One year ago, Crane Data launched Bond Fund Intelligence, a monthly newsletter with news and performance data on bond mutual funds. With money market fund reform a reality, we saw an opportunity to broaden our scope beyond 2a-7 money funds to cover the ultra-short and short-term bond fund market. In the first issue (Jan. 2015), we began tracking about 200 bond funds, focusing primarily on the Ultra-Short universe and our new "Conservative Ultra-Short Bond" category. As the year went on, we expanded our coverage out to all types of bond funds, though the editorial focus is still primarily on the short end of the market. By December 31, we were tracking 375 bond funds (and ETFs), totaling $1.663 trillion in assets -- over half of the market. Below, we excerpt from the article, "BFI's First Year, Top Stories & Funds in '15, Outlook for '16." Also, we report on Treasury Strategies' latest "Quarterly Cash Briefing," where the conversation turned to money fund reform and its impact on the market.
Our January Bond Fund Intelligence says, "It was a challenging year for bond funds, but not bad considering — both assets and returns were roughly flat overall. While assets are up slightly through Nov 30, there have been steady outflows through the second half of the year. According to ICI, bond fund assets stood at $3.465 trillion as of Nov. 30, up just $5 billion from Dec. 31, 2014. But with outflows in December, they may finish the year in the red. This was just one of the big stories of 2015. Here are our "Top 10 Stories of 2015," in chronological order."
It continues, "In January, we introduced ourselves in the story, "Welcome to BFI! 2015 Outlook & Top Bond Funds of 2014." In February we wrote, "New Fund Launches Continue in Ultra Short, ETF Bond Space." It focused on the launch of the Vanguard Ultra- Short Term Bond Fund, which made a big splash in the space. The launch of new Ultra-Shorts was a theme we'd see throughout the year. In March we wrote, "ICI Analyzes Bond Fund Volatility," where we quoted ICI's Brian Reid on the historically low volatility of bond funds."
BFI tells us, "In April we reported, "Who's the Biggest Bond Fund? A Look at the Largest and Top 10." It was on the changing of the guard as Vanguard Total Bond Market Index Fund surpassed Pimco Total Return as the largest bond fund in the world. In June, we wrote, "Bond Market Conundrum: Ultra-Shorts Raise Profile." This story looked at the conundrum of asset inflows despite stalling returns for bond funds. Later in the year, we would see those inflows turn to outflows and stay that way throughout the latter half of the year. In the August story, "Bond Fund Assets Peak as Fed Rate Hike Draws Nigh," we saw the outflows begin and assets plateau."
We write, "In September, "Bond Fund Assets Continue Slide," and October, "No Fed Rate Hike in Sept., But Dec.?," we saw the market slide further on the anticipation that the Federal Reserve was finally going to hike interest rates. Citing uncertainty in China, following its September stock market crash, the Fed did not raise rates. It would, however, raise rates in December. In November, we wrote about another money manager offering money market- like bond funds, "SSgA Intros New Bond Funds." As it prepares for "the new world of cash," SSgA launched 3 new ultra-short bond funds, along with 3 new 2a-7 money funds.... Finally, in December, we wrote, "Junk Bond Fund Liquidates," on Third Avenue Management which liquidated its Focused Credit Fund. It sent shockwaves through the market and sparked concerns about volatility in the high yield sector."
Our 1-Year Anniversary issue adds, "What's ahead for 2016? It'll be another challenging year for bond funds as the Fed is expected to raise interest rates at least a couple more times this year. But most expect the Fed to be very gradual and cautious in its approach. The ultra-short sector should see continued inflows as investors seek alternatives to Prime money funds once MMF reforms are implemented in October. Meanwhile, look for BFI to continue to expand its coverage and launch a new website in 2016." (Contact us if you'd like to see the latest issue of Bond Fund Intelligence or if you'd like to subscribe.)
Finally, under a "Top Performers for 2015" sidebar, we explain, "The table below lists the No.-1 performing bond funds based on total return for through 12/31/15 in each of our 7 bond fund categories. PIMCO Short Asset Inv Fund Inst (PAIDX) was the top performing fund in our Conservative Ultra-Short category, Vanguard Total Intl Bond Mkt Ind Inv (VTIBX) won in the Global category, Fidelity Capital & Income (FAGIX) returned the most in our High Yield category, DoubleLine Total Return I (DBLTX) was No. 1 among Intermediate-Term Bond Funds, American Funds Govt R6 (RGVGX) was No. 1 among Long Term Bond Funds, Invesco High Yield Muni A (ACTHX) was No. 1 among Muni Bond Funds, PIMCO Income Inst (PIMIX) was No. 1 among Short Term BFs, and Guggenheim Limited Duration Instl (GILHX) placed first among Ultra-Short Bond Funds. Congratulations to the winners! Note that we will continue to expand our collections and tweak our categorizations in the coming year, so watch for changes in 2016."
In other news, Treasury Strategies Quarterly Cash Briefing host Tony Carfang asked the panel -- Fitch Ratings' Roger Merritt, Federated Investors' Debbie Cunningham, and Association of Corporate Treasurers' Peter Matza –- about how the regulatory landscape will affect cash management strategies in 2016. Merritt said, "We just did [a] survey of corporate treasurers ... and it's very clear from our survey and those conversations [that] the number one issue for them is fees and gates."
He explained, "They've always viewed money market funds as a very attractive option because they offered same day liquidity, preservation of capital, and yield. Now, or at least starting in October, that free lunch no longer exists. As a corporate treasurer, you'll have to give up one of those three features based on the products that will be available to you going forward. That is the key issue." Merritt added, "We also expect to see a proliferation of new liquidity products coming to market, trying to continue to meet the demands of cash investors."
Federated's Cunningham said, "We've got two different implementation dates in 2016. The major changes will occur in mid-October, but there are other changes that will occur in April that will maybe give will us some insight into what to expect from a cash flow perspective from customers. They are changes to reporting and disclosure. They will include reporting the information on the 4-digit mark-to-market NAV for all funds ... on a daily basis. We'll be able to see that information for all funds and our clients will be able to see that information, in addition to the posting of the weekly liquidity numbers on a daily basis, which are the basis off which the potential for a fee or gate could potentially be triggered. That additional disclosure ... might be the beginning of what would be insightful information for expected cash flow."
Also, Cunningham commented on the billions of assets industrywide that are being converted from Prime to Government funds in response to reforms (by our count, $263 billion). She noted that about 80% of the conversions are complete with another $40-$50 billion to convert. She said, "What that doesn't take into consideration are people who are in a Prime fund that may withdraw their balances from their prime fund and go into the Government space. There have been estimates that that could be several more hundreds of billions of dollars, but there is no firmness in those estimates. It seems to be a moving target."
Cunningham added that when reforms were first introduced, many clients were adamant that they would not be in liquidity products that had fees and gates or a floating NAV. She explained, "If you ask those same clients that same question today and you talk about yield spreads, there is much more potential interest and tolerance" for the unlikely occurrence of a fee or a gate being imposed, or mild volatility, given the potential for returns higher than a Government fund. "I think we still have a lot to learn and perhaps we start to learn some of that in April," she added. Carfang commented, "At Treasury Strategies, our clients clearly are less concerned about fees gates and floating NAV than they were six months ago ... nine months ago, and it's truly a question of spread between prime and government funds."
There was also some discussion of the High Yield bond fund market, specifically the Third Avenue Focused Credit Fund, which halted redemptions in December. Fitch's Merritt said that through research his firm did into the fund, he found it to be "a bit of an outlier.... It was clear that the Third Avenue fund had a very high portion of its assets in what would appear to be in distressed or less liquid assets, whereas that's not the case for most other high yield funds." He said it may have been the case of essentially a hedge fund operating as an open-ended mutual fund.
