wells fargo

Wake me up when they stop talking about bond funds

Why would you invest in a bond fund? It sounds like the most conservative of investments.

It isn’t. Bond funds, like the bonds they’re comprised of, offer yields that most stocks and mutual funds don’t. Bond funds can be volatile.

We examined the composition of the Wells Fargo Advantage Total Return Bond Fund (ticker symbol MNTRX), one of the biggest (if not the biggest) bond funds in existence. Here’s what it’s invested in:

That lists the fund’s 10 largest components, leaving 80% of the fund unaccounted for. So what’s missing?

Scroll to the bottom and in a tiny font it says “Click here for more complete holdings.” The hyperlinked part of the copy (“Click here”) isn’t even recognizable as a hyperlink.

How many bonds does MNTRX has a piece of? One Control Your Cash author guessed 50.

It holds 569. That’s not every bond in existence, but it’s plenty. We can’t fit the entire list on one page, nor would you want to read it, but here’s as much as we could cram into one screen cap.

If you can’t be bothered to look through all 569 components, this summary breaks them down by sector and grade.

The bonds typically pay interest quarterly, so there’s always money going in and coming out, thus the fund has to have cash reserves, therefore MNTRX’s primary component is a money market fund with readily accessible cash. (The rare “so/thus/therefore” hat trick.) Understandably, that money market fund is a Wells Fargo security too.

What about the actual bond components of MNTRX? First, notice how many U.S. Treasurys are on there. Makes sense, seeing as those are the only investments “backed by the full faith and credit of the U.S. government,” to the extent that that phrase still means anything.

But that’s only a small part of the story. The top 22 bond components include:

9 Fannie Mae
6 U.S. Treasury
3 Ginnie Mae
2 Freddie Mac

Not long ago we explained as best we could how Fannie Mae and Freddie Mac are hundreds of times more rapacious than an entire investment bank full of Bernie Madoffs could ever be. Also, Fannie Mae and Freddie Mac investments come with no explicit governmental guarantee. So why would Wells Fargo, a profit-seeking company, invest in Fannie Mae and Freddie Mac bonds?

Because the ruse that they’re not backed by the government (and thus, you) is laughable. For all practical purposes, when the so-called “government-sponsored enterprises” run low on funds, the Department of the Treasury bankrolls them to whatever extent they can get away with.

Go to the second item in the list of components. The simple designation “FNMA” tells you little about the particular bond that the Wells Fargo fund is invested in. You have to look at the next column over, which contains a 9-character string called the CUSIP (Committee on Uniform Security Identification Procedures) number.

The first 6 digits of a CUSIP number tell you who the issuer is, the following 2 what type of security it is (debt or equity). The final digit is a check digit. There are a handful of online indices that let you search for a CUSIP, but they’re all either incomplete or they cost money. Your best bet is to just Google the CUSIP. Oh, is that too inconvenient for you? 20 years ago you’d have had to go to a broker’s office and look it up in a book. The second item on the list of components, 912828RM4, is listed as

U.S. Treasury Note, coupon rate of 1%, maturing October 31, 2016.

We’ll do the next 8, too:

912828RF9
U.S. Treasury Note, coupon rate of 1%, maturing August 31, 2016.

The only difference between the two is the maturity date. They each pay semiannually, and they’re each rated AAA.

912828RX0
U.S. Treasury Note, coupon rate of ⅞%, maturing December 31, 2016.

31402CVV1
Fannie Mae bond with a 6% pass-through rate, maturing March 1, 2034.

“Pass-through” rate means what the bond pays after the issuing agency takes its cut.

01F032617
Fannie Mae bond, 30-year term, 3½% coupon, 30-year term.

We can do this all day, but what does it mean?

In 2012, if you’re investing in a bond fund it’s because you want a higher return than you’d get from a certificate of deposit. You have to go all the way down to the 28th item on the list before finding a true corporate bond, that one being from Citibank’s Omni Master Trust series.

A whole bunch of federal government debt, interspersed with a handful of Extended Stay America and Bank of Montreal bonds. Does that mean that anyone with a list of bonds and a list of criteria could create a bond fund comparable to this one from Wells Fargo? Possibly.

Bond yields are extremely low right now. The yield on a 5-year Treasury Inflation-Protected Security is -.94%. Yes, negative. That’s more a function of the (steep) price it last traded at, than of how long it’ll take to mature. (10-year TIPS yield a slightly more rewarding .40%.) This is what happens when the Fed sets rates artificially low, essentially 0 for an extended period. You buy a bond with a negative yield when you’re anticipating that inflation will come, but hard. Keep in mind, we’re talking specifically about TIPS. Other treasurys don’t protect you against inflation. Nor do they protect you against deflation: should that happen, a TIPS will pay you the face value at maturity.

Oh yeah, the price. You can buy a share of MNTRX for $12.96 right now, which is almost the $13.10 it’s peaked at multiple times in the last couple of years. MNTRX debuted in 1997 at $12, and has never fallen below the $11.05 it sank to in 2000. A safer investment with less variance than a stock? Yes. A way to get rich? Probably not, unless the economy at large goes Greek. But a bond fund is a way to preserve your wealth while saving yourself from the risk of only having a couple of bonds in your portfolio and having them underperform. Unlike a bond itself, you can sell your position in a bond fund almost whenever you want.

This article is featured in:

**The Carnival of Personal Finance #350: The Little Prince’s Journey to Financial Enlightenment**

If you haven’t used a Wells Fargo ATM lately, you’re really missing something. They now let you deposit checks without an envelope. You can even buy stamps. And, they provide you with free corporate propaganda. To wit:

This is the most misleading, unhelpful, counterproductive advice offered by a major financial institution since BankAmericard (VISA’s predecessor) used the ridiculous slogan “Think of it as cash.”

Despite what Wells Fargo tells you, don’t think of anything as “extra” money. There is no extra money. Not for you, not for Carlos Slim Helu. We’re all slaves to scarcity – it’s what forces us to make choices, opting for the college fund over the Bora Bora trip. (Although if you’re going to study English or philosophy, the latter might be the better buy.)

This is the same fallacy that gamblers use to rationalize with when they win on their first spin of the slot machine. “It’s OK if I lose it. I’m playing with the house’s money.”

By that logic, it’s no big deal to lose your entire paycheck. After all, you’re playing with your employer’s money. Which makes about as much sense as a bank considering “bonuses” to be a separate class of money distinct from the kind that comes in your salary.

If it’s yours, it’s yours. It doesn’t matter whether you spent hours in the hot sun harvesting watermelons to earn it, or if you found it on a street corner. It’s all green to the salesman at the yacht store, or wherever else you decide to squander it. (And don’t kid yourself: the yacht salesman doesn’t think of the money he receives from you as “extra.”) If you’re going to spend some of your money intelligently – say by buying undervalued stocks, or refinancing your house should interest rates have fallen enough – why wouldn’t you spend all of your money intelligently?

Look; unlike some people, we don’t make it a habit of bashing commercial banks just for existing. A lot of this country’s collective personal financial pain of the last few years could have been avoided if people had spent a few minutes reading the agreements they’d made with banks before signing those agreements. You shouldn’t begrudge Wells Fargo one dime of what they take in credit card interest payments. Nor was it wrong for them to foreclose on the house of anyone who refused to honor their mortgage.

But this seemingly innocent ATM screen “tip” belies something more sinister. The implicit message is that instead of investing your bonus or tax refund yourself…well, Wells Fargo has an idea as to who might do it better.

“Set aside this money in your savings account”? Wells Fargo’s basic savings account requires you to keep at least $300 in it. Do that, and they WON’T charge you a monthly $5 service fee:

$5 a month = $60 a year = at best, a -20% rate of return on your money.

Never mind that if you want to keep $299.99 in your account, it costs Wells Fargo a miniscule fraction of a penny to “service” it. The remaining $59.9999…. is pure profit for almost no incremental effort or risk on their part.

But if you’re enough of a fat cat to keep $300 in your new Wells Fargo savings account, gently recommended by the friendly reminder on the ATM screen, you’ll enjoy the bank’s generous interest payments.

Of .03%.

In other words, if you keep $299.99 in your account, doing so will cost you $60 over the course of a year. But if you keep $300 in your account, you’ll be 9¢ ahead.

That’s in current dollars, of course. If inflation stays higher than .03%, which it will, you’ll still be losing money regardless of how much you keep in your savings account. Meanwhile, the bank will be loaning out your ready cash at far greater rates.

But you don’t have to earn a better return on this savings account balance – after all, it’s just “extra”, right?

If you don’t need your bonus to feed and clothe yourself with immediately, then put it in your 401(k). If your tax return (which you shouldn’t have received anyway, because it meant the IRS enjoyed your money interest-free all year long) is burning a hole in your pocket, invest the money in a depressed commodity. Or use it to further reduce an outstanding debt.

The rule remains eternally valid: Always look at a transaction from the other party’s perspective. What are they getting out of it? In this case, they’re getting near-unfettered access to your money.

And nothing is worth that.

**This article is featured in the Carnival of Personal Finance #318: The Breaking Bad Edition**