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By Christine Benz and Eric Jacobson | 02-28-2013 03:00 PM

Will Investors Hit the Credit Brake Anytime Soon?

Core, corporate, and short-duration bond funds continue to be popular as investors seek safer streams of income, but Morningstar's Eric Jacobson is concerned about the longer-term risks.

Christine Benz: Hi, I'm Christine Benz for Morningstar.com. With fund flows continuing into bond funds so far in 2013, we decided to take a closer look at some of the specific funds that investors have been buying. Joining me to discuss that topic is Eric Jacobson; he is a senior fund analyst with Morningstar.

Eric, thank you so much for being here.

Eric Jacobson: Great to be with you, Christine. How are you?

Benz: Good. Thanks, Eric. So let's get right into this list. I'm wondering if you can kind of generalize when you look at some of these biggest asset gatherers year to date, we've got PIMCO Total Return, DoubleLine Total Return, MetWest, when you look at some of the biggest asset gatherers, what sort of themes do you see emerge?

Jacobson: Well, on the one hand, it's interesting because they're not niche funds per se. Not everyone on the list, but those that you mentioned, in particular, are real core-focused bond funds. They tend to be very popular with investors for that central part of the portfolio. None of them is completely skewed in such a way--they are not high-yield funds, for example, and they are not all-foreign or what have you. So, that's one interesting thing.

The other interesting thing about them is that most of them are not managing very closely to the commonly used benchmark, the Barclays U.S. Aggregate Bond Index, over the last couple of years. They're taking on essentially less interest-rate risk and more credit risk.

Benz: I know it's hard to generalize about what investors, in general, are thinking when they're buying specific funds, but when you look at this particular crop, this more generalist group of funds, would you say that maybe investors are a little uncertain about what's next for the bond market and so they want to delegate to managers who have some flexibility to range across different sectors and so forth?

Jacobson: I think that's part of it. I think we are seeing a few different streams of interest in terms of what investors are doing. One of them is this delegate to your manager. In some cases, as you mentioned, you've got it in these big, well-known core funds, like PIMCO Total Return.

In other cases, even not necessarily in the top five, but a little farther down on the list, you've got PIMCO's Unconstrained Bond fund, for example, which still had very strong flows last year, as have some of its closer competitors, which are funds that really have that go-anywhere mandate and not just in terms of the sectors, but also in terms of keeping their interest-rate sensitivity, not only very, very short but sometimes even a little bit negative.

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