25 Funds Investors Are Buying
Investors are keeping the faith in actively managed bond funds but using index products almost everywhere else.
"How about showing us the 25 funds that investors are buying?"
That comment kicked off a string of remarks in response to my recent article, "25 Funds Investors Are Dumping."
With the help of Morningstar research analyst Annette Larson, we've compiled a list of the 25 funds that have gained the most assets on a dollar basis during the trailing one-year period. Many of these funds have seen enormous asset gains on a percentage basis, too. That should help satisfy--at least partially--those readers who said they'd like to see a list of funds that had made the largest percentage gains in their assets.
The list of the fund world's biggest asset gatherers can be roughly subdivided into two groups: PIMCO beneficiaries and index funds.
Can They Scale Up?
In last week's article, I pointed to widespread outflows at PIMCO, with PIMCO Total Return (PTTAX) and PIMCO Unconstrained Bond (PUBAX) leading the fund industry's outflows. But investors fleeing PIMCO haven't been selling out of bonds entirely; instead, they've been swapping into other intermediate-term bond funds. Indeed, 10 of the top 25 asset gatherers land in the intermediate-term bond Morningstar Category (the home of PIMCO Total Return). Nine of these funds are actively managed, indicating that fixed income is one area where investors are keeping the faith in active management, even as they appear to be strongly preferring index funds and ETFs for their equity exposure.
A major question is whether some of these PIMCO beneficiaries will be as adept at managing enormous sums of money as PIMCO has been, especially if the going gets rough for bonds in the years ahead. Many of the big PIMCO funds, including Total Return, employed derivatives to obtain exposures to different slices of the bond market, relying less on bond-picking. But some of the intermediate-term bond funds that have been picking up assets that formerly belonged to PIMCO have relied more heavily on bond-picking and trafficked in less-liquid market sectors to fuel their past results; rapid asset growth has the potential to affect their strategies by forcing them into more liquid positions.
That's an issue that senior analyst Karin Anderson says she's watching closely at Metropolitan West Total Return Bond (MWTRX), which has been the fund world's biggest asset gatherer during the past year. In her latest analyst report, she says she's keeping an eye on Met West Total Return's portfolio for signs of asset bloat--specifically, whether management will be less able to traffic in some of the less-liquid securities that have brought it success in the past. For example, she notes that management has de-emphasized nonagency mortgage-backed bonds in favor of Treasuries. On its face, that might appear to be a red flag, though management says it did so for fundamental--rather than liquidity--reasons.
Dodge & Cox Income (DODIX) has been another big PIMCO beneficiary that has historically put an emphasis on bond-picking, especially in the corporate sector. Not only that, but it has historically concentrated its portfolio in 50 or so issuers. On the plus side, the team running the fund doesn't employ a fast-trading strategy, maintaining a 3- to 5-year time horizon for its picks. Moreover, the firm is one of the fund industry's best stewards; it closed Dodge & Cox International (DODFX), for example, in an effort to keep strong asset inflows from altering its strategy and impeding its performance.
Multisector-bond fund PIMCO Income (PONAX) has been a rare exception to outflows from the firm, appearing on our list of the funds that have seen the largest dollar inflows during the past year. Strong performance and a peer-beating yield have likely contributed to the fund's continued asset growth, though as a multisector-bond fund, its risk profile is higher than core bond funds like PIMCO Total Return. (That point is particularly important for those who have supplanted PIMCO Total Return with PIMCO Income; the latter is likely to provide less cover in an equity-market shock.) Investors are also likely comforted by the fact that the fund's management picture has remained stable. Dan Ivascyn has been on board here since the fund's 2007 inception, and PIMCO veteran Alfred Murata has been a comanager here since early 2013. However, it's worth noting that Ivascyn has substantially enlarged his responsibilities since Gross' departure. Moreover, senior analyst Eric Jacobson notes in his just-published review of the fund that PIMCO Income, like Met West Total Return, has long benefited from its exposure to nonagency mortgage-backed bonds. He notes that shrinking opportunities in that sector, as well as the fund's growing asset size, could reduce their importance to performance in the future.
Passive Almost Everywhere Else
Even as actively managed bond funds were dominant on the list of the fund world's biggest asset gatherers, the list also points to the ongoing popularity of indexing. Vanguard Total Bond Market Index (VBMFX) appears to have captured some of the PIMCO outflows, so not all bond investors are casting their lot with active management.
Indexing has been particularly popular on the equity side. Indeed, six of the 25 funds with the largest one-year inflows are broad-market equity index funds, especially from Vanguard. Such products are popular in 401(k) plans; the big Vanguard index funds are also constituent holdings in Vanguard's target-date series. In addition, many financial advisors have also been shifting client portfolios away from actively managed funds and into passive products, preferring to add value with asset-allocation and financial-planning advice rather than security selection. Indeed, the sole active equity funds on the list are Dodge & Cox International, which closed to new investors in mid-January 2015, and BlackRock Multi-Asset Income (BAICX). The BlackRock fund is a relatively new offering that tactically maneuvers for income across a variety of asset classes, including stocks, bonds, and alternatives.
Christine Benz does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.