TIPS on a Tear, but for How Long?

Who knew investing in Treasury Inflation-Protected Securities could be so exciting?

The yield on a 10-year TIPS bond before any inflation adjustment was 2.17% at the beginning of 2009. As of Dec. 1, it was 1.14%. The last time 10-year TIPS yielded below 1.20% was in early 2008.

The big drop in yield has meant strong returns for TIPS funds this year even though inflation is about flat on an annualized basis over the past 12 months.

The average year-to-date return of the 41 funds in the inflation-protected bond category is 12.51%. That handily beats the 6.9% return for the average intermediate government bond fund over the same period.

The worst-performing fund in the category, Principal Inflation Protection (PIPIX), is still up 8.19%. The best-performing funds are up more than 20%. Below is a list of the largest funds in the category.

Largest Funds in the Inflation-Protected Bond Category

Name Total Assets ($B) YTD Return through 12/2/09 Vanguard Inflation-Protected (VIPSX) 26.3 12.98 PIMCO Real Return (PRRIX) 16.0 21.02 PIMCO Real Return Asset (PRAIX) 4.7 20.28 American Century Infl-Adj Bond (ACITX) 3.0 12.50 Fidelity Inflation-Protected Bond  2.5 11.82 ___________________________     iShares Barclays TIPS Bond (TIP) 18.2 13.47 SPDR Barclays Capital TIPS (IPE) 0.3 13.29 ___________________________     Inflation-Protected Bond Averages 2.0 12.51

 
The largest TIPS fund in terms of assets,  Vanguard Inflation-Protected Securities (VIPSX), is no exception. The $26 billion fund is up an impressive 13% for the year to date through Dec. 2.

The fund, run by Kenneth Volpert and John Hollyer since its inception, has had an influx of investor assets. It is now Vanguard's ninth-largest fund, up from 2008 when it was the firm's 13th largest. It started this year with roughly $17 billion in assets.

The big run-up and interest in TIPS has some managers wary of the future returns for many TIPS maturities, especially those with less than a five-year maturity. For example, Bloomberg reports that on Dec. 3 the yield on the five-year TIPS is 0.18%, near its all-time low.

Mihir Worah, manager of  PIMCO Real Return (PRTNX), wrote in his Sept. 30, 2009, commentary that he expects to keep an underweighting in TIPS "as disinflationary pressures should ... caus[e] TIPS to underperform nominal [Treasury bonds]."

Likewise,  Hussman Strategic Total Return (HSTRX) manager John Hussman has been reducing the TIPS exposure in his fund recently in favor of nominal Treasury bonds. "The problem with negative real yields on TIPS is that in the event that inflation does not present itself near-term, TIPS holders are forced to accept negative current returns as the price of longer-term inflation protection. Generally speaking, market participants do not sit with this sort of 'negative carry' trade for very long once price momentum eases," he wrote in a recent market commentary.

At the very least, investors shouldn't expect this year's frothy TIPS returns to continue indefinitely.

Eaton Vance Announces Manager Changes
Eaton Vance announced several manager changes will occur in December. Yana Barton will replace Duncan Richardson as co-portfolio manager at Eaton Vance Large-Cap Growth (EALCX). Michael Mach at  Eaton Vance Large-Cap Value (ECSTX) will be joined by Matthew Beaudry, John Crowley, and Stephen Kaszynski. When Eaton Vance named three comanagers on  Tax-Managed Growth (ETTGX), lead manager Richardson took on some executive duties at the firm and reduced his role at the fund. Also, Eaton Vance's analysts are very experienced and play a very big role in stock selection at the equity funds. The portfolio managers focus more on portfolio construction. This could be a way of recognizing the analysts' contributions. Even if Mach were to have a reduced role at Large-Cap Value, the effect may not be very significant.

Etc.
DWS is joining the long list of companies doing away with B shares. In other DWS news, Pam Holding, lead manager of  Putnam International Growth & Income (PNGAX), will retire at the end of this year. Darren Jaroch will take over as lead manager at the beginning of 2009. Jaroch, a quantitative specialist who joined Putnam in 1999, used to be a comanager on the fund.

 Federated Prudent Global Income  will be changing its name at the end of January to Prudent DollarBear Fund to more accurately reflect its investment strategy.

 BlackRock (BLK) announced it will maintain the iShares brand now that its purchase of the nation's largest ETF provider has closed.

Matthews International Capital Management, LLC, advisor to the Matthews Asia Funds, will launch a new fund dedicated exclusively to investing in Chinese dividend-paying companies. The Matthews China Dividend Fund will invest in both the equity and convertible securities of Chinese companies. It will be managed by Jesper Madsen and comanaged by Richard Gao. Madsen currently manages  Matthews Asia Dividend (MAPIX) and Gao is the lead manager of the  Matthews China (MCHFX) and Pacific Tiger (MAPTX).

Brandes Institutional Enhanced Income  will liquidate all assets by Dec. 29, 2009.

The force was not with Jamestown Select . The fund with Star Wars-themed ticker symbol will liquidate by Dec. 28, 2009.

 Touchstone Large Cap Value  will liquidate by Jan. 15, 2010. Touchstone previously announced the fund would liquidate in December 2009.

Jacobs and Company  began liquidating assets on Dec. 1, 2009.

Pacific Capital Tax-Free Securities  and Pacific Capital Tax-Free Short Intermediate Securities  will no longer offer Class C shares to investors.

All six of the Van Kampen O'Shaughnessy funds are closed to new investors: Van Kampen O'Shaughnessy All Cap Core , Van Kampen O'Shaughnessy Enhanced Dividend , Van Kampen O'Shaughnessy Global , Van Kampen O'Shaughnessy International , Van Kampen O'Shaughnessy Large Cap Growtha , and Van Kampen O'Shaughnessy Small/Mid Cap Growth .

Wayne Plewniak is no longer a comanager of GAMCO Global Convertible Securities (GAGAX).

Todd Kuimjian is off the management team of  Evergreen Adjustable Rate (ESAAX) and Evergreen US Government .

Northern Funds made several manager changes at their funds. John Cole is off the management team of Northern Growth Equity ; Matthew Peron replaced David Kalis as manager of Northern Mid Cap Growth ; and David Kalis is off the management team of Northern Small Cap Growth (NSGRX).

Virginia Au joined the management team at AIM Trimark Small Companies .

Thomas Lettenberger replaced C. Thomas Johnson on the management team at Virtus Balanced Allocation .

Fund analysts Greg Carlson and David Falkof  contributed to this report.