When Your Bond Fund Is An Equity Fund

Have you seen the disparaging memes that go something like "if your boyfriend doesn't know how to drive a stick shift, well then ladies, you have a girlfriend"?

That was running through my head as I read this shocking article about the AlphaCentric Income Opportunities Fund (IOFIX). Here's the chart and if your bond fund has a double digit CAGR for four or five years in a row, well then fund holders, you have an equity fund.

 

Read the article. The short version on the fund is that it invests heavily in illiquid, low grade, volatile mortgage derivatives. Then there's the part of the story about trying to manipulate how their holdings were marked to market which I think is why the chart looks so smooth right up until it crashed...both times.

One thing I've always written about is new funds or funds that are new to me. A part of that leearning process is to want to understand what the fund should look like on a chart, what is it a proxy for? I try to figure that out when I am analyzing a fund or I ask it directly when I'm speaking to someone from the fund company. A fund can be a proxy for something else, like merger arbitrage being a proxy for fixed income IMO, have an expectation for how volatile it should or should not be or set an expectation for low or high correlation to something else. Gold or managed futures are examples of niches that tend to have a low to negative correlation to equities more often than not. 

There are no absolutes and nothing is infallible but if you're looking at IOFIX in late 2019 to add to your fixed income portfolio, it's not that difficult to look at the 4+ year period and think it doesn't look like a bond fund, it looks more like an equity fund. Something that can go up like an equity fund, can go down like an equity fund too. 

That is born out YTD

 

And during the 2020 Pandemic Crash.

 

If you buy a fund that you expect to behave like an equity and it goes down 25% in a down 20% world, bummer but that's kind of in the ballpark. You don't expect that kind of decline from a bond proxy and of course I'm saying IOFIX is not a proxy for bonds. That longer maturity bond funds have gotten hit so hard is course a rarity that caught many investors off guard, saying that 60/40 has failed this year despite the risk of a year like this being in our faces for many years. 

New thought; 60/40 hasn't failed this year, it failed years ago when it first started exposing investors who held long duration in their 60/40 to the risk of a year like 2022. Investors feeling the full brunt this year are simply now facing the consequence of taking a risk they didn't know they've been taking for ages. Ouch.