Jason Stipp: I am Jason Stipp for Morningstar. We are about two-thirds of the way through 2010 now. We thought it would be a good time to take a step back and talk about some of the things that surprised us this year. Here with me to offer her take is Morningstar's Christine Benz. She's director of personal finance for Morningstar.com.
Christine, thanks for joining me.
Christine Benz: Jason, nice to be here.
Stipp: So, 2008, I think surprised a lot of folks in a big way on the downside, 2009 may have surprised some folks with the strength of the recovery.
2010 the market has been much more flattish. It hasn't been that flashy. There have been some moments of up and down, but there were some surprises in 2010. So, I think a good one to start out with is some performance numbers, and one that really jumps at you when you look at the categories, is Treasuries. What are you seeing on Treasuries?
Benz: Well, long Treasuries, the typical long-government fund in our database has gained something like 24% year-to-date. And Jason, coming into this year, there was really a lot of smart money converging around the idea that Treasuries would not be the place to be in the bond market, and long Treasuries in particular, a lot of people thought could be vulnerable if the economy continued to pick up steam, rates went up; they could be just a sitting duck. But Treasuries, long Treasuries have outperformed really every other asset class in our database year-to-date.
And the lesson to me--and I'll say that I was a person saying that you might want to downplay long Treasuries as a component of your portfolio or Treasuries generally--the lesson is that, don't cast your lot, if you're a bond investor, with these all-or-nothing scenarios. You've got to prepare for one or the other scenario to pan out, so while you do want to leave open the room for some sensitivity to an economic recovery, you also do want to have Treasuries or government bonds, which will tend to perform best in a period of weakness like we seem to be in right now.Read Full Transcript
Stipp: And certainly things like the European crisis that we saw and the Flash Crash just added to all those jitters that folks were having as the economic data started to slow down, so having those Treasuries as a part of your portfolio would have helped certainly this year.
Stipp: Another sub-segment of that that is kind of interesting is TIPS. These are the Treasuries that offer some adjustment for inflation. And inflation certainly has been pretty mild--so you might expect that people wouldn't be looking at TIPS right now since it doesn't look like inflation will happen for a while, but they've done pretty well.
Benz: Right, deflation has been all of the buzz lately, but what we've seen even within the past month where there has been a lot of talk about deflation, double-dip recession, et cetera, we've seen actually tips have done all right. And all I can think is that investors must be just looking at the Treasury piece of that and that's partly why TIPS have behaved relatively well in an environment when you wouldn't expect them to.
Stipp: Certainly an interesting phenomenon.
Also, I think a curious one is real estate. This is a fund category that's been up 13%. We just went through real estate crisis, but people seem to be putting some money into real estate more than other fund categories. What do you think is behind that?
Benz: Right. So, these are REIT funds, commercial real estate funds. I think there are a couple of things going on, Jason. And yes, I would agree that REITs are generally thought of as pretty economically sensitive, but the sector isn't a monolith, so actually have REIT categories that will tend to perform reasonably well in periods of economic weakness. So, some of the health-care REITs, some of the apartment-related REITs, in a period where people are leaving their homes and instead opting for apartments, you might expect them to hold up reasonably well.
And also, they were coming off such lows, REITs in general, that they did have some room to run up. Now though, it's my fear that what we're seeing is some performance/yield chasing. So the category has performed well. Yields, while not high relative to REIT norms, are relatively high alongside bonds. So, I think investors might be doing a little bit of performance-chasing here, and that's worrisome.
Stipp: Fund Analyst, Andy Gogerty wrote in a Fund Favorites & Red Flags this week that his take on real estate is that, your allocation to real estate probably should be on the lower end of your target just because we have seen such a runup in that area and there still are some clouds on the horizon for parts of it.
Benz: Sounds like good advice to me, Jason.
Stipp: Another interesting one to look at is style and market-cap size. And I think there are some interesting trends there given what you would expect to see in a shaky economy and what we're actually seeing. How is that playing out?
Benz: Well, last year 2009, when people were thinking that the economy would continue to grow, small caps outperformed large, no surprise there. What we've seen year-to-date, though, is that trend has persisted, and typically what you would think of is, if investors are anticipating a weakening or even slowing economy, you might see small caps handed off to large and large caps outperform small. It hasn't been the case year-to-date. We have seen generally small caps outperforming large.
Stipp: And speaking of equities in general, how they've been performing as far as where investors are putting their dollars, we've seen some trends in the fund flows that are also somewhat surprising. What are you pulling out from where investors are putting their money?
Benz: Well, first of all, huge outflows from stock funds and even bigger inflows into bond funds. So I guess I am a little surprised about the outflows from stock funds; yes, the market has been jittery year-to-date, but stocks were up 25-plus percent in 2009. And what we often see is that investors react to that and send more money to stocks at that point; they've been doing the opposite. They've been pulling money out of stocks and stock funds, sending it to bonds. With bonds I think investors are just saying I'd prefer this safe but low return versus a potentially higher but uncertain return.
Stipp: And speaking of the fund flows and one fund family in particular, American Funds, have seen quite a bit of outflows, an outflow trend, certainly something that we've been watching closely. But it's kind of surprising when you look at how the funds have performed over time to see that. What do you think of that?
Benz: It's true, Jason. I am a little confounded by this. I run these screens; we do this Five-Star Investor piece every week, and I'm always looking for funds from a variety of angles, good core conservative stock funds, wide-moat stock funds.
What I find time and again is that these American Funds hit my screens because performance has been so good over the past decade, and they've got long manager tenures. They've got reasonable expenses.
I think there are a couple of things going on. One of the key ones is that advisors--and those are the main people who use American Funds, they put clients in American Funds--they're switching to ETFs, and they're employing tactical approaches with ETFs. And also, my thought is that perhaps advisors expected too much of American Funds in terms of being able to protect on the downside. So, even though the funds have always held some bonds and cash, they did not lose a lot less than competitors in 2008.
Stipp: Well, certainly some interesting phenomena to take note of, Christine. We'll probably check back in maybe in five or six months from now and see how some of these plays have panned out.
Benz: Always surprises.
Stipp: Thanks so much for joining me.
Benz: Thank you, Jason.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.