The September issue of our Bond Fund Intelligence, which was sent out to subscribers Monday morning, features the lead story, "Ultra-Short Bond Funds Getting Flows, More Attention," which reviews a recent uptick in coverage of ultra-short bond funds, and the profile, "Fidelity Conservative Income Bond Fund Breaks $10 Bil.," which interviews Fidelity Investments Portfolio Manager Julian Potenza. BFI also recaps the latest Bond Fund News and includes our Crane BFI Indexes, which show that bond fund yields fell while returns moved higher in August. We excerpt from the latest issue below. (Contact us if you'd like to see a copy of Bond Fund Intelligence and our BFI XLS spreadsheet "complement," and watch for details soon on our 3rd annual Bond Fund Symposium, which will take place March 25-26, 2019 in Philadelphia.)
Our lead BFI story says, "Ultra-short bond funds continue to be the fastest-growing portion of the $4.7 trillion bond fund marketplace. While bond funds are still seeing inflows, the "conservative" or ultra, ultra-short segment of the market appears to be in the sweet spot. (See our table below of YTD asset changes by category.) Gradually rising rates and positive returns are making these funds more attractive, while losses in the huge intermediate-term space are beginning to impact flows here. Below, we review some of the most recent coverage on this hot segment."
It continues, "Barrons' recently wrote "Bond Funds Are Thriving as Short-Term Yields Top 3%. Here's Why." They explain, 'Investors are selling stocks and buying bonds. That might seem odd given that bond returns have been anemic, at best, while stocks keep chugging along, hitting record highs. Nonetheless, investors can't seem to get enough of bonds. Taxable fixed-income mutual funds and exchange-traded funds have raked in $166 billion in net inflows this year, including more than $6.1 billion in the week that ended Aug. 8, according to the Investment Company Institute. Bond funds and ETF assets now total $4.7 trillion, with ETFs accounting for 12.5% of the total bond-fund market, according to Bond Fund Intelligence, an industry newsletter.'"
Barron's adds, "Bond funds may be benefiting from an exodus out of stocks that has been building for months. Domestic equity funds have seen net withdrawals of $87 billion this year and $192 billion overall since January 2016, according to ICI data. Taxable bond funds, meanwhile, have recorded net inflows of $706 billion since then, while muni funds have raked in $75 billion. Yet bonds are under their own pressures, as rising interest rates drag on prices across the board. The Bloomberg Barclays U.S. Aggregate Index is down 0.9% this year."
Our "profile" on article reads, "This month, Bond Fund Intelligence interviews Fidelity Investments Portfolio Manager Julian Potenza, who along with Rob Galusza, runs Fidelity Conservative Income Bond Fund. Fidelity 'CIB' as it's referred to, is one of the pioneers in the 'Conservative' Ultra-Short Bond Fund space, and recently passed the $10 billion milestone. We discuss the fund's strategies, its success, and a number of issues in the shortest segment of the ultra-short term bond fund space."
BFI asks, "Tell us about your history." Potenza tells us, "Fidelity has a very long history managing fixed income assets across the entire yield curve. Obviously, that includes our money market business, with which you're very familiar. We also have a long track record managing short-term bond funds.... For example, Fidelity Short Term Bond Fund, another fund that I co-manage, has been around since the mid-1980s.... The Conservative Income Bond Fund was launched in 2011."
He continues, "I have been involved with Fidelity's fixed income investment efforts since about 2007. I joined as a 'financials' analyst, and cut my teeth covering banks.... Then in 2012, I moved into our macro research team, focusing on the U.S. economy and the Fed. I've with both our bond and money market investment teams for about 10 years [and] joined the Conservative Income Bond Fund management team a little under a year ago in October of 2017."
BFI also asks, "What drove the launch of CIB?" Potenza responds, "The fund was launched in the midst of the zero-interest rate environment.... Our philosophy has always been to offer a range of products across the duration and risk spectrum.... It's also always been clear that there is a portion of clients' liquidity portfolios, where they have a little bit longer time horizon and a little bit more of a risk appetite." (Watch for more excerpts from this article later this month, or see the latest issue of BFI.)
A Bond Fund News brief, entitled, "Yields Fall and Returns Rise in August," tells us, "Bond fund yields fell over the past month as returns moved higher across all categories but Global. The BFI Total Index averaged a 1-month return of 0.24% and the 12-month gain was 0.36%. The BFI 100 returned 0.37% in August and 0.28% over 1 year. The BFI Conservative Ultra-Short Index returned 0.13% over 1 month and 1.56% over 1-year; the BFI Ultra-Short Index averaged 0.16% in August and 1.28% over 12 mos. Our BFI Short-Term Index returned 0.30% and 0.47%, and our BFI Intm-Term Index returned 0.46% and -0.70% for the 1-mo and year. BFI's Long-Term Index returned 0.46% in August and -0.89% for 1yr; BFI's High Yield Index returned 0.55% in Aug. and 2.74% over 1-yr."
Another brief, entitled, "P&I on Gross," explains, 'Gross' unconstrained bond fund ... strained,' in Pensions & Investments tells us, 'Janus Henderson's Global Unconstrained Bond Fund saw about $802 million in net outflows ... through July 31. The fund, managed by William H. Gross, lost 6.86% over that period, after annual gains of 5.26% and 2.43% in 2016 and 2017, respectively. 2018's outflows nearly wiped out net inflows during the past two years as investors fled the fund, which ranked at the bottom of its peer group.'"
A third News brief, "FA on USB and ESG," cites a Fund Action piece, "UBS sees opportunities in 'untapped' fixed income ESG space." They write, "UBS Asset Management is looking to capitalize on a lack of products with measurable environmental, social and governance impact -- particularly in the fixed income space -- despite growing demand." (See too Crane Data's Sept. 6 News, "DWS ESG Liquidity Goes Live.")
Finally, a sidebar entitled, "Morningstar on Ultrashorts," explains, "Morningstar continues its newfound emphasis on bond funds with the article, '2 Ultrashort Bond Fund Picks for a Rising Rate Environment.' It tells us, 'With two Federal Reserve rate rises so far this year, and the broader markets anticipating continued lifts in the federal funds rate in the near future, the landscape for ultrashort bond funds is at a dynamic point. Ultrashort bond funds blend the higher quality and more liquid bias of money market funds with a sector flexibility that is more similar to short-term bond funds, investing across geographies and in corporate debt and municipals.'"
