When writing this series of articles for retired investors looking for income, I wanted to write about a fund that is commonly found in 401k options. As many of you know, most Americans do not have the freedom to pick any investment they want in their qualified retirement plans at work. If you are lucky, one who has a bond fund such as The Bond Fund of America (ABNFX), I recommend you take a look at allocating some of your assets here. When doing some recent consulting for a small business pension plan, I came across the ABNFX. I was shocked to find a fund that has been around for over five decades, that I could back-test thoroughly for the plan participants.
(Source: The American Funds)
ABNFX is a high-quality core bond portfolio with broad diversification. The fund has the ability to invest in every sector of the bond market, with a limited number of below-investment-grade holdings. This approach historically has helped to diversify equity risk in a portfolio. Let's get to work and break down what the ABNFX pays its shareholders and what its risk metrics are.
The Average Yield To Worst
The average yield to worst yield calculation is a little different than the typically used distribution yield. This metric is used to evaluate the worst-case scenario for yield to help investors manage risks and ensure that specific income requirements will still be met even in the worst scenarios. With a current average yield to worst of 2.8%, the fund is offering yields competitive to that of most core bond funds out there. The yield to worst is an important measurement to use when a fund holds bonds that are callable, which many bond mutual funds do.
ABNFX Is A Fund That Can Help Retired Investors Stay On Track
I am a big believer that we need balance in our lives, let alone your investment portfolios. When I saw the graphic below that American Funds created for ABNFX, I knew I had to use it here. The graphic does a great job of summarizing why it's so important to own a core bond fund in any portfolio. When the markets sold off at the end of the year, the ABNFX provided a positive 1.5% return while equities fell -19.4%.
(Source: American Funds)
This is a point I can't stress enough for those who are in retirement, or near retirement. The power of owning any solid core bond like ABNFX can provide you reduced risk in your portfolios. Most investors cannot experience a drawdown of 12-20% in nature when trying to preserve capital and keep up with income needs.
ABNFX Risk Metrics
Anyone who is a follower of mine knows I am all about running the risk metrics of any fund, or any financial instrument. Even though ABNFX seems like lower risk from the cover, it is still really important to take a look inside at the metrics.
|Arithmetic Mean (monthly)||0.40%|
|Arithmetic Mean (annualized)||4.91%|
|Geometric Mean (monthly)||0.40%|
|Geometric Mean (annualized)||4.86%|
|Downside Deviation (monthly)||0.45%|
|US Market Correlation||0.13|
|Treynor Ratio (%)||153.61|
|Historical Value-at-Risk (5%)||-1.05%|
|Analytical Value-at-Risk (5%)||-1.11%|
|Conditional Value-at-Risk (5%)||-1.57%|
|Upside Capture Ratio (%)||12.56|
|Downside Capture Ratio (%)||-8.35|
|Safe Withdrawal Rate||12.61%|
|Perpetual Withdrawal Rate||2.94%|
|Positive Periods||86 out of 125 (68.80%)|
When looking at bond fund risk, I look at how much the fund could fluctuate in price per year. The annualized volatility of the fund is around 3.18%, which is great if you have become more conservative with age. The beta which is how a security reacts with the overall market stands at .13. This measurement proves the fund will only move with the markets 13% of the time. You want this type of number in order to have a diverse portfolio. One more figure that is attractive to me here is the positive periods. Out of the past ten years, 86 months out of 125 have been net positive.
Under The Hood
Any investment fund you purchase, you have to take a look at where the money is invested.
|Global ex-US Developed Markets||0.00%|
As you can see from the above chart, The Bond Fund of America is mostly invested in treasuries and corporate bonds. The average duration of these notes is around 5 years. This is very comparable to that of the Barclays Aggregate Bond Index (AGG).
When looking at your portfolio in your 401k or 403b this coming month, take a look at what your bond allocations are and what you can purchase. Certain qualified plans offer this core fixed income fund from American Funds. If they don't, you could purchase some shares in your IRA or individual cash account. As you get older, and as equity markets reach new highs again, it is important to allocate assets to a fund like ABNFX. With an expense ratio of around .33% or 33 basis points, it can be worth paying a very slight premium for active management. Owning an active bond fund like this could be a great choice for you as it has been around since 1974. Many investors do not check when a fund was created and what the experience is of the fund managers themselves. With over $44 billion in assets under management, it is clear that ABNFX is a popular choice with other investors as well.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Ortner Capital consults pension clients who could own ABNFX. These opinions are that of Mr. Josh Ortner, CTFA. Please consult a certified professional before acting on any article. Ortner Capital receives no compensation from American Funds.