4 Good Funds with Big Outflows

Christine Benz: Hi, I'm Christine Benz for Morningstar. Which funds are investors throwing overboard? Joining me to discuss some of the funds with the biggest outflows of assets year to date is Russ Kinnel. He's Morningstar's director of manager research. Russ, thank you so much for being here.

Russ Kinnel: Glad to join you.

Benz: Russ, let's talk about flows year to date. We have seen pretty significant flows into bond funds, I believe, but there have been some bond funds that have been seeing outflows. Let's start there. Pimco Income has seen sizable outflows year to date after experiencing pretty strong inflows for the better part of the past decade. What's going on there?

Kinnel: That's right. Pimco Income is a Silver-rated fund, so obviously we like it, but it's had about $10 billion in outflows in the first half. What's really going on there is that the fund's got--it's fairly aggressive and it's got some nongovernment mortgages, which have been great performers for a very long stretch but not this year because of concerns about the economy, obviously. It's had a stretch of rough returns this year, but it's long-term record is still good. And obviously we think very highly of it. I think you just have to recognize this is a fairly aggressive fund. If you understand that, you should be OK.

Benz: And I think that it's important to kind of think about where you place it in your portfolio, right? That if it's your mortgage payment or next year's tuition payment, it's probably too risky for that.

Kinnel: Oh, for sure. I think it's a pretty aggressive bond fund. I think if you're thinking about something you're going to tap for cash in a year or two, you want something like a short-term bond fund with high quality or a money market. I think this is much more like, as you're building out a very wide-ranging income portfolio, this is one of your more aggressive options.

Benz: Good to know. Templeton Global Bond, that one I believe has been in redemptions for a little while now. Let's talk about that fund and what is driving investors to continue to hit the exits there.

Kinnel: Yeah. This is Michael Hasenstab's fund, a manager we really like, but it's had about $6 billion in outflows, and I can understand why because it's got a big emerging-markets bias, which has hurt its three- and five-year returns, but we still like its long-term prospects. We rate it Gold. We think Hasenstab's a very good investor, but you can see when macro calls go wrong, even at the best of funds, it can hurt performance.

Benz: DoubleLine Total Return is here. This had been a real darling for investors for many years, but they seem to be pulling assets recently. Why do you think that is?

Kinnel: It's had about $5 billion in outflows in the first half and a little similar to Pimco Income, although maybe it's had even more nonagency mortgages. That's led to a mediocre to poor one-, three-, and five-year performance. I think, to a degree, this is a fund that had done so well, maybe people had unrealistic expectations, and now it's come back to earth a bit, but we rated it Bronze, at least some of the share classes. We still think it's a pretty good fund.

Benz: And the last one is First Eagle Global. The first three were all bond funds. This is an equity, mainly equity, fund. Let's talk about why investors seem to be retreating from this one.

Kinnel: We've been talking about some aggressive funds that had a difficult year. This is a fund that's supposed to be very conservative, that's supposed to protect against losses through an array of measures by value stocks, by gold, some fixed income, but actually year-to-date losses has been pretty disappointing. And so I think investors were kind of unhappy with it in the bull market because it was falling behind, but now it's underperformed a bit, not dramatically, but I think, given expectations, that's still pretty disappointing. I think that's why people are leaving it. Now, we still have it rated Bronze. We still think it's got some good characteristics, but it has been disappointing and part of that is simply that value has underperformed growth, but even beyond that, I think it's a little bit disappointing.

Benz: Well, I wanted to ask about that Russ, because I think in the last financial crisis, we saw that as well, where value didn't necessarily save investors. Should investors not overly rely on funds with value orientations to save them in these periodic equity corrections?

Kinnel: No. I think value does have some greater economic sensitivity than growth. And so that's why these last two bear markets, which happened at the same time as the recession, that value has gotten hurt. I think maybe being diversified value to growth and obviously having some fixed income is probably more important. A fund like this does try to be defensive, but obviously we can see from this year that those have real limits.

Benz: Russ, it's always great to get your insights. Thank you so much for being here.

Kinnel: You're welcome.

Benz: Thanks for watching. I'm Christine Benz for Morningstar.