The December issue of our Bond Fund Intelligence, which was sent out to subscribers Friday afternoon, features the lead story, "Mixed Year for Bond Funds; Short, Ultra Only Havens," which reviews funds' lackluster performance and declining flows in 2018, and the profile, "GMO's Tracey Keenan Talks Short Duration Strategies," our latest Portfolio Manager interview. BFI also recaps the latest Bond Fund News and includes our Crane BFI Indexes, which show that bond fund yields rose again in November and returns rebounded from losses in Oct. We excerpt from the new issue below. (Contact us if you'd like to see our Bond Fund Intelligence and BFI XLS spreadsheet, or our Bond Fund Portfolio Holdings dataset, and mark your calendars our 3rd annual Bond Fund Symposium, which will take place March 25-26, 2019 in Philadelphia.)
The lead BFI story says, "Bond fund returns bounced back in November after an ugly October, but outflows continued for the second month in a row. Our BFI Total Index (an average of 632 funds) shows bond funds declined in 5 of 11 months so far in 2018 with an average return of -0.54% year-to-date. In 2018 so far, only Short-Term, Ultra-Short, Conservative Ultra-Short and Muni funds show positive returns."
It continues, "Meanwhile, while bond funds eked out a tiny gain in assets in November (after a big decline in October), asset flows for bond funds have turned decidedly negative after years of strong inflows. Thus, while there remains a little time left in the year, 2018 will likely go down as a mixed year at best. We show the latest monthly flow data below, and we show monthly returns on page 4."
Our "Fund Profile" says, "This month, BFI interviews Tracey Keenan, Portfolio Manager for Short Duration Strategies at GMO. GMO, also known as Grantham, Mayo, & van Otterloo, is a Boston-based institutional investment manager, which manages both mutual funds and separate accounts. We discuss their short-term strategies, and a number of other fixed-income topics, in our Q&A below."
BFI asks Keenan to, "Tell us about your history." She responds, "I've been at GMO since 2002, and GMO has been investing in short term bonds as part of their asset allocation strategies for many years.... In 2014, we started to expand our cash investing to more customizable solutions with dedicated internal portfolio managers."
BFI also says, "Tell us about your strategies." Keenan comments, "We invest in U.S. and non-U.S. governments and agencies, all currency hedged. We focus on high-quality liquid assets, so we really want minimal currency exposure, and tend to run one-year maximum weighted duration with a two-year max maturity."
She adds, "What we found coming out of money market reform in 2016 was that there was a supply and demand issue around Treasury bills because of the [huge demand from] government money market funds. We were basically competing with the government-only money market funds in the same space with limited supply. So there was a lot of supply and demand dynamics in the market that we didn’t really need to compete with. We decided to try and focus outside of that money market space, while maintaining." (Watch for more excerpts from this article later this month, or see the latest issue of BFI.)
Our Bond Fund News includes the brief, "Yields Rise Again, Returns Rebound in November." It explains, "Bond fund yields rose again and returns rebounded last month. The BFI Total Index returned 0.23% for 1-month and -0.14% over 12 months. The BFI 100 returned 0.24% in November and -0.27% over 1 year. The BFI Conservative Ultra-Short Index returned 0.17% over 1 month and 1.69% over 1-year; the BFI Ultra-Short Index averaged 0.15% in Nov. and 1.39% over 12 mos. BFI Short-Term returned 0.12% and 0.58%, and BFI Intm-Term Index returned 0.41% and -1.11% for 1-mo and 1-year. BFI's Long-Term Index returned 0.27% in Nov. and -2.13% for 1-year; BFI's High Yield Index returned -0.67% in Nov. and 0.21% over 1-year."
Another brief, entitled, "BlackRock Blogs 'How the pros use bond ETFs,' which says, "Rising rates and market uncertainty have many people taking a second look at their bond portfolios -- not just sector exposures but the vehicles they use to gain those exposures. More and more, `investors are moving away from individual bonds and turning to exchange trade funds (ETFs) for their simplicity, low cost and diversification. Large institutional investors have been big adopters of bond ETFs. As Greenwich Associates found in their new report, 60% of institutions in the U.S. and Europe have increased their use of bond ETFs in the past three years, with an average allocation of 18% to their fixed income portfolios."
A third News brief, "WSJ Writes, 'Now Loan Investors Are Heading for the Exits.' They explain, "Investors have pulled $5.4 billion from loan-focused mutual funds since mid- October, including $4.1 billion in the past three weeks alone, according to data from Lipper. That's quite the turnaround: Investors had poured nearly $12 billion into loan-focused mutual funds in the year up to mid-October, even as they withdrew more than $22 billion from high-yield bond funds, according to Lipper."
Finally, a sidebar entitled, "Vanguard Breaks $1 Trillion in Bond Funds," comments, "The latest 'Family Rankings' in our Bond Fund Intelligence XLS show Vanguard breaking $1 trillion in bond fund assets for the first time ever. The funds tracked by BFI XLS for the top bond fund manager total $1.010 trillion, up $52.5 billion, or 33.8% over the past 12 months. Vanguard represents over one-third (33.8%) of the $2.986 trillion in bond funds and bond ETF assets in BFI XLS. (Note: Crane Data continues to expand its collection of bond funds, so these numbers may not represent all funds managed and may be inflated by the addition of new funds.)"
Finally, it adds, "BlackRock ranks a distant number 2 in our ranking with $314.4 billion. They've seen assets grow by $13.4 billion, or 4.5%, and represent 10.5% of bond fund assets. PIMCO ranks No. 3 with $267.9 billion (9.0%), while Fidelity ranks No. 4 with $223.4 billion (7.5%). American Funds, JPMorgan, MetWest, DFA, T Rowe and DoubleLine round out the list of the 10 largest bond fund managers."
