Long lie the bond king, Bill Gross of Pimco, dethroned this past week as manager of the world's largest mutual fund. Gross's Total Return Fund finally lost the fund industry asset crown to Vanguard's Total Stock Market Index Fund.
It's a nice data point, but in and of itself, it doesn't tell you much. The truth is, the asset flip-flop between the Pimco and Vanguard fund was a data point in the making for months—a fund fait accompli. The Pimco Total Return Fund had six consecutive months of outflows leading up to "regime change" in mutual funds, so Gross's slip offers investors little insight into how to make sense of the shifting investment landscape.
Here are a few important themes that underlie this week's watershed event in the mutual fund industry.
Don't shoot the messenger
Bill Gross is as synonymous with bond funds as Jack Bogle is with fund fees and Steven Cohen is now with fund misdeeds—and Gross did notably get the interest-rate call wrong in a way he had not for decades before—but the asset outflows from Pimco Total Return are really just another way of stating the obvious in fixed-income: Investors ran scared from interest rates once the taper talk began, and even with the taper talk put off, they are still running, and investors don't want any exposure to duration in bonds.
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"Bond fund managers all face the higher interest-rate movement," said Jeff Tjornehoj, director of research at Lipper. "First we worried [the Fed taper] would happen in the fall, and that didn't happen, and now investors are starting to worry the taper arrives in 2014 and all the bond fund managers get crushed. I don't think that will happen. Even with the chaos this year, the taxable bond market continues to see investor inflows," he said.
Those inflows aren't impressive but are worth noting: The overall situation for bond funds may be better described as treading water. Bond funds have inflows of $48 billion this year, according to the most recent Lipper data. That's the lowest total since 2007, when bond funds took in $33 billion in assets. This year's organic growth rate in bond funds—a meager 1.4 percent—is the slowest growth rate for bond funds since 2000.
"It's notable because it says a lot about investor appetite for core bond investing. Whether it's the right thing, people do seem to be turning away from core funds," said Eric Jacobson, head of fixed-income fund research at Morningstar.
"Whether it's the right thing" is the key phrase in Jacobson's analysis.
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