Bond fund PMs are playing games with their bogeys. That is the contention of Kirsten Grind's Wall Street Journal article
. Is she just "Monday morning quarterbacking"?
Grind writes that bond funds managers have been trying to "make themselves look better" by benchmarking their funds to safe indices even as they invest in risky bonds. The SEC requires funds to use an "appropriate broad-based" index for comparison but doesn't make any specific requirements.
Grind posits that this vague rulemaking lets bond fund managers game the system.
Morningstar ran the numbers for the WSJ
and found that the tracking error for bond funds has edged higher the last few years. The number is now at 2.20 percent for the 12 months through August. The tracking error was 1.95 for the year before, and 1.37 percent in the five years before the financial crisis.
Some of the biggest and most successful bond funds have significant tracking error, Grind reports. She singles out the Pimco Total Return Fund
, the Oppenheimer Global Strategic Income Fund
, and Putnam's Diversified Income Trust
fund for veering from their benchmarks.
The Pimco fund, Grind writes, looks great against its benchmark because it has sold its holdings in U.S. Treasuries. This isn't a secret strategy — at a conference last week Bill Gross bragged
that his fund can yield great returns compared to its index because it doesn't have to hold a specific percentage of Treasuries.
Oppenheimer CIO Art Steinmetz
told Grind that yes, his company's Global Strategic Income fund, with a 7.5 percent tracking error, has diverged quite a bit from its index. But he said that "the fund frequently changes its holdings, and it wouldn't make sense to change its benchmark often."
The full story is here.
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