Bond Mutual Funds

This may be a stupid question, but I bought a highly-rated bond fund at the beginning of 2007 (FSICX) which has been losing money ever since. Because of dollar-cost-averaging and interest I’m not breaking the bank but I’m still down still down. My question is, as interest rates have plummeted, why has this continued to lose money? I can understand that with the credit crisis there is less liquidity, and spreads rise, and some bonds may be in fact “junk”, but shouldn’t the massive decline in interest be a stronger influence than all of this, especially since its top holding are gov’t securities? This seems to go against what you read in the CFAI text.

Whodey: I’ll take a stab at this, as this is new to me as well. FSCIX Strategy: Investing primarily in debt securities by allocating assets among four general investment categories: high yield securities, U.S. Government and investment-grade securities, emerging market securities, and foreign developed market securities. The fund uses a neutral mix of approximately 40% high yield, 30% U.S. Government and investment-grade, 15% emerging markets, and 15% foreign developed markets. Engaging in transactions that have a leveraging effect on the fund. It appears that this is more so of a high-yield fund and when you first got in, the credit spread may have been lower. With 40% in high yield and 15% in emerging markets, my guess is that as everyone sold to get in to treasuries/investment grade (flight to quality), it increased yields, therefore, decreasing your bond prices… Just an “educated” guess though…

Still down still down? You’re up a perent or so this year and last year couldn’t have been too bad. Geez, I’ve lost 10% in a day…

JoeyDVivre Wrote: ------------------------------------------------------- > Still down still down? You’re up a perent or so > this year and last year couldn’t have been too > bad. Geez, I’ve lost 10% in a day… it’s not like i’m losing sleep over it, I’m just trying to figure out the underlying dynamics in the context of what I’ve been reading lately, obviously hardly anything in real life is ever “text book” as the reading would lead you to believe

It’s surely a credit spread issue as soxboys suggested. All those huge losses from financial firms are from products that aren’t very far away from some of the stuff that could be in your portfolio. When you bought this fund, you took on lots of credit risk, spread risk, interest rate risk, and even country, tax, and FX risk from international bonds. Since the turnover is pretty high, you took on manager risk (although I have a high opinion of the guy running the fund).

OK, that makes sense, thanks for the info Joey and soxboys