Schwab YieldPlus Fund, sold as an alternative to low-risk money-market accounts, struggled this year. The $4.9 billion fund, run by a five-member...
Schwab YieldPlus Fund, sold as an alternative to low-risk money-market accounts, struggled this year.
The $4.9 billion fund, run by a five-member team at Charles Schwab, seeks to generate “high current income with minimal changes in share price,” according to the San Francisco-based company’s Web site. Assets have dropped from about $10.6 billion in August, spokeswoman Sondra Harris said.
The fund lost 11 percent this year through March 17, ranking last out of 50 “ultrashort” bond funds tracked by Morningstar, the Chicago-based research firm. SSGA Yield Plus, managed by Boston-based State Street Corp., was next with a 10 percent decline. The category fell an average of 1.12 percent through March 17.
“It’s a combination of unprecedented market conditions and also a bolder investment approach,” said Miriam Sjoblom, a fund analyst with Morningstar.
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About 38 percent of the YieldPlus fund was invested in nonsubprime mortgage securities without guarantees from government-chartered Fannie Mae or Freddie Mac and about 9 percent in asset-backed securities including subprime-loan bonds as of Dec. 31, according to the latest disclosures on Schwab’s Web site. About 34 percent of the fund was in corporate bonds.
The fund’s stumble reflected the rapid pace at which a debt-market collapse that began with subprime mortgages, those made to borrowers with poor credit histories, spread to other securities, including home loans considered less likely to default.
Ultrashort bond funds were marketed to investors as a higher-yielding alternative to money-market funds, which offer a combination of safety and liquidity, or as a way to have quick access cash. The substitutes buy short-term debt, including subprime, and have fewer investment restrictions than money funds.
Money funds are considered the safest investments besides bank accounts and government debt. They’re required to hold debt that matures in 13 months or less and maintains top short-term corporate debt ratings. Morningstar gives the YieldPlus fund two stars of a possible five. YieldPlus has a three-year Sharpe ratio of -1.2, compared with -0.97 for competing funds, Morningstar’s data show. A higher Sharpe ratio means better risk-adjusted returns.
Cash as a percentage of holdings increased to 15 percent, according to Harris, the Schwab spokeswoman. The fund had 2.3 percent cash on Nov. 30.
As of Oct. 30, the Schwab Retirement Income Fund held 1.6 million shares in the YieldPlus fund. Four other Schwab retirement-date funds are also listed as shareholders.
YieldPlus seeks to keep the average duration of its portfolio at one year or less. The fund lost 1 percent in 2007, compared with an average 4.1 percent gain by rival funds, according to Bloomberg data.
“It was never, ever considered a risky fund and we continue to manage the fund in the best interest of our shareholders,” Harris said.