Finally, investors are looking "beyond bonds" for income these days, and this drove sales of three of the top 10 mutual funds. This includes funds from Goldman, JPMorgan, and Bridge Builder from regional broker-dealer Edward Jones. If we include floating-rate notes as part of this trend, it would also include one ETF, the PowerShares Senior Loan Portfolio (BKLN). All told, these four products had net sales of $28.8 billion over the last 12 months.
Demand for these blockbusters is based on deep concerns about future inflation and interest-rate policy. After a 30-year bull market in bonds, U.S. investors are now focusing on how fast the Federal Reserve will taper its bond purchases and begin the process of normalizing interest rates. Concerns about rising rates have been driving large shifts in investor demand — away from government and municipal bonds and into other fixed-income products, such as corporate bond funds, loan participation funds and world taxable fixed-income funds.
Rate concerns are also behind the blockbuster products that go beyond bonds and seek enhanced income with fewer constraints on the portfolio manager. The names of these mutual funds hint at greater freedom for the portfolio manager: Goldman Sachs Strategic Income (GSZIX) and JPMorgan Strategic Income Opportunities Fund (JSOSX). The popularity of these mutual funds shows that investors are less concerned with style boxes and more concerned with finding new fixed-income solutions.
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In Lipper's report on product innovation, we discuss these new fixed-income solutions that fund providers are using to meet investor needs. These approaches vary in how much emphasis they put on the different roles of bonds: income, diversification and liquidity. Lipper believes that demand will remain robust for new approaches to fixed income as retirees seek lifetime income. Lifetime income is especially difficult to achieve when interest rates are low and longevity is rising.
This drives demand for new bundled solutions as well, such as the Bridge Builder Bond Fund (BBTBX) from Edward Jones, mentioned above. This proprietary fund is built for fee-based advisors at Edward Jones, which is using an affiliated company, Olive Street Investment Advisors, as a sub-advisor. So this blockbuster fund shows how distribution prowess and a hot category can lead to a blockbuster product.