Investor apathy towards bonds means many have missed out on profits
It's hard to get revved up about the much-touted revival of bond mutual funds this year.
Competitively speaking, bond funds have enjoyed near-perfect conditions, what with a long slump in stock prices, falling money-fund yields, and a strong market for high-quality debt securities.
Yet these funds as a group have attracted only a trickle of new money from investors.
If this is the best they can do when everything's breaking in their favour, it's an inauspicious sign for their longer-term prospects ' especially when you listen to talk among some analysts that a two-decade bull market for bonds might have just about run its course.
Recent investment results certainly aren't the problem. Bond funds are about to close out their second straight year of better performance than their two rival asset classes, stocks and money markets.
Through the first week of December, the Bloomberg average of more than 4,500 bond funds sports a gain of 5% since the start of the year. That stacks up handsomely next to a 13% loss on average among more than 8,800 stock funds. Meanwhile, yields on money funds, which were above 6% in late 2000, have plunged below 2%.
The largest of all US bond funds, the $50bn Pimco Total Return Fund, has gained 18.2% in the past 20 months, skunking the Standard & Poor's 500 Index of the stock market by 40 percentage points. Yet, except for a rush of money into that and two or three other high-profile bond funds, the investing public is paying little tribute.
According to the latest asset tallies by the Investment Company Institute, bond funds' share of every dollar invested in funds of all types increased by only 2 cents, from 12 cents to 14 cents, from year-end 2000 through to October 2001. As recently as 1993, bond funds had a 37% share of the fund market.
Those investors who did flee the stock bear market into funds concentrating on interest-bearing securities overwhelmingly opted for money-market funds. Through the first 10 months of 2001, the ICI reports, net new cash flow into bond funds of $82bn was less than one-fourth the $341bn that money funds attracted.
Apparently a vicious decline in stock prices since early 2000 still hasn't done much to diminish fund investors' optimism about long-term prospects for the stock market. That's either a bracing sign of confidence or disturbing evidence of persistent complacency, depending on your point of view.
Beyond that, I'd say, the numbers show that bond funds still have a long way to go to restore their image after the bad experiences many investors endured when interest rates rose in the late 1980s and again in 1994.
The bond market itself remains a huge and vibrant place.
The Bond Market Association puts total private and public debt outstanding at $18 trillion, double the amount of a decade ago. Why aren't bond funds growing at anything like the same pace? The sort of investor who buys mutual funds is apparently easily put off by a supposedly conservative investment whose net asset value can nosedive when rates rise. Then there's the problem that funds, with their continuously managed portfolios, lack the set maturity dates offered by most other fixed-income investments.
Ordinary citizens' apathy toward bonds sometimes borders on the spectacular. The fund firm American Century Investments, reporting last month on a telephone survey of 750 investors, found 'a high degree of confusion.''
For instance, fewer than a third of the people surveyed correctly answered that a rise in interest rates generally means a drop in bond prices. A mere one-eighth knew that bonds' sensitivity to rate changes tends to increase along with their maturities.
By American Century's reckoning, the perky performance of bonds over the past couple of years has done nothing at all to help close the knowledge gap. In a similar 1998 survey, 35% got at least five of the 10 questions right. This time, only 27% did.
'Confusion about bonds apparently prevents many from actually investing in bonds and bond funds,'' the survey report concluded. If the bond rally of the past couple of years didn't clear away that fog, what would?
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