August 28, 2024
Dear Investors and Friends,
In the world of investing, there’s often a temptation to follow the crowd, especially when it comes to popular funds. The Vanguard Total Bond Market Fund, the largest bond fund available with approximately $300 Billion in assets, is a prime example. With its widespread appeal, many investors might assume it's a safe bet. However, a closer look at the numbers tells a different story.
Performance Matters: Comparing Returns
Over the past 10 years, ending June 30, 2024, the Vanguard Total Bond Market Fund (Ticker VTBIX) has delivered an annualized return of just 1.26%. For an investor seeking steady growth and reliable income, this return falls far short of what’s possible with a more strategic approach to bond investing.
Let’s compare this to our own strategies. Our short duration high yield corporate bond strategy achieved a robust annualized return net of fees of 6.57% over the same period. Meanwhile, our tax-equivalent net return in our municipal bond strategy was 4.84%.
These figures aren’t just higher, they represent a significant difference in what’s possible when you choose a more tailored approach rather than sticking with a one-size-fits-all solution.
Direct Bond Ownership vs. Bond Funds
But there’s more to consider than just returns. When you invest in a bond fund like the Vanguard Total Bond Market Fund, a frequently overlooked issue is that, as an investor, you are essentially buying an equity that owns a pool of bonds. While this can offer convenience, it also comes with limitations—most notably, the lack of control over the specific bonds in the portfolio. In contrast, when you work with a boutique firm like ours, we build your portfolio with individual bonds in a separately managed account (SMA). This approach gives you direct ownership of the bonds, allowing for greater transparency, customization, and control over your investments.
The Advantage of Boutique Management
The sheer size of large funds like the Vanguard Total Bond Market Fund often forces them to allocate capital across a broad spectrum of investments, including those with mediocre return potential, simply to stay fully invested. Boutique firms like ours, with more manageable asset bases, can be nimble and selective on behalf of our clients. We have the flexibility to pursue smaller, high-quality opportunities that larger funds might overlook or be unable to capitalize on due to their size.
This ability to focus on the best ideas, coupled with the benefits of direct bond ownership, is a key reason why our performance has outpaced that of larger funds. By carefully selecting bonds and managing them actively in SMAs, we’ve been able to deliver much better outcomes for our clients. Our approach is rooted in deep market analysis, selective bond picking, and a focus on maximizing returns while managing risk.
Key Takeaways for Fixed-Income Investors
Don’t be swayed by the size or popularity of a fund, look beyond the surface, understand the actual risks and potential returns, and choose strategies that align with your financial goals—whether that means achieving higher returns, maintaining greater control over your investments, or both. In a world where every percentage point counts, following the crowd could mean leaving significant returns on the table or taking unnecessary risks.
RCM’s Approach
RCM helps our clients navigate the complexities of the bond markets. Specifically, we create customized portfolios of individual bonds in separately managed accounts tailored to the specific needs of each client. This helps our clients achieve their financial objectives with greater confidence.
Please don't hesitate to reach out with any questions or comments. Thank you for entrusting RCM with your capital; it's a privilege to serve you.
Warm Regards,
David and Mike
Disclaimer
Roosevelt Capital Management LLC is a registered investment adviser. The information presented is for educational purposes only and is not intended to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.
Past performance is not indicative of future performance. Principal value and investment return will fluctuate. No guarantees or assurances that the target returns will be achieved, or objectives will be met are implied. Future returns may differ significantly from past returns due to many different factors. Investments involve risk and the possibility of loss of principal.
While all the values used in this report were obtained from sources believed to be reliable, all calculations that underly numbers shown in this report believed to be accurate, and all assumptions made in this report believed to be reasonable, Roosevelt Capital Management LLC neither represents nor warrants the values, calculations or assumptions and encourages each prospective investor to conduct their own review of the audits, values, calculations and assumptions.