Fund Times: Redemptions Hit an All-Time High in September
Plus, Schroder muni funds liquidate and more.
The recent market upheaval has triggered the largest wave of monthly net redemptions in the history of the mutual fund industry. In September 2008, investors pulled an estimated $47.5 billion out of mutual funds, capping off an erratic month that featured the federal takeover of Freddie Mac (FRE) and Fannie Mae (FNM), the bankruptcy of Lehman Brothers, the government's bailout of American International Group (AIG), and plans for a massive government rescue package. Investor concern about the deepening financial crisis and a money market fund "breaking the buck" contributed to the record-setting flight from funds.
Almost no asset class was left unscathed. International stock funds were hit the hardest, with more than $19.9 billion in outflows in September. U.S. stock funds weren't far behind, experiencing roughly $19 billion in net redemptions. Balanced funds, which buy both stocks and bonds, saw a drop of nearly $5.9 billion, and taxable and municipal bonds faced estimated net outflows of $1.6 billion and $1.4 billion, respectively. The alternative asset class--which includes long-short, bear market, currency, and precious-metals funds--was the only class that didn't experience redemptions, instead seeing inflows of $340 million. Many of these funds have historically performed well when the rest of the market is suffering.
September's substantial outflows were far worse than those experienced during any month of the bear market of 2000-2002. July 2002 was the worst month during that stretch and saw net redemptions of $17.4 billion (roughly three times less than September 2008's outflows). Although investors fled from stock funds in droves during that bear market, they moved a lot of money into bond funds, which were thriving at the time. This time around, though, the current credit crisis has roiled nearly every segment of the market, and many investors have simply pulled their money out of mutual funds altogether.
Schroder Funds Bite the Dust
Massive shareholder redemptions have forced Schroder Municipal Bond (SMBIX) and Schroder Short-Term Municipal Bond (STMIX) to shut down and liquidate. Illiquidity has plagued the municipal market in the weeks since Lehman Brothers' collapse, making it difficult for these funds to sell securities to meet redemption demands. While recent weeks have severely hampered many muni funds, these two funds actually started running into trouble in the earlier stages of the credit crisis. In particular, the funds owned a sizable stake in floating-rate bonds that were hit hard earlier this year, and redemptions started increasing in April. Between April 1 and Sept. 30, Schroder Municipal Bond lost roughly a fourth of its assets to outflows, according to Morningstar's estimates. Both funds have been among the worst performers in their categories this year: Schroder Municipal Bond was down 12.6% in the year to date through Oct. 14, 2008, and Schroder Short-Term Municipal Bond lost 7.3% in the same period.
The funds closed to new shareholders Oct. 14, and the liquidation will occur in stages. Shareholders can expect the first capital distribution on or around Nov. 28 and subsequent distributions after that. Schroder also announced that fund comanager Susan Beck has taken over leadership of the firm's muni team from David Baldt, although Baldt remains with the firm.
Muhlenkamp Mulls Fund Distributions
Muhlenkamp's (MUHLX) longtime manager, Ron Muhlenkamp, posed a question to fund shareholders in his quarterly newsletter: Do shareholders prefer a capital gains distribution this year or in the future when tax rates could be higher? In 2007, some investors were miffed about paying taxes on capital gains in a year that the fund lost money. This year, the fund is also down--it's lost 38.1% in the year to date through Oct. 15, 2008--and it's again incurred large capital gains, mainly from energy holdings that it sold earlier this year (which turned out to be a good move; energy stocks have generally dropped since the summer). Muhlenkamp noted that the upcoming presidential election opens the door for a potential increase in the capital gains tax from its current rate of 15% to 20% or more. If that were to happen, he notes, it would make sense to maximize the capital gains distribution this year when rates are still low. However, he encouraged shareholders to call in and voice their preference before he decides whether to declare a distribution.
We always like to see managers putting shareholders' interests first, and Muhlenkamp's call for input is certainly a shareholder-friendly move. The small, one-fund shop with $865 million in assets may also be hoping to deter redemptions by trying to keep investors happy.
T. Rowe</> Price's New Bond Fund
T. Rowe Price is planning to launch Strategic Income Fund Dec. 15, 2008. The bond fund will look to garner income and could court considerable credit risk--it can invest as much as 65% in non-investment-grade (or junk) bonds--as well as interest-rate risk given that it has no maturity limit. The fund can also invest as much as half of its assets in foreign currencies. The no-load fund will cap expenses at 0.80%. Steven Huber will perform the day-to-day responsibilities of the fund and will receive insight from several sector specialists. Michael Conelius--who has successfully managed T. Rowe Price Emerging Markets Bond (PREMX) since taking over in 1995--will run the emerging-markets arm. Recent hire Andrew McCormick--who took over T. Rowe Price GNMA (PRGMX) in April 2008--will provide expertise on mortgage-backed and asset-backed securities. David Stanley will focus on foreign developed countries, and head of fixed-income credit research Michael McGonigle will also contribute.
T. Rowe Price has a strong, low-cost bond lineup, and many of its offerings are featured in our Analyst Picks. This new multisector-bond fund shows promise, but we would limit it to a small portion of an investor's portfolio.
New Fidelity Freedom Funds
Two new funds--Fidelity Series Large Cap Value and Fidelity Series All-Sector Equity--have entered the Fidelity Freedom Funds lineup, a group of target-date funds geared toward retirement planning. The two fund additions were created specifically for the Freedom Funds lineup and won't be sold individually to investors. Manager Bruce Dirks--who has run Fidelity Large Cap Value (FSLVX) with moderate success since 2005--will run Fidelity Series Large Cap Value in a similar fashion, using the Russell 1000 Value Index and quantitative models to allocate the fund.
Fidelity Series All-Sector Equity will track the S&P 500's sector weightings. The fund can invest in foreign equities as well as futures and exchange-traded funds. A group of nine managers will run the fund, each focusing on a sector. This team also recently took over the equity portion of Fidelity Balanced (FBALX).
Katie Rushkewicz Reichart does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.