Analysis of Metropolitan West Total Return Bond Fund
April 4, 2017
Analysis of TIAA-CREF Bond Fund
A recent piece in Barron’s profiles the Metropolitan West Total Return Bond Fund (MWTRX; M Class shares). This $78.6 billion no-load fixed-income fund has a 0.66% expense ratio and 303% turnover. According to the article
In the past 15 years, the fund has delivered a 5.7% annualized return.
The fund’s prospectus benchmark is the Bloomberg Barclays US Aggregate Bond Index. One of the long-lived and accessible implementations of this index is the iShares Core U.S. Aggregate Bond ETF (AGG). Given the change of the famous lead manager in December 2009, it would not make sense to evaluate the fund’s relative performance before that time. Alpholio™ calculations indicate that from January 2010 through February 2017 the fund returned more than the ETF in approximately 78% of all rolling 36-month periods, 71% of 24-month periods and 52% of 12-month periods. The median cumulative (not annualized) outperformance over a rolling 36-month period was 7.1%.
A rolling returns comparison does not take into account the fund’s volatility or exposures. This is where Alpholio™’s patented methodology comes in. In its simplest variant, it constructs a reference ETF portfolio with fixed membership and weights that most closely tracks periodic returns of the analyzed fund. To make substitution practical, in the following analyses the number of ETFs in the reference portfolio was limited to no more than four. Here is the resulting chart with statistics of the cumulative RealAlpha™ for the Metropolitan West Total Return over the five years through February 2017 (to learn more about this and other performance measures, please consult the FAQ):
The fund added a significant amount of RealAlpha™ through 2014. However, subsequently the cumulative RealAlpha™ curve flattened out. The fund’s volatility, measured as the standard deviation of monthly returns, was higher than than of the reference ETF portfolio. Due to a slightly negative correlation between bond and stock returns, the fund’s RealBeta™ was just below zero.
The following chart with statistics shows the constant reference ETF portfolio for the fund over the same evaluation period:
The fund had equivalent positions in the Schwab U.S. Aggregate Bond ETF™ (SCHZ), iShares 1-3 Year Credit Bond ETF (CSJ), and FlexShares iBoxx® 5-Year Target Duration TIPS Index Fund (TDTF).
Let’s take a closer look at the more recent performance of the fund. Here is the cumulative RealAlpha™ chart with statistics for the past three years:
The fund failed to add value relative to its reference ETF portfolio, which had a slightly higher volatility. One of the reasons may have been the sudden inflow of over $31 billion following the departure of a prominent lead manager of a competing fund.
The following chart with statistics shows the composition of the reference ETF portfolio over the three-year period:
The fund had equivalent positions in the Vanguard Total Bond Market ETF (BND), Vanguard Mortgage-Backed Securities ETF (VBMS), and iShares MBS ETF (MBB).
Due to its large size, the Metropolitan West Total Return Bond Fund may find it difficult to outperform on a truly risk-adjusted basis. As the last analysis demonstrated, investors may be better off by replacing the fund with a simple portfolio of bond ETFs.
To learn more about the Metropolitan West Total Return Bond and other mutual funds, please register on our website.
August 6, 2016
Analysis of BlackRock Global Allocation Fund
Today’s profile in Barron’s features the TIAA-CREF Bond Fund (TIORX; Retail Class shares). This $3.5 billion no-load fund has a 0.62% expense ratio and an elevated 309% turnover. According to the article
[active management] has guided [this] low-cost fund to 4.5% average annual returns over the past three years—better than 85% of intermediate-bond funds tracked by Morningstar and ahead of the 4.2% average annual gains for the Barclays U.S. Aggregate Bond Index.
The current lead manager took the reins of the fund in late August 2011. Therefore, this analysis will span from September 2011 through June 2016.
The primary prospectus benchmark for the fund is the Barclays U.S. Aggregate Bond Index. One of the accessible implementations of this index is the iShares Core U.S. Aggregate Bond ETF (AGG). Alpholio™’s calculations show that in the above time frame the fund returned more than the ETF in approximately 91% of all rolling 36-month periods, 80% of 24-month periods and 68% of 12-month periods. The fund’s median cumulative (not annualized) outperformance over a rolling 36-month period was 2.1%.
A comparison of rolling returns tries to approximate the average holding period of the fund. However, it does not take the fund’s composition and volatility into account. To adjust for the latter, let’s apply the simplest variant of Alpholio™’s patented methodology. In this approach, a reference ETF portfolio with both fixed membership and weights is custom-built to most closely track returns of the analyzed fund. Here is the resulting chart and related statistics of cumulative RealAlpha™ for the TIAA-CREF Bond Fund:
Over the entire analysis period, the fund added virtually no RealAlpha™. At 2.88%, the fund’s standard deviation (a measure of volatility of returns) was 0.08% higher than that of the reference portfolio. The fund’s RealBeta™ was close to zero, which implies very little correlation of the fund’s returns to those of the broad-market equity ETF.
The following chart and accompanying statistics illustrate the constant reference ETF portfolio for the fund:
The fund had major equivalent positions in the Vanguard Mortgage-Backed Securities ETF (VMBS), SPDR® Barclays Intermediate Term Corporate Bond ETF (ITR), iShares Intermediate Credit Bond ETF (CIU), Vanguard Intermediate-Term Corporate Bond ETF (VCIT), Schwab U.S. Aggregate Bond ETF™ (SCHZ), and PIMCO 0-5 Year High Yield Corporate Bond Index ETF (HYS). The Other component in the chart collectively represents additional six ETFs with smaller weights. (Some of the weights in the above table are shown as zero due to rounding.)
Under current management, the TIAA-CREF Bond Fund added practically no value on a truly risk-adjusted basis. An investor could have achieved similar results with a simple reference ETF portfolio comprising just six to nine fixed positions. The article provides a likely explanation
…[the lead manager] is quick to give credit to the 13 managers who run individual “sleeves” of the portfolio.
It appears that all the intense trading of the fund’s holdings (re: turnover in excess of 300%) merely compensated for its substantial management expenses.
To learn more about the TIAA-CREF Bond and other mutual funds, please register on our website.
February 4, 2014
Alternatives vs. Bonds
A recent story in InvestmentNews covers the origins and performance of BlackRock Global Allocation Fund in the last 25 years:
Since the fund’s inception, it has recorded an annualized return of 10.63% through the end of last year, beating the benchmark portfolio of 60% global stocks and 40% global bonds by more than 250 basis points a year. A $100,000 investment in the fund at inception would have grown to just over $1.1 million today, $500,000 more than the benchmark portfolio. That outperformance has come with about one-third of the downside.
While this record under the guidance of a long-term main manager is certainly impressive, as usual it is worth taking a look at the most recent performance of the fund.
First, the fund has multiple share classes; for the purpose of this analysis, Investor A class shares (MDLOX) with a maximum sales charge of 5.25% and net expense ratio of 1.07% will be used.
Second, the fund has grown to $57.3 billion in AUM. This will make it more difficult for the fund to provide a 100% return over each future ten-year period, as its institutional share class did in the past.
Third, because the fund invests in both domestic and foreign stocks and bonds, it uses a custom reference benchmark that is a blend of four indices:
The reference benchmark consists of 36% S&P 500 Index, 24% FTSE World (ex. US), 24% BofA ML 5-year US Treasury Bond Index and 16% Citigroup Non-US Dollar World Govt. Bond Index.
With the sales charge, the fund failed to beat this benchmark in the one-, three- and five-year periods through 2013. Without the sales charge, the fund outperformed the benchmark last year, but not over three or five years. However, in both cases the fund returned more than the benchmark in the ten-year period. The fund issuer claims that
Since the Fund’s launch in 1989, investors have doubled their money every 10 years, no matter when they bought the fund… The fund has outperformed global equities with 1/3 less risk [based on annualized standard deviation of monthly returns for Institutional shares from 2/28/89 to 12/31/13, compared to the FTSE World Index].
Let’s take a look at the fund’s performance from Alpholio™’s perspective. Here is the cumulative RealAlpha™ chart for the fund (disregarding the sales charge):
From early 2005 to mid-2008, the fund generated a fair amount of RealAlpha™ but lost most of it in the second half of 2008. After a two-year recovery to the previous peak level, the cumulative RealAlpha™ for the fund stayed largely flat until it rebounded in 2013. Even though the fund suffered a smaller decline in 2008 than its peer world allocation funds did (-20.6 vs. -29% per Morningstar), it significantly declined against its reference portfolio of ETFs. In addition, the ETF reference portfolio had a much smaller volatility than that of the fund.
The following chart shows the weights of ETFs in the reference portfolio in the same analysis period:
The fund’s equivalent position in cash and short-term investments was in the iShares 1-3 Year Treasury Bond ETF (SHY; average weight of 35.4%). Domestic large-cap stocks were represented by the iShares S&P 100 ETF (OEF; 16%). The fund’s foreign stock holdings were covered by the iShares MSCI Japan ETF (EWJ; 9.6%) and iShares MSCI EMU ETF (EZU; 6.5%). Finally, the fund’s domestic bond holdings were embodied by the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD; 5%) and iShares TIPS Bond ETF (TIP; 5%).
While the BlackRock Global Allocation Fund has added value for investors over its long history, its performance in 2008 shows that it may quickly lose a lot of that value in a market downturn. Despite a large number of holdings (about 700 global securities), the fund may find it hard to outperform in the future due to its size. Finally, in good past years the fund had significant distributions, which makes it more suitable for tax-exempt accounts.
To learn more about the BlackRock Global Allocation and other mutual funds, please register on our website.
July 26, 2013
In light of a recent downturn in bonds caused by a perception of the Fed’s upcoming actions, a Barron’s blog post and a Morningstar article explore alternative investments with “bond-like” returns. However, it turns out that these alternatives behave mostly like stocks with poor return-to-risk characteristics, and thus do not provide diversification to a broader portfolio.
To illustrate, here are correlations to stocks and Sharpe Ratios derived from Morningstar’s statistics for mutual funds and ETFs mentioned in the post and article:
These three-year statistics indicate a high positive correlation to stocks coupled with sub-par risk-adjusted returns. This observation is corroborated by a new study from the Leuthold Group cited in The Wall Street Journal article that states:
“From 1994 through May, it found that hedge-fund correlations have slowly been inching up to 0.75, almost 36% higher than earlier levels. Since a measure of 1.00 represents lock-step movements, hedge fund returns are generally following the tendencies of stocks about three-quarters of the time… Funds with correlations to stocks of 0.6 or less are prized by investors since they can significantly reduce portfolio volatility and limit risks over full-market cycles.”
In the past month or so, these alternative funds held their value well relative to bond investments. This is supported by their negative or low positive three-year correlations to iShares Core Total U.S. Bond Market ETF (AGG), as estimated by Alpholio™:
|IQ Merger Arbitrage ETF
|IQ Alpha Hedge Strategy
For reference, the correlation of SPDR® S&P 500® ETF (SPY) to AGG over the same period is -0.33. Therefore, these alternatives do not provide a significant amount of diversification to a balanced equity-and-bond portfolio, but could be marginally helpful if the portfolio contains only bonds. However, even in the latter case they could be a drag on the risk-adjusted performance of the portfolio: at 1.31, the Sharpe Ratio of SPY is higher than that of any of the above funds.