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Atteberry: Investors Are Stretching for Yield

Jason Stipp

Jason Stipp: We've seen fund flow data at Morningstar about where investors are putting their money, and it's primarily been into bond funds over the last year. What's your take on the investor popularity for bond funds, and is it misaligned with the fundamentals? Do people think that they're going to be getting more out of their fixed-income securities then perhaps the prospects for that asset class?

Thomas Atteberry: As we analyze, the data is somewhere north for the last five months, north of $400 billion has gone into bond funds. And we look at it, and we look at the behavior, and we've asked questions and we've sort of come away with two things. One, with zero interest policy, the Federal Reserve Bank wants you out of money market funds and putting it somewhere else--anywhere else. They're kind of agnostic to where, but anywhere else. So I think these fund investors who are looking for yield, they realize my money market fund is zero, my CD is zero, I've got to go find some yield, they start to look in other areas.

We've also seen what we can find out is investors are saying, well, bonds are less risky than stocks, so I'll go look at bonds. OK, traditionally bonds have been less risky than stocks. But something to keep in mind, if I look at the last 10 years, the return on 10-year Treasury is about 9.8%. If I look at the S&P 500, it's about 0%.

Well which one of those two looks like value-wise might be misaligned? It's the probably the bond. So we see investors we think are stretching for yield, desperately looking for yield. So what they're going to end up doing is they're really going to take on interest rate risk in the form of duration risk or they're going to take on credit risk, one of the two.

And historically, when a bond investor does that, the intermediate and the longer term outcome is not very pretty. And so we look at this and we realize, yes, they think they have gone in a safe investment, they may find themselves in something that's unsafe. And we're not sure how much staying power they have or what will occur if interest rates rise on them.

Stipp: So sort of a classic rearview mirror. I think we are seeing a lot of investors investing on what's happened over the last 10 and not really seeing what's going to happen over the next 10.

Atteberry: Yes. You can look at history, you get very, very few periods of time over a 10 year period of time where bonds have outperformed stocks. That's a very unusual event.

Stipp: Sure. Not likely to be repeated probably, at least in the near future.

Atteberry: Not for a while.

Stipp: So, last question for you is more of an operational question about the fund. Bob Rodriguez went on sabbatical at the beginning of this year. I'd just like to know a bit about the day-to-day management of the fund. Have you seen really any changes in how the fund is managed and how has it been going without Bob? How has the process been happening without Bob?

Atteberry: How am I managing without Bob. [laughs] Well, specifically to your question to day-to-day changes: there's been no change. It's the same as it was a year ago, which would sort of be when Bob was here. So from that standpoint, there has not been a change.

How is it without Bob? You know, at times I miss being able to sit down and talk to him about items. I think he misses the same opportunity. I hope he's enjoying his sabbatical well. It's a well deserved rest that he needs to come back with.

But as far as how the fund operates, how we come to investment decisions, it hasn't changed whether he was here or whether he was not here. And quite frankly, I've been working with Bob for 13 years. There isn't a day that goes by that Bob's voice isn't into my head reminding me of things that he has sort of passed on of how the fund... how to invest appropriately.

Stipp: Sure. Tom, thanks so much for joining me today. Thanks for your insights.

Atteberry: You are welcome very much.

Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.