened more than ten years ago, and for the last ten years I see that it's outperformed the index (although the bigger 2020 glitch suggests it is taking more risk).

Image

I dunno. At what point do you "forgive and forget?" Is a five-star rating a good capsule summary of the risk-adjusted, category-relative behavior of this bond fund? Is Morningstar serving investors well by awarding it five stars and ignoring 2008-2009?
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Re: Core bond fund which lost -40% in 12 months (2008-9) rates five stars today

Post by Ferdinand2014 »

I just don’t see the point of the star rating. Even M*’s own studies demonstrate it’s not a good predictor of future returns (expenses are the most reliable predictor within any given asset class - according to M*).
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Re: Core bond fund which lost -40% in 12 months (2008-9) rates five stars today

Post by nisiprius »

Ferdinand2014 wrote: Thu Nov 25, 2021 8:19 am I just don’t see the point of the star rating. Even M*’s own studies demonstrate it’s not a good predictor of future returns (expenses are the most reliable predictor within any given asset class - according to M*).
It's better than "straight" past performance because it takes risk into account, and because it compares apples-to-apples. But since it's still not predictive... I agree.

On the one hand, Morningstar continues to find that by far the single most reliable predictor of future performance is expense ratio.

On the other hand, when you look at their data, what they are really saying is that high expenses (like 1%) reliably predict low performance, but differences between low expense ratios (0.10 versus 0.25, or 0.04 versus 0.05) don't--or their effects are lost in the noise.

Morningstar's analyst ratings--gold, silver, bronze, neutral, negative--which are intended to be predictive, are now hidden unless you pay for a subscription... and they did a revamp of their methodology even though it was only a few years old.. so it is, and is going to be, pretty hard to tell if they're worth anything. I suspect that "negative" ratings are predictive, but that differences between gold/silver/bronze are not.
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Re: Core bond fund which lost -40% in 12 months (2008-9) rates five stars today

Post by dukeblue219 »

What's the backstory on that fund? I would normally assume some random one off distribution that isn't being captured correctly in the plot, but I figure nisiprius knows more than I :)
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Re: Core bond fund which lost -40% in 12 months (2008-9) rates five stars today

Post by UpperNwGuy »

nisiprius wrote: Thu Nov 25, 2021 8:38 am Morningstar's analyst ratings--gold, silver, bronze, neutral, negative--which are intended to be predictive, are now hidden unless you pay for a subscription... and they did a revamp of their methodology even though it was only a few years old.. so it is, and is going to be, pretty hard to tell if they're worth anything. I suspect that "negative" ratings are predictive, but that differences between gold/silver/bronze are not.
I don't go to Morningstar's own website when I want to see their ratings. I can often find them on Schwab and Fidelity's websites, but I have to be logged in.
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Re: Core bond fund which lost -40% in 12 months (2008-9) rates five stars today

Post by muffins14 »

I think the moral of the story is just that the star ratings are useless for choosing a portfolio
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Re: Core bond fund which lost -40% in 12 months (2008-9) rates five stars today

Post by livesoft »

I've mentioned this before: At that time I had a US Government Securities bond fund in my 401(k) run by Morgan Stanley. It dropped quite a lot at the time. Later, when reading the prospectus, I saw that it could have up to 20% of non-USGovSecuriies in it. I suspect that Morgan Stanley bought worthless CountryWide securities off the hands of its best customers and stuffed them in that bond fund. The bastards!
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Re: Core bond fund which lost -40% in 12 months (2008-9) rates five stars today

Post by UpperNwGuy »

muffins14 wrote: Thu Nov 25, 2021 9:00 am I think the moral of the story is just that the star ratings are useless for choosing a portfolio
But we already knew that. A boglehead should be concerned with the index, how closely the fund tracks the index, and the cost of the fund. We don't need Morningstar to find out any of that stuff.
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Re: Core bond fund which lost -40% in 12 months (2008-9) rates five stars today

Post by Nate79 »

Here is a quote to help explain what happened.
https://basonasset.com/2014/03/18/the-c ... for-yield/
So what happened? The fund was reaching for yield.  It loaded up on mortgage debt.  Multiple Oppenheimer bond funds had exposure to credit default swaps from Lehman Brothers, AIG and Wachovia. Derivative bets essentially created leverage in the fund, adding extra exposure to risky securities.  So, in an effort to juice up returns a bit, investors in the fund got crushed when risk returned
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Re: Core bond fund which lost -40% in 12 months (2008-9) rates five stars today

Post by dbr »

nisiprius wrote: Thu Nov 25, 2021 7:34 am

I dunno. At what point do you "forgive and forget?" Is a five-star rating a good capsule summary of the risk-adjusted, category-relative behavior of this bond fund? Is Morningstar serving investors well by awarding it five stars and ignoring 2008-2009?
I think that you do not forget that manager risk can materialize at any time.

As to M*, why would anyone even bother to know the star rating.
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Re: Core bond fund which lost -40% in 12 months (2008-9) rates five stars today

Post by Candor »

Any way to find its M* rating prior to 2008? I did a quick search and wasn't able to find anything.
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Re: Core bond fund which lost -40% in 12 months (2008-9) rates five stars today

Post by ivk5 »

I take it as a reminder that volatility is not the same as risk.

From outside in, it’s easy to see an active fund’s volatility. Much harder, if you can’t see inside, to assess the embedded risks.

As nisi points out, sometimes those risks are silent for extended periods, until they materialize suddenly and dramatically.

You see what everyone’s wearing when the tide goes out…
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Re: Core bond fund which lost -40% in 12 months (2008-9) rates five stars today

Post by tibbitts »

Nate79 wrote: Thu Nov 25, 2021 10:15 am Here is a quote to help explain what happened.
https://basonasset.com/2014/03/18/the-c ... for-yield/
So what happened? The fund was reaching for yield.  It loaded up on mortgage debt.  Multiple Oppenheimer bond funds had exposure to credit default swaps from Lehman Brothers, AIG and Wachovia. Derivative bets essentially created leverage in the fund, adding extra exposure to risky securities.  So, in an effort to juice up returns a bit, investors in the fund got crushed when risk returned
I believe Vanguard Total Bond Market experienced losses for similar reasons (to a lesser extent), and dropped substantially relative to its index at some point. So manager risk can happen even with index funds.
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Re: Core bond fund which lost -40% in 12 months (2008-9) rates five stars today

Post by jeffyscott »

UpperNwGuy wrote: Thu Nov 25, 2021 8:58 am
nisiprius wrote: Thu Nov 25, 2021 8:38 am Morningstar's analyst ratings--gold, silver, bronze, neutral, negative--which are intended to be predictive, are now hidden unless you pay for a subscription... and they did a revamp of their methodology even though it was only a few years old.. so it is, and is going to be, pretty hard to tell if they're worth anything. I suspect that "negative" ratings are predictive, but that differences between gold/silver/bronze are not.
I don't go to Morningstar's own website when I want to see their ratings. I can often find them on Schwab and Fidelity's websites, but I have to be logged in.
Where are you seeing that? I don't see the medalist ratings (gold, silver, bronze) on Schwab or Fidelity, only the star ratings.

That share class (A) gets a neutral rating and the summary section of the analyst review says:
The strategy is now managed through the same structured and consistent process executed successfully across other taxable fixed-income offerings in this team’s purview; the strategy earns an upgrade to its Process Pillar rating from Average to Above Average. This leads to a Morningstar Analyst Rating upgrade on the strategy’s cheaper share classes from Neutral to Bronze, while its more-expensive share classes continue to receive Neutral and Negative ratings.
And the review includes more details about changes to the fund. So it may be that the past record could just as well be for a completely different fund in this particular case :?: .

The Y and R6 share classes are the bronze ones, with ERs of 0.46% and 0.40%.
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Re: Core bond fund which lost -40% in 12 months (2008-9) rates five stars today

Post by nisiprius »

tibbitts wrote: Thu Nov 25, 2021 10:46 am
Nate79 wrote: Thu Nov 25, 2021 10:15 am Here is a quote to help explain what happened.
https://basonasset.com/2014/03/18/the-c ... for-yield/
So what happened? The fund was reaching for yield.  It loaded up on mortgage debt.  Multiple Oppenheimer bond funds had exposure to credit default swaps from Lehman Brothers, AIG and Wachovia. Derivative bets essentially created leverage in the fund, adding extra exposure to risky securities.  So, in an effort to juice up returns a bit, investors in the fund got crushed when risk returned
I believe Vanguard Total Bond Market experienced losses for similar reasons (to a lesser extent), and dropped substantially relative to its index at some point. So manager risk can happen even with index funds.
The point that manager risk can happen with index funds is accurate, but...

It wasn't for similar reasons. In fact Vanguard was an outlier in avoiding the use of subprime MBS-based "AAA" securities in 2008-2009.

To say "to a lesser extent" gives a misleading impression. It happened in 2002-2003, Total Bond made money, just less than it should have. About -2% less. That's not the same as losing -40%.

Fidelity's bond index fund did have a similar problem in 2008-2009, and it was for similar reasons as OPIGX--one of the Fidelity "Central Funds" had AAA-rated subprime-based stuff in it--and I remember it very well because I was holding that fund at that time. But again, it was not serious. It didn't lose money, it only made less than it should have made, and it was a similar lag, it made perhaps 6% when it should have made 8%.
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Re: Core bond fund which lost -40% in 12 months (2008-9) rates five stars today

Post by nisiprius »

jeffyscott wrote: Thu Nov 25, 2021 11:06 am...That share class (A) gets a neutral rating and the summary section of the analyst review says:
The strategy is now managed through the same structured and consistent process executed successfully across other taxable fixed-income offerings in this team’s purview; the strategy earns an upgrade to its Process Pillar rating from Average to Above Average. This leads to a Morningstar Analyst Rating upgrade on the strategy’s cheaper share classes from Neutral to Bronze, while its more-expensive share classes continue to receive Neutral and Negative ratings....
So the five-star rating is there, but you are saying the "analyst rating" of "neutral," and their discussion of the fund actually do raise concerns. Good.
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Re: Core bond fund which lost -40% in 12 months (2008-9) rates five stars today

Post by Triple digit golfer »

Avoid actively managed funds.
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Re: Core bond fund which lost -40% in 12 months (2008-9) rates five stars today

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nisiprius wrote: Thu Nov 25, 2021 11:13 am
jeffyscott wrote: Thu Nov 25, 2021 11:06 am...That share class (A) gets a neutral rating and the summary section of the analyst review says:
The strategy is now managed through the same structured and consistent process executed successfully across other taxable fixed-income offerings in this team’s purview; the strategy earns an upgrade to its Process Pillar rating from Average to Above Average. This leads to a Morningstar Analyst Rating upgrade on the strategy’s cheaper share classes from Neutral to Bronze, while its more-expensive share classes continue to receive Neutral and Negative ratings....
So the five-star rating is there, but you are saying the "analyst rating" of "neutral," and their discussion of the fund actually do raise concerns. Good.
Generally, it's positive comments about the process and the changes to it and also about fund management/staff, but criticism of the ER (for that share class, as well as the C and R class). Also mentions that: it courts more credit risk than the typical intermediate core-bond peer. The 30% BBB rated stake is almost 12 percentage points higher than the typical rival.
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Re: Core bond fund which lost -40% in 12 months (2008-9) rates five stars today

Post by er999 »

Any idea what BND (vanguard total bond) lost in 2008? I remember at the time some 529 plans lost 30-40% of their value in their bonds funds. Scary for people who think they have a conservative investment and have that happen.
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Re: Core bond fund which lost -40% in 12 months (2008-9) rates five stars today

Post by rich126 »

How long do you hold something against a fund? I know many rate a fund like Dodge and Cox highly but they got destroyed in 08-09 compared to some competitors. On the other hand they did exceedingly well in the late 90s with the Internet bust. Probably mostly good/bad luck and no one can be right 100%.

You see similar things with bonds, international and maybe even gold. Domestic growth stocks have done so well people have given up on other options. People also forgot about inflation since we had almost nothing for a long time. Diversification lowers returns but done correctly it should reduce risk.
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Re: Core bond fund which lost -40% in 12 months (2008-9) rates five stars today

Post by jeffyscott »

er999 wrote: Thu Nov 25, 2021 11:31 am Any idea what BND (vanguard total bond) lost in 2008? I remember at the time some 529 plans lost 30-40% of their value in their bonds funds. Scary for people who think they have a conservative investment and have that happen.
According to portfolio visualizer, max drawdown was about 4%, 3.94% for VBTLX and 4.01% for BND:
https://www.portfoliovisualizer.com/bac ... ion2_2=100

Max was actually 2013 for the ETF, but 2008, 2013, 2016, and 2020 all were about the same with about 3.5% to 4% drawdowns for both.
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Re: Core bond fund which lost -40% in 12 months (2008-9) rates five stars today

Post by dbr »

er999 wrote: Thu Nov 25, 2021 11:31 am Any idea what BND (vanguard total bond) lost in 2008? I remember at the time some 529 plans lost 30-40% of their value in their bonds funds. Scary for people who think they have a conservative investment and have that happen.
From 1988 to 2021 the max drawdown for VBMFX was -5.86% and that occurred between March and September 1987 and recovered by January 1988. There was a drawdown of -4.00% between April and October 2008. The total return for VBMFX for 2008 was +5.3%. In September and October of 2008 there was a negative return of about -3.7%. The fund recovered in the last quarter of 2008. All of this is total return meaning NAV plus reinvested dividends.
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Re: Core bond fund which lost -40% in 12 months (2008-9) rates five stars today

Post by dbr »

rich126 wrote: Thu Nov 25, 2021 11:39 am How long do you hold something against a fund? I know many rate a fund like Dodge and Cox highly but they got destroyed in 08-09 compared to some competitors. On the other hand they did exceedingly well in the late 90s with the Internet bust. Probably mostly good/bad luck and no one can be right 100%.

You see similar things with bonds, international and maybe even gold. Domestic growth stocks have done so well people have given up on other options. People also forgot about inflation since we had almost nothing for a long time. Diversification lowers returns but done correctly it should reduce risk.
I think you hold the possibility of manager risk for an actively managed fund against the fund from the get go even if it has not yet materialized at any point. I would probably change the language from "hold against" to just note that manager or agency risk is a risk to be considered. Technically risk should be considered to potentially be both positive and negative. The issue is whether or not the risk is justified by higher expected return.
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Re: Core bond fund which lost -40% in 12 months (2008-9) rates five stars today

Post by jeffyscott »

rich126 wrote: Thu Nov 25, 2021 11:39 amHow long do you hold something against a fund? I know many rate a fund like Dodge and Cox highly but they got destroyed in 08-09 compared to some competitors.
They didn't lose 40%+ in a bond fund. DODIX had max drawdown of about 8% and has beaten the index fund on both an absolute and risk adjusted basis.

In any case, I would hold a 1.1% ER against a bond fund forever.
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Re: Core bond fund which lost -40% in 12 months (2008-9) rates five stars today

Post by tibbitts »

nisiprius wrote: Thu Nov 25, 2021 11:12 am It wasn't for similar reasons. In fact Vanguard was an outlier in avoiding the use of subprime MBS-based "AAA" securities in 2008-2009.

To say "to a lesser extent" gives a misleading impression. It happened in 2002-2003, Total Bond made money, just less than it should have. About -2% less. That's not the same as losing -40%.
I thought losses on swaps were the reason for Total Bond Market's problems in 2002. If not, what were the reasons? I don't think "lesser extent" was misleading; I'll guess that losing 2% to the index was considered a crisis internally at Vanguard.
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Re: Core bond fund which lost -40% in 12 months (2008-9) rates five stars today

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jeffyscott wrote: Thu Nov 25, 2021 12:05 pm
rich126 wrote: Thu Nov 25, 2021 11:39 amHow long do you hold something against a fund? I know many rate a fund like Dodge and Cox highly but they got destroyed in 08-09 compared to some competitors.
They didn't lose 40%+ in a bond fund. DODIX had max drawdown of about 8% and has beaten the index fund on both an absolute and risk adjusted basis.

In any case, I would hold a 1.1% ER against a bond fund forever.
Clearly I meant the stock fund and was talking about management. And to me an active fund history ends when management changes.
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Re: Core bond fund which lost -40% in 12 months (2008-9) rates five stars today

Post by nisiprius »

er999 wrote: Thu Nov 25, 2021 11:31 am Any idea what BND (vanguard total bond) lost in 2008? I remember at the time some 529 plans lost 30-40% of their value in their bonds funds. Scary for people who think they have a conservative investment and have that happen.
It did not lose a dime in 2008.

A $10,000 investment would have made $514.85, i.e. it had a +5.14% return.

Source

Image
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Re: Core bond fund which lost -40% in 12 months (2008-9) rates five stars today

Post by arcticpineapplecorp. »

nisiprius wrote: Thu Nov 25, 2021 7:02 pm
er999 wrote: Thu Nov 25, 2021 11:31 am Any idea what BND (vanguard total bond) lost in 2008? I remember at the time some 529 plans lost 30-40% of their value in their bonds funds. Scary for people who think they have a conservative investment and have that happen.
It did not lose a dime in 2008.

A $10,000 investment would have made $514.85, i.e. it had a +5.14% return.

Source

Image
yes and the worst loss during that period was between 9/12/2008-10/31/2008 (as seen on the chart from peak to trough) and that loss was only -5.00% which it not only recovered from by around Mid November 2008 (just a couple weeks after it declined) but then eked out a gain by the end of the year one month later.

source:
http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D

the moral is TBM fell less and recovered quicker than riskier assets like TSM.

ya gotta hold the right bond fund. Guess Morgan Stanley and Oppenheimer aren't it if you're looking for low risk.
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Re: Core bond fund which lost -40% in 12 months (2008-9) rates five stars today

Post by Northern Flicker »

The Oppenheimer core bond fund debacle rose to a higher level than just manager risk materializing. This fund was included in 529 plans administered by Oppenheimer as a conservative fixed income investment option.

The portfolio manager apparently tried to time the bottom of the market for CDO's, the toxic asset at the heart of the global financial crisis.

Some states sued regarding the 529 fund losses, and Oppenheimer settled by reimbursing participants for around 50% of the losses in the state 529 plans in one or more states. Such an outcome indicates more than just normal manager risk, but taking risks beyond the range of what was specified or marketed.
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Re: Core bond fund which lost -40% in 12 months (2008-9) rates five stars today

Post by 000 »

This is a good example of manager risk, but given this:
Northern Flicker wrote: Thu Nov 25, 2021 10:17 pm Such an outcome indicates more than just normal manager risk, but taking risks beyond the range of what was specified or marketed.
is there any reason to believe such risk couldn't show up in an index fund too? Many index fund managers play around with derivatives. :oops:

And given this (emphasis mine):
Northern Flicker wrote: Thu Nov 25, 2021 10:17 pm Oppenheimer settled by reimbursing participants for around 50% of the losses in the state 529 plans in one or more states.
it would seem likely that ordinary fund investors will be SOL without help from federal regulators if mutual fund managers go off script.
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Re: Core bond fund which lost -40% in 12 months (2008-9) rates five stars today

Post by Northern Flicker »

There have been a couple of high profile tracking error events with index funds that I can think of. I believe one was with Vanguard's total bond market fund VBTLX and I believe one was with iShares's EM equity fund EEM.

But we are not talking about a 40% discrepancy from going off script. Manager error generally is far lower with an index fund than with an actively managed fund.

So the answer to your question is no, an event like what happened with the Oppenheimer Core Bond fund is not something an investor in a total bond market index fund should worry about.
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Re: Core bond fund which lost -40% in 12 months (2008-9) rates five stars today

Post by Northern Flicker »

This is an interesting read:

https://global.vanguard.com/portal/site ... volatility
As one might expect, as market volatility increases, investors tend to invest in or redeem from funds more frequently. And this is often the same time that liquidity is lower. As a result, transaction costs for the fund can increase. But there is a way to reduce the impact of these costs on investors who are not transacting at these times.

To protect existing investors in a fund from the costs incurred when other investors are buying or selling, Vanguard uses a process called swing pricing. This involves adjusting the net asset value (NAV) of the fund to reflect the costs incurred by purchases or redemptions in the fund. This means the costs of transacting are borne by the investors who are trading in and out of the fund, rather than by existing investors in the fund.
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Re: Core bond fund which lost -40% in 12 months (2008-9) rates five stars today

Post by nisiprius »

The Vanguard glitch.

1) There was no more than "normal" tracking error during 2008-2009.

2) In 2002, Total Bond investors made money, 8.26%. But the index gained 10.26%. (I calculated the technically correct "geometric difference", 1.0826/1.1026 - 1 to get -1.81%. I'm not trying to minimize the glitch, if you want to call it -2% I'm fine with that).

A black eye for Vanguard, for sure, but not a catastrophe for a Total Bond investor. I actually experienced a similar-sized glitch in the Fidelity Total Bond Market Index Fund around 2008 and didn't even notice it in my account, until a news story called it to my attention.

Image
Last edited by nisiprius on Fri Nov 26, 2021 10:06 am, edited 2 times in total.
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Re: Core bond fund which lost -40% in 12 months (2008-9) rates five stars today

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rich126 wrote: Thu Nov 25, 2021 1:41 pm
jeffyscott wrote: Thu Nov 25, 2021 12:05 pm
rich126 wrote: Thu Nov 25, 2021 11:39 amHow long do you hold something against a fund? I know many rate a fund like Dodge and Cox highly but they got destroyed in 08-09 compared to some competitors.
They didn't lose 40%+ in a bond fund. DODIX had max drawdown of about 8% and has beaten the index fund on both an absolute and risk adjusted basis.

In any case, I would hold a 1.1% ER against a bond fund forever.
Clearly I meant the stock fund and was talking about management. And to me an active fund history ends when management changes.
I'd maybe consider whether the strategy changed, as well. That bond fund has changed managers, strategy, and even it's name, so the past record has little to do with the current fund. But it is still a terrible choice based on the ER for the share classes that are available to the general public.

Dodge and Cox stock also didn't underperform to anything near the level of the bond fund being discussed. Max drawdown was about 59% vs. about 55% for Vanguard Value Index and 51% for Total Stock or S&P 500.
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Re: Core bond fund which lost -40% in 12 months (2008-9) rates five stars today

Post by nisiprius »

Now that I've got the spreadsheet set up...

Image
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Re: Core bond fund which lost -40% in 12 months (2008-9) rates five stars today

Post by nisiprius »

I really don't want there to be any confusion between what happened to OPIGX and what happened to other bond funds. Bland qualitative comparisons--"Once upon a time Total Bond messed up too"--really do not convey an accurate picture.

Here's a chart for OPIGX, but unfortunately I had to completely rework the scaling in order to get the data to fit.

Image

For direct comparison, here's Vanguard Total Bond replotted, on the same axes and same scaling over the same time period.

Image
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Re: Core bond fund which lost -40% in 12 months (2008-9) rates five stars today

Post by jeffyscott »

nisiprius wrote: Fri Nov 26, 2021 10:37 am I really don't want there to be any confusion between what happened to OPIGX and what happened to other bond funds. Bland qualitative comparisons--"Once upon a time Total Bond messed up too"--really do not convey an accurate picture.
Yes, the losses were incredible for a fund that called itself "Core Bond", which it appears was it's name even back then (I was under the mistaken impression it had changed).

It's interesting to look back at the old Morningstar analyst reviews, which were pretty positive (aside from some mild criticism of the cost of it) prior to and even during it's collapse.

In Feb. 2008, the morningstar review said:
Oppenheimer Core Bond's long-term prospects are better than recent performance suggests.

Caught in the protracted wake of last summer's subprime-fueled credit crisis...Its performance over the past 12 months hasn't been disastrous in absolute terms (the fund lost half a percentage point over that period), but it has placed the fund near the back of the category pack... The fund's struggles have become even more pronounced in recent months: As of Feb. 19, it lost 3.8% in 2008 alone.

These results are undeniably disappointing, but we still wouldn't count this fund out.


In July, they still said:
Don't count Oppenheimer Core Bond out.

and Oct:
Oppenheimer Core Bond has been bruised, but we see cause for optimism.

...the fund's recent losses (20.5% for the year ended Oct. 24, 2008) have been sizable enough to erase any gains that investors made here over the past five years.


Finally in December
We've lost confidence in Oppenheimer Core Bond.

Since our last update in October, this fund has continued its dramatic slide. For the year ended Dec. 16, 2008, it has lost 37.6%, which is 31 percentage points worse than its typical intermediate-term bond rival's loss.


By November of 2009, the fund had apparently been revamped and they said:
Investors shouldn't expect Oppenheimer Core Bond to act anything like its old self...Krishna Memani and team took over on April 1, 2009, and he has sworn off the outsized risks of his predecessors.
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Re: Core bond fund which lost -40% in 12 months (2008-9) rates five stars today

Post by nisiprius »

Thank you very much. That sounds like a black eye for Morningstar, whose analysts apparently were unable to look beneath the surface and alert investors to "the outsized risks of his predecessors" during the time when his predecessors were taking those outsized risks.
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Re: Core bond fund which lost -40% in 12 months (2008-9) rates five stars today

Post by whereskyle »

nisiprius wrote: Thu Nov 25, 2021 7:34 am Let me state up front: a) the fund is in new hands (Invesco, not Oppenheimer), b) Morningstar star ratings emphasize the last three years and only look back ten years, c) the -40% loss happened more than ten years ago. There's no reason to doubt that Morningstar is following its star rating methodology correctly.

What brought it to mind is that it is Thanksgiving day, and a Facebook friend posted a cartoon of a turkey looking at a weather forecast saying "Thursday's temp 350°" and thinking "that can't be right."

Which called to mind Nassim Nicholas' Taleb's illustration of the risks of extrapolation:

Image

Which called to mind the real-world performance of OPIGX, the Oppenheimer Core Bond Fund, offered in 401(k) plans as an ordinary bond fund suitable for ordinary retirement savers, which did this

Image

while core bond funds from Vanguard, Fidelity, etc. stayed close to the green index line.

I was startled to find that Morningstar considers OPIGX to be a five star fund

Image

because the loss happened more than ten years ago, and for the last ten years I see that it's outperformed the index (although the bigger 2020 glitch suggests it is taking more risk).

Image

I dunno. At what point do you "forgive and forget?" Is a five-star rating a good capsule summary of the risk-adjusted, category-relative behavior of this bond fund? Is Morningstar serving investors well by awarding it five stars and ignoring 2008-2009?
Morningstar should completely do away with the star rating. It's a shame that they won't accept responsibility for misleading investors into judging funds based purely on recent performance.
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Re: Core bond fund which lost -40% in 12 months (2008-9) rates five stars today

Post by Northern Flicker »

What was insidious for savers using 529 college savings plans administered by Oppenheimer was that the Core Bond Fund was the bond fund used in aged-based target year portfolios for college savings, so alot of families had assets in it without even choosing it specifically.

https://abcnews.go.com/Business/story?id=6563042&page=1
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Re: Core bond fund which lost -40% in 12 months (2008-9) rates five stars today

Post by 000 »

Northern Flicker wrote: Thu Nov 25, 2021 11:16 pm There have been a couple of high profile tracking error events with index funds that I can think of. I believe one was with Vanguard's total bond market fund VBTLX and I believe one was with iShares's EM equity fund EEM.

But we are not talking about a 40% discrepancy from going off script. Manager error generally is far lower with an index fund than with an actively managed fund.

So the answer to your question is no, an event like what happened with the Oppenheimer Core Bond fund is not something an investor in a total bond market index fund should worry about.
No, I think you missed my point.

If index fund managers start investing contrary to the prospectus it seems we will be SOL.
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Re: Core bond fund which lost -40% in 12 months (2008-9) rates five stars today

Post by Northern Flicker »

Why would index fund managers do that? The statutory prospectus and statement of additional infornation are required, binding, regulatory documents. And even if they have broad latitude in the specs in those documents, if a fund is advertised as tracking an index in marketing materials, the fund company has to make a good faith effort to track the index. The transparency accorded by attempting to track an index also would make it obvious if and when there were an issue.

If manager risk is your concern, index funds are your friend, not your adversary.
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Re: Core bond fund which lost -40% in 12 months (2008-9) rates five stars today

Post by 000 »

Northern Flicker wrote: Fri Nov 26, 2021 4:59 pm Why would index fund managers do that?
We could ask the same about why a core bond fund manager would put a double digit percentage of fund assets in a narrow market slice of variable instruments.

The potential motivations are irrelevant. If it's possible, it's a risk.
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Re: Core bond fund which lost -40% in 12 months (2008-9) rates five stars today

Post by sunnywindy »

Possibly a more fair judgment of the five-star rated OPIGX is to look at its Morningstar "Risk & Return Rating." Just as Nisiprius says, this does not include the 'hiccup' which was over 10 years ago. https://www.morningstar.com/funds/xnas/opigx/risk

Risk | Return
3 Years - Above Average | Above Average
5 Years - Above Average | Above Average
10 Years - Above Average | High

Compared to the same category "Intermediate Core Bond" three-star Vanguard Total Bond Market ETF (BND):

Risk | Return
3 Years - Average | Average
5 Years - Average | Average
10 Years - Average | Average

My conclusion is that I wouldn't hold the past against this fund as a completely different crew manage the fund - someone else owns the past, not the current managers.
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Re: Core bond fund which lost -40% in 12 months (2008-9) rates five stars today

Post by Northern Flicker »

000 wrote: Fri Nov 26, 2021 5:06 pm
Northern Flicker wrote: Fri Nov 26, 2021 4:59 pm Why would index fund managers do that?
We could ask the same about why a core bond fund manager would put a double digit percentage of fund assets in a narrow market slice of variable instruments.
This is not even remotely comparable.

Oppenheimer had liability for including the fund as the conservative bond fund option in 529 plans. It was an actively managed fund, and I believe that they did not violate the range of strategies within scope of the fund prospectus, which offer substantial latitude to active managers. I thus don't believe that investors in the fund who, say, chose the fund for their IRA, would have had a case against Oppenheimer.

On the other hand, if a fund that claims to track a bond index did something similar, I believe that the fund company would have liability to all investors in the fund for not making a good faith effort to track the index.
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Re: Core bond fund which lost -40% in 12 months (2008-9) rates five stars today

Post by 000 »

Northern Flicker wrote: Fri Nov 26, 2021 7:16 pm This is not even remotely comparable.

Oppenheimer had liability for including the fund as the conservative bond fund option in 529 plans. It was an actively managed fund, and I believe that they did not violate the range of strategies within scope of the fund prospectus, which offer substantial latitude to active managers. I thus don't believe that investors in the fund who, say, chose the fund for their IRA, would have had a case against Oppenheimer.

On the other hand, if a fund that claims to track a bond index did something similar, I believe that the fund company would have liability to all investors in the fund for not making a good faith effort to track the index.
Most index fund prospectuses include two critical provisions:
  • 80% rule
  • can deviate at management discretion if for good reason blah blah blah
So a bond index fund investing 20% of assets in junk CDOs probably would be within the terms of the prospectus.
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Re: Core bond fund which lost -40% in 12 months (2008-9) rates five stars today

Post by grok87 »

Northern Flicker wrote: Thu Nov 25, 2021 11:20 pm This is an interesting read:

https://global.vanguard.com/portal/site ... volatility
As one might expect, as market volatility increases, investors tend to invest in or redeem from funds more frequently. And this is often the same time that liquidity is lower. As a result, transaction costs for the fund can increase. But there is a way to reduce the impact of these costs on investors who are not transacting at these times.

To protect existing investors in a fund from the costs incurred when other investors are buying or selling, Vanguard uses a process called swing pricing. This involves adjusting the net asset value (NAV) of the fund to reflect the costs incurred by purchases or redemptions in the fund. This means the costs of transacting are borne by the investors who are trading in and out of the fund, rather than by existing investors in the fund.
thanks, that is interesting.
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Re: Core bond fund which lost -40% in 12 months (2008-9) rates five stars today

Post by Northern Flicker »

000 wrote: Fri Nov 26, 2021 7:46 pm
Northern Flicker wrote: Fri Nov 26, 2021 7:16 pm This is not even remotely comparable.

Oppenheimer had liability for including the fund as the conservative bond fund option in 529 plans. It was an actively managed fund, and I believe that they did not violate the range of strategies within scope of the fund prospectus, which offer substantial latitude to active managers. I thus don't believe that investors in the fund who, say, chose the fund for their IRA, would have had a case against Oppenheimer.

On the other hand, if a fund that claims to track a bond index did something similar, I believe that the fund company would have liability to all investors in the fund for not making a good faith effort to track the index.
Most index fund prospectuses include two critical provisions:
  • 80% rule
  • can deviate at management discretion if for good reason blah blah blah
So a bond index fund investing 20% of assets in junk CDOs probably would be within the terms of the prospectus.
The 80% is standard boilerplate language for the regulations for naming a fund. If they say the objective of the fund is to track an index, that is an additional constraint. Both must be obeyed.
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Re: Core bond fund which lost -40% in 12 months (2008-9) rates five stars today

Post by grok87 »

Triple digit golfer wrote: Thu Nov 25, 2021 11:20 am Avoid actively managed funds.
agree. and i would add, "especially actively managed bond funds."

The playbook for actively managed bond funds is always the same. Take extra risk compared to the benchmark- increased credit risk, increased duration risk etc. The trouble is credit risk is correlated with equity risk. So when equity markets tank the actively managed bond will tank as well. And the extra duration hurts as well because when credit spreads increase the price drop is ~=duration*spread-change.

But wait you say- maybe the extra returns (from the increased credit risk and increased duration risk) are worth it over the long run. This is a seductive argument but it doesn't really stack up. Most if not all of the extra expected returns are eaten up by the higher fees. Even if there is some net extra return after fees, studies show its more efficient to get that return from equities. in other words if you want higher portfolio returns don't use actively managed bond funds. stick with broad bond market index funds but increase your allocation to stocks.

TL/DR skip actively managed bond funds. if you want higher portfolio returns increase your equity allocation.

cheers,
grok
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Re: Core bond fund which lost -40% in 12 months (2008-9) rates five stars today

Post by 000 »

The sad thing is that the illiquid bond space (corporates, etc) is where active management can work the best even without taking more risk.

Some vanguard active bond funds have had less volatility and higher return.

I do think that indexing Treasuries is very reasonable and TIPS mostly reasonable.
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