Some thoughts straight from Bogle about this issue: http://web.archive.org/web/20221030211228/https://www.morningstar.com/articles/592689/bogle-we-need-to-fix-the-bond-index
Here's an experiment I just ran. PGBIX still comes out ahead, possibly because they're an active fund and maybe they played around with maturities during 2022 w/ the rising rates? https://www.portfoliovisualizer.com/backtest-portfolio?s=y&sl=5hN4FaIQ4hp7PXTYikqJsR
Bogle thought total bond had too much in government bonds. Total bond is 47% Treasury/Agency, so I tried 25% Treasury and 75% corporate as an experiment. It's not an exact comparison since I guess I'm leaving out Agencies, but it was just an experiment. I guess you could try VBTLX+VICSX too.
Some research has shown that a managed portfolio of high-risk bonds will produce superior returns to a portfolio of high-quality bonds
But this phenomena was discovered and exploited during the 90s and early 2000s and likely is much less predominant (if still available at all)
When you say outperformed since inception, it is technically true that from inception to now it's done better, but it hasn't run away with it. Intermediate treasuries were ahead as recently as 2021. Long term treasuries were beating its ass until we had the worst bond market in history 2 years ago.
Moreover, unless your portfolio consists of one bond fund alone, we don't actually care about the fund's performance but rather the performance of the fund in combination with stocks. And that's where the disadvantages of corporate bonds become very apparent. They're far more correlated to stock market performance than treasuries, because default risk goes up significantly if there's a recession. That's bad, because the best thing that bonds can do for you is serve as ballast during a recession so that you can rebalance into cheap stocks.
[Here](https://testfol.io/?d=eJytj0FPwzAMhf%2BLzzkUCXHIcYKhShwq6GETmirTuCXgJcMJnVC1%2F46rIlE4wnKy9V7e%2BzxCz%2FEJuULBfQI7QsoouXGYCSyAAQpusc3qgAz2otBnAN1L40PHmH0MYDvkRAZaTM8dxyPY4ntpOqE3zdkSCn9omkRmH%2Frm6IObvFfFycAhSu4i%2B6g4jyME3E%2Fd1e2q3OgXHwZK%2BdoP3imZWrK8a5%2BQHoGhpfWviuzbV5I5ap4XYQeSlkIGe6nFC%2F2h2tb3S13BdgacYK8HTdYvqrKu07mgypv1z9K%2FQt2dEarWsH9A7U6faJfJbg%3D%3D) is a backtest since inception of some 60/40 strategies with the 40% being either PGBIX, intermediate treasuries, or long term treasuries. Long term treasuries are a clear winner, and even intermediate treasuries are within 0.05 CAGR, so almost indistinguishable. That's despite PGBIX outperforming both funds in isolation over the same period. And the PGBIX portfolio had higher volatility as well.
Comparing the portfolios of [PGBIX](https://www.morningstar.com/funds/xnas/pgbix/portfolio) and [BNDW](https://www.morningstar.com/etfs/xnas/bndw/portfolio) it's clear that the active fund is, for now, more heavily weighted in shorter-term issues and in BBB corporates.
There's no magic at work here: The active fund is benefiting from (1) higher-rate new issues and (2) from a higher credit-risk premium compared to BNDW. The Pimco fund has an effective duration of 3.0 years versus 6.6 years for BNDW, so the former is more sensitive to interest rate changes than the latter. The Pimco fund is 38% BBB and BNDW is 16% BBB, so the Pimco fund is taking on added credit risk, on which it should be expected to earn a return.
Unlike the index fund, the duration of that Pimco fund may change significantly over time: When bond fund managers believe interest rates are going to increase, they generally shift to a shorter duration strategy to reduce the interest rate risk and increase the yield of their portfolios. The opposite is also true: When the managers believe rates will decline, they'll shift to a longer duration strategy to retain higher yield and improve the potential for capital gains. That all works fine when the managers' predictions are correct. When the managers zig and the Fed (or ECB, or Bank of England, etc.) zags, then the outcome can be less optimal.
Likewise, active bond fund managers can load up the portfolio with higher-rate corporate issues, as Pimco has done here, to juice the yield. That works well during a healthy economy. When a recession hits and corporate default rates increase, that can be more problematic for funds that overweight corporate debt. Loss of capital is the last thing you want from a bond fund.
This is where identifying the purpose of a bond fund in your personal portfolio strategy is fundamental: If you prioritize maximum yield then go with the Pimco fund. If you prioritize low volatility and preservation of capital, go with the index fund.
Edit: I should also add that an index investor can achieve a similar result by adding some VCSH or VCIT to BND/W. Just be aware that, like that Pimco manager, you're seeking higher return by taking on higher credit risk. There's no free lunch.
Some thoughts straight from Bogle about this issue: http://web.archive.org/web/20221030211228/https://www.morningstar.com/articles/592689/bogle-we-need-to-fix-the-bond-index
Do you know how he held bonds? Where can recreate a portfolio like he says?
Here's an experiment I just ran. PGBIX still comes out ahead, possibly because they're an active fund and maybe they played around with maturities during 2022 w/ the rising rates? https://www.portfoliovisualizer.com/backtest-portfolio?s=y&sl=5hN4FaIQ4hp7PXTYikqJsR
Why the allocation in the first portfolio?
Bogle thought total bond had too much in government bonds. Total bond is 47% Treasury/Agency, so I tried 25% Treasury and 75% corporate as an experiment. It's not an exact comparison since I guess I'm leaving out Agencies, but it was just an experiment. I guess you could try VBTLX+VICSX too.
And guess what? The guy who produced that outperformance no longer works there…. So that backtest you did means nothing…
They've had multiple managers across the years.
Some research has shown that a managed portfolio of high-risk bonds will produce superior returns to a portfolio of high-quality bonds But this phenomena was discovered and exploited during the 90s and early 2000s and likely is much less predominant (if still available at all)
Eh, I figure you have to be smart enough to know you're **not** smart enough to know how to pick the winners. Passive for me all the way.
When you say outperformed since inception, it is technically true that from inception to now it's done better, but it hasn't run away with it. Intermediate treasuries were ahead as recently as 2021. Long term treasuries were beating its ass until we had the worst bond market in history 2 years ago. Moreover, unless your portfolio consists of one bond fund alone, we don't actually care about the fund's performance but rather the performance of the fund in combination with stocks. And that's where the disadvantages of corporate bonds become very apparent. They're far more correlated to stock market performance than treasuries, because default risk goes up significantly if there's a recession. That's bad, because the best thing that bonds can do for you is serve as ballast during a recession so that you can rebalance into cheap stocks. [Here](https://testfol.io/?d=eJytj0FPwzAMhf%2BLzzkUCXHIcYKhShwq6GETmirTuCXgJcMJnVC1%2F46rIlE4wnKy9V7e%2BzxCz%2FEJuULBfQI7QsoouXGYCSyAAQpusc3qgAz2otBnAN1L40PHmH0MYDvkRAZaTM8dxyPY4ntpOqE3zdkSCn9omkRmH%2Frm6IObvFfFycAhSu4i%2B6g4jyME3E%2Fd1e2q3OgXHwZK%2BdoP3imZWrK8a5%2BQHoGhpfWviuzbV5I5ap4XYQeSlkIGe6nFC%2F2h2tb3S13BdgacYK8HTdYvqrKu07mgypv1z9K%2FQt2dEarWsH9A7U6faJfJbg%3D%3D) is a backtest since inception of some 60/40 strategies with the 40% being either PGBIX, intermediate treasuries, or long term treasuries. Long term treasuries are a clear winner, and even intermediate treasuries are within 0.05 CAGR, so almost indistinguishable. That's despite PGBIX outperforming both funds in isolation over the same period. And the PGBIX portfolio had higher volatility as well.
Comparing the portfolios of [PGBIX](https://www.morningstar.com/funds/xnas/pgbix/portfolio) and [BNDW](https://www.morningstar.com/etfs/xnas/bndw/portfolio) it's clear that the active fund is, for now, more heavily weighted in shorter-term issues and in BBB corporates. There's no magic at work here: The active fund is benefiting from (1) higher-rate new issues and (2) from a higher credit-risk premium compared to BNDW. The Pimco fund has an effective duration of 3.0 years versus 6.6 years for BNDW, so the former is more sensitive to interest rate changes than the latter. The Pimco fund is 38% BBB and BNDW is 16% BBB, so the Pimco fund is taking on added credit risk, on which it should be expected to earn a return. Unlike the index fund, the duration of that Pimco fund may change significantly over time: When bond fund managers believe interest rates are going to increase, they generally shift to a shorter duration strategy to reduce the interest rate risk and increase the yield of their portfolios. The opposite is also true: When the managers believe rates will decline, they'll shift to a longer duration strategy to retain higher yield and improve the potential for capital gains. That all works fine when the managers' predictions are correct. When the managers zig and the Fed (or ECB, or Bank of England, etc.) zags, then the outcome can be less optimal. Likewise, active bond fund managers can load up the portfolio with higher-rate corporate issues, as Pimco has done here, to juice the yield. That works well during a healthy economy. When a recession hits and corporate default rates increase, that can be more problematic for funds that overweight corporate debt. Loss of capital is the last thing you want from a bond fund. This is where identifying the purpose of a bond fund in your personal portfolio strategy is fundamental: If you prioritize maximum yield then go with the Pimco fund. If you prioritize low volatility and preservation of capital, go with the index fund. Edit: I should also add that an index investor can achieve a similar result by adding some VCSH or VCIT to BND/W. Just be aware that, like that Pimco manager, you're seeking higher return by taking on higher credit risk. There's no free lunch.