Mon, 15 Jul 2013
As yields rose, both taxable- and municipal-bond funds saw record monthly redemptions in absolute terms in June.
Christine Benz: Hi, I'm Christine Benz for Morningstar.com.
Rising bond yields meant a tough month for fund flows in June 2013. Joining me to discuss the latest data is Michael Rawson. He is a fund analyst with Morningstar.
Mike, thank you so much for being here.
Michael Rawson: Thanks for having me, Christine.
Benz: As I said, Mike, it was a month in which we saw bond yields creep up about 80 basis points, and we saw a lot of bond funds have pretty significant losses. So it's probably not surprising that investors were doing some selling.
Rawson: It was just a terrible month in terms of bond flows. Both taxable-bond and municipal-bond funds lost the most money that they've ever lost on record. So very strong outflows.
Now, of course, those category groups have grown tremendously over the past several years, particularly last year when they had such strong inflows. So on a relative basis, divided by assets, the outflows weren't as strong as they were back in October 2008, during the height of the financial crisis.
Looking at the longer timeframe, outflows were much larger and more sustained back in 1994. 1994 was a year in which the Federal Reserve raised interest rates, and bond funds did pretty poorly that year. So hopefully this isn't a sign of things to come, but … we have [seen] a lot of interest rate increase in a very short period of time, and very rapid outflows.
Benz: When you look at the categories that have seen the biggest outflows recently in terms of taxable bonds, where have investors been concentrating their sales?
Rawson: Almost all of the taxable-bond categories had strong outflows, whether it be intermediate bond, government bond, and even the inflation-protected bond funds, emerging-market bond funds. It was pretty surprising that so many of the different categories saw strong outflows; high-yield bond was another one. So not only was it a spike in interest rates, which affected the safe Treasury bonds, but also there was kind of a liquidity issue and investors got skeptical about emerging-market areas and other high-risk areas. So they saw outflows as well.
Benz: Performance certainly was tough in some of those categories, too, such as emerging-markets bond.
Let's talk about PIMCO Total Return, which had been for several years one of the biggest asset gatherers in terms of new inflows. We've recently seen some pretty big shareholder redemptions there.
Rawson: Absolutely. So last month in June they lost about $9.6 billion, which is quite a lot considering that in 2012 they gained about $18 billion in assets, and it put them up there among the top-gaining funds of all 2012. We saw almost half of that go out of the fund in just a month.
I guess it shouldn't be too surprising, because we know Bill Gross has placed a lot of bets in some of those other fixed-income categories that we just discussed that had strong outflows, whether it be emerging-markets bond, Treasury inflation-protected securities. Those categories did very poorly, and maybe investors have seen that and pulled away from PIMCO Total Return.
Benz: So relative performance there has not been particularly good?
Rawson: I think PIMCO Total Return lost about almost 3%, and that's in line with the index. But certainly bond investors don't like to see losses.
Benz: Absolutely. Let's talk about Vanguard, another firm that had been in asset-gathering mode, and has done very well in terms of gathering new flows. It had a rare month of outflows in June. What funds were investors selling from the Vanguard lineup?
Rawson: It was a very rare month. In fact, you'd have to go back almost 20 years to see outflows from Vanguard, the firm as a whole. Normally when we talk about fund flows, we're talking about just long-term funds. We exclude money market funds, because those tend to be quite volatile in terms of money going in and out. But if you include money market funds, Vanguard actually had an outflow last month--again, the first time in about 20 years.
The funds which led the outflows last month for Vanguard were their Total Bond Market Index Fund, so no surprise there, but also their High-Yield Corporate Bond Fund, their Inflation-Protected Securities Fund, and their GNMA Fund also has had some weak flows over the past several months.
Benz: Were there any bright spots for bond fund flows? Any categories that did see inflows, in fact?
Rawson: Out of the 14 categories that Morningstar tracks, there were three categories that actually had inflows, and those were non-traditional bond, ultrashort bond, and bank loan, [which] had strong flows. So what do those three categories have in common? It's the duration, very short duration. So one of the top-flowing funds this year has been Oppenheimer Senior Floating Rate Loan; that has a duration of about three months, so very short duration.
Benz: That's a bank loan?
Rawson: Bank-loan fund. So PIMCO Unconstrained is in the non-traditional category. That has a duration of about a year to a year-and-a-half. So that's longer than the bank-loan fund, but still quite shorter than PIMCO Total Return.
Benz: Do you have a sense, Mike, since investors were pulling [money] from their taxable- and muni-bond funds, where they were putting it besides these sort of noncore bond categories? Any other categories that in fact were seeing inflows?
Rawson: It's hard to say, because money market funds actually had outflows last month. But one of the category groups that has done well is international stocks. International stocks gained about $7 billion to $8 billion last month, and in particular, one of the funds that we're watching is Oakmark International. This fund has had strong flows and very strong performance. So over the past one year, the fund has nearly doubled in size. In fact, I think for the one-year period, the fund is up about 47%, whereas the category is up only about 20%. This is a Gold-rated fund. It's run by David Herro, and it's had just tremendous performance and very strong flows.
Benz: Performance-chasers, though, maybe ought to be aware that that is a fund that's sometimes streaky, not always at the absolute top of the charts, even though it's a fund that we like quite a bit.
Benz: Mike, thank you so much. It's always great to hear your insights on the latest in fund flows.
Rawson: Thank you, Christine.
Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.