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By Jason Stipp | 09-02-2010 04:44 PM

Rekenthaler on Five Fund Phenomena

Morningstar's vice president of research weighs in on PIMCO's target-date allure, active management in bonds versus stocks, and echoes in the buy and hold debate.

Jason Stipp: I am Jason Stipp for Morningstar and welcome to The Friday Five. This is our weekly take on five notable investment themes. Joining me today for The Friday Five is Morningstar's vice president of research, John Rekenthaler.

John, thanks for being here.

John Rekenthaler: Sure thing, Jason.

Stipp: So this week we're going to talk about five interesting themes; first, we're going to touch on PIMCO and target-date funds. We're going to talk a little bit about active managers losing out. We're going to touch on bond funds and active management. Liquidity and outperformance. And finally, we're going to get John's take on the buy-and-hold debate.

So, John, let's start off first with PIMCO and target-date fund asset management. There was an interesting article this week that showed just how much money PIMCO might be managing in that space. Tell us little bit about what you think on that topic.

Rekenthaler: Well, it's quite remarkable. It's no surprise that PIMCO is running a lot of – put a lot of money into the PIMCO Total Return Bond Fund run by Bill Gross, in its own target-date funds, but what Josh Charlson pointed out is in several other target-date funds from other fund families, you not only see the Total Return fund, but you see the allocations increasing, 10%, 12%, 14% of assets--and this is an outside fund family. You don't see that very often with target-date funds. They tend to like to run the money in-house and it's a tribute to the power of not just the nation's, but the world's largest mutual fund.

Stipp: So on the theme of active management but on the equity side, we've seen a trend of people fleeing actively managed equity funds, it is something we've seen it for a while. What's your take on that and the move. Where is the money going if it's leaving the actively managed funds?

Rekenthaler: For five years now, we've seen money flowing out of actively managed stock funds, and some of it is going into bonds, particularly after the 2008 market crash. We see record inflows into bond funds. But actually, there were positive inflows in equity funds--they just happened to be index funds, whether it's index mutual funds or exchange-traded funds.

So, it's really behind the scenes. You see the headlines, and you see money flowing out of stock funds or maybe flat into stock funds, and money into bonds, and we think stocks to bonds; that's part of it. But part of it also is active managers on equity funds--people are fleeing them and putting their money into index funds, whether mutual funds or exchange-traded.

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