The February issue of our Bond Fund Intelligence, which was sent to subscribers Wednesday morning, features the stories, "S&P on Bond Index Funds, 'The Hare and the Tortoise'," which features a new study from S&P Dow Jones Indices on bond index funds and "Bloomberg Profiles Capital Group, Bond Fund of America," which reviews how Capital Group is making a name in bond funds. BFI also recaps the latest Bond Fund News and includes our Crane BFI Indexes, which show that bond fund returns jumped again in January while yields plunged once more. We excerpt from the new issue below. (Contact us if you'd like to see our latest Bond Fund Intelligence and BFI XLS spreadsheet, or our Bond Fund Portfolio Holdings data.) (Note: Please join us for our upcoming Bond Fund Symposium, which is March 25-26 in Philadelphia!)
Our "S&P on Bond Index Funds" piece states, "FT Alphaville’s article 'The Passive Attack on Bond Markets' alerted us to a new study from S&P Dow Jones Indices on bond index funds. They write, 'The first passive bond fund launched nearly four decades ago, and ever since then people have mostly made fun of the whole idea as preposterous. To be fair, there are some solid reasons for scepticism: The bond market is less efficient, which means more opportunities for active managers. Their fees are also generally lower, making cost a milder headwind.'"
The piece continues, "And yet: Passive bond funds have seen cumulative inflows of nearly $2.8tn since the beginning of 2007. In contrast, active bond funds have only taken in a net $1tn over the same period, after taking a beating in the 2022 bear market. This is astonishing, both in scale and steadiness. Which is why this new report from S&P Dow Jones Indices caught FT Alphaville's eye. Although it's primarily an equity benchmarking shop, S&PDJI's 'The Hare and the Tortoise: Assessing Passive's Potential in Bonds' is fascinating.'"
Our "Capital Group" article states, "Bloomberg published the article, 'Capital Group Builds Bond Team to Chase Pimco in Fixed Income,' which tells us, 'Capital Group Inc., better known as a behemoth in stock picking, is putting up some of the best results and strongest growth among actively run bond funds, elbowing past fixed-income rivals who are enduring a siege from cheaper index funds and rising interest rates. By the end of last year, Capital Group had amassed $498 billion in its fixed-income holdings, more than doubling assets since 2015. It now runs the second-largest actively managed bond mutual fund in the US -- Bond Fund of America -- trailing only an income fund offered by ... Pacific Investment Management Co. As for returns, one measure tracked by Morningstar shows a specific share class of Bond Fund of America has beaten all other peers over the past four years, when a new manager took over."
It states: "Ryan Murphy, head of fixed-income business development, tells Bloomberg, 'We snuck up on people's radars over the last couple years.' They write, 'Capital Group made an enormous investment in people, technology and infrastructure to increase its presence in bond funds over the past decade, Murphy said, capped by a 'big push over the last 18 months into the ETF market.'"
Our first News brief, "Returns & Yields Inch Higher in Jan. Bond fund returns were up slightly after two monster return months while yields rose slightly last month. Our BFI Total Index increased 0.14% over 1-month and 4.21% over 12 months. The BFI 100 rose 0.07% in Jan. and 3.94% over 12 mos. Our BFI Conservative Ultra-Short Index was up 0.47% over 1-month and 5.42% for 1-year; Ultra-Shorts rose 0.59% and 5.73%. Short-Term rose 0.51% and 4.84%, and Intm-Term increased 0.00% in Jan. and 2.72% over 1-year. BFI's Long-Term Index fell 0.21% and 2.53%. High Yield rose 0.31% in Jan. and 7.99% over 12 months."
A second News brief, "Morningstar Takes a 'A Closer Look at Vanguard's Newest Core Bond ETFs.' They write, 'Vanguard launched two actively managed bond exchange-traded funds in December 2023: Vanguard Core Bond ETF VCRB and Vanguard Core-Plus Bond ETF VPLS. The ETF wrapper is the only thing that's new about the pair. They're the second and third actively managed fixed-income ETFs from Vanguard, and the underlying strategies mimic those that Vanguard has offered through mutual funds for several years.'"
Our next News brief, "WSJ's 'Want a Tax Shelter? Buy a Bond Fund' says, 'Bond investors are still trying to recover from 2022, arguably the worst year in history for fixed income. After that 13% annual loss in the aggregate U.S. bond market, fixed-income funds still have billions of dollars of unrealized losses on their books. That, in turn, has created a highly unusual opportunity. Because of those losses, a substantial chunk of many bond funds' current and future returns won’t be subject to the tax treatment that historically was typical.'"
A BFI sidebar, "Q4 Earnings F-I Comments," says, "Asset managers reported fourth-quarter earnings over the past 2 weeks, and several shed light on the strength of the bond fund marketplace. On BlackRock's latest earnings release and earnings call, CFO Martin Small tells us, 'The last two years have been a character-building and awe-inspiring time for investors, for clients, and certainly for us at BlackRock. The monetary policy shock of a rapid rate-rising campaign upended 10 years of asset allocation practices and spurred repositioning of portfolios into cash and money market funds at the expense of risk assets.... We've spoken throughout the year about what conditions we'd expect to bring investors out of cash and into risk assets. It's generally unfolding as we described. With greater clarity on terminal rates in the fourth quarter, we saw evidence of portfolio 're-risking', and we expect this trend to accelerate in 2024.'"
Finally, another sidebar, "Barron's Claims Cash Is Over," comments, "Barron's writes, 'King Cash Is Being Dethroned. What to Buy Now.' The article comments, 'The mantra 'cash is king' reigned supreme last year. Now it's time to dethrone the king and start putting cash to work. Lured by 5% yields, investors have flooded into money-market funds and other cash proxies, plowing more than $7 trillion into the holdings. But the outlook for cash is dimming. The Federal Reserve is widely expected to cut its benchmark federal-funds rate this year; the timing and magnitude are a coin toss, but even small rate cuts would erode yields on cash.'"
