SGVIX: A Bond Mutual Fund For People With Few Options
Summary SGVIX has underperformed alternative options with lower expense ratios. Some employees that have their employer-sponsored accounts through fidelity may find SGVIX is the only government bond option available under tier 1 or tier 2. SGVIX has not done as poorly as I would expect based on the difference in expense ratios, but it still falls short compared to either intermediate treasuries or MBS. Fidelity does have good treasury mutual funds, like FLBAX, but employees are at the mercy of their retirement plans. The Wells Fargo Advantage Government Securities Fund (MUTF: SGVIX ) is one of the new tier two options for some employees that have their employer-based retirement accounts going through Fidelity. This is an area of interest for me because my wife recently received some literature on the new tiered options for her account. Since I handle my wife’s retirement accounts, she dropped the documents on my desk. That puts me in the unfortunate position of having to choose from a severely limited lineup of funds. The best mutual funds by fidelity have been removed from the options and investors that fail to either deal with more headache by creating a brokerage-link account or select new options will find themselves automatically defaulted to a target date plan based on their projected retirement age. There is nothing fundamentally wrong with target date plans. However, investors are stuck with being clumped together by age regardless of risk tolerance. If you are experiencing this kind of change to your retirement plan, you may notice some major problems with the literature sent out. For instance, in 19 pages there were precisely 0 actual expense ratios mentioned. If you happen to be given the same options that were available for my wife, this is the only government bond fund included in the tier 2 options. If investors want to assign an allocation specifically to government bonds, this is the only choice. Why You May Want Government Bonds Mid to long duration government bonds show a strong negative correlation with the stock market which makes them a great tool for diversifying portfolio risk. When an investor takes a small position in the long term government bonds they can immediately and materially reduce the total volatility of their portfolio because the bonds will often move up when the market moves down and move down when the market moves up. This is great for investors that would like to see a lower level of total risk and it makes government bonds a desirable asset class even though their interest rates are currently very low. For comparison sake, I ran a comparison including a couple of ETFs. I’m using the Schwab Intermediate-Term U.S. Treasury ETF (NYSEARCA: SCHR ) and the Vanguard Mortgage-Backed Securities Index ETF (NASDAQ: VMBS ). Hypothetical Portfolio I ran a quick hypothetical portfolio over the last 5 years and one month of data. Theoretically, the only reason you would own SGVIX is because it is the only option available, but for comparison sake I’m putting it in a very simple portfolio. (click to enlarge) You’ll see immediately that SCHR is offering a beta that is further into the negative territory which indicates that it will do better at offsetting the risk from a portfolio that is heavy on domestic equity. On the other hand you’ll see a lower beta for VMBS as investors may be less prone to buy into MBS when they are fearful of negative moves in the market. As a result, the negative beta is fairly low. The interesting thing about this sample period is that the total return on SCHR and the total return on VMBS are both superior to the total return on SGVIX. Correlation The chart below shows the correlation of each ETF or mutual fund with each other. Blue boxes indicate positive correlations and tan box indicate negative correlations. Generally speaking lower levels of correlation are highly desirable and high levels of correlation substantially reduce the benefits from diversification. You can see immediately that SGVIX has a higher correlation with SCHR than with VMBS and that makes sense since the portfolio in SGVIX better resembles SCHR than VMBS. The Holdings The chart below shows the holdings: (click to enlarge) As you can see, there is a mix of treasury securities and mortgage related securities. Due to that mix, I felt it was most appropriate to compare SGVIX with both a treasury ETF and a MBS ETF. Maturity The following chart shows the distribution of maturities in the portfolio. One major weakness here is that the portfolio is so heavily focused on the short term that it is incapable of providing a higher negative beta. The other issue is that such a strong short term focus results in weaker levels of income because the yield curve is currently providing materially higher interest by the time we look 3 to 7 years out than when we are looking at maturities under 2 years. Expense Ratio The biggest problem here, a reason that I expect SGVIX to consistently underperform similar investments is that the mutual fund carries a hefty net expense ratio of .49%. It is also showing a remarkable portfolio turnover rate of 349%. Despite heavy trading, it just can’t keep up with funds like SCHR which has an expense ratio of .09% or VMBS which has an expense ratio of .12%. Since the expense ratio is about .4% higher and the time period is about five years, I would estimate that it should underperform by about 2% during that time span. In that sense, the fund has done very well since it only underperformed VMBS by .4% and SCHR by .8%. The managers are creating value through intelligent security selections, but it is has not been enough value to pay for the higher costs. Conclusion Despite solid management, the expense ratio on SGVIX puts it in a constant uphill battle to try to stay even with lower expense options. Unfortunately, some investors may find their investing options severely restricted. The portfolio is designed reasonably well, but investors aiming to reduce portfolio risk as rapidly as possible would benefit more from using longer duration treasury ETFs to gain their diversification benefits with a smaller allocation. The only rationale I see for restricting investor’s choices is to push them into funds with substantially higher expense ratios. As I have been going over several of the funds, I’ve found the best options that were previously available have been entirely removed. It isn’t like Fidelity has no low cost long duration treasury funds. The Spartan® Long-Term Treasury Bond Index Fund – Fidelity Advantage Class (MUTF: FLBAX ) would have been a solid option and has an expense ratio of only .1%. For investors that have that fund as an option in their retirement account, I would take it in a heartbeat over SGVIX. FLBAX is far more volatile than SGVIX, but a beta of negative .47 means a fairly small allocation in the portfolio would be enough to counteract the positive betas from a portfolio that is heavily invested in the S&P 500 or a broad market index. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) 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: Information in this article represents the opinion of the analyst. All statements are represented as opinions, rather than facts, and should not be construed as advice to buy or sell a security. Ratings of “outperform” and “underperform” reflect the analyst’s estimation of a divergence between the market value for a security and the price that would be appropriate given the potential for risks and returns relative to other securities. The analyst does not know your particular objectives for returns or constraints upon investing. All investors are encouraged to do their own research before making any investment decision. Information is regularly obtained from Yahoo Finance, Google Finance, and SEC Database. If Yahoo, Google, or the SEC database contained faulty or old information it could be incorporated into my analysis.