The February issue of our Bond Fund Intelligence, which was sent to subscribers Friday morning, features the lead story, "Too Hot To Handle: Bond Funds in Bubble. Burst in '20?," which reviews the latest flows and signs of a market top, and, "Touchstone Ultra Short Hits $1 Billion; Miller & Mayfield," which interviews Fort Washington Investment Advisors' Brent Miller and Laura Mayfield. BFI also recaps the latest Bond Fund News and includes our Crane BFI Indexes, which show bond fund yields fell sharply and returns surged in January. 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 data.)
Our "Bond Bubble" article says, "Given the gigantic inflows year-to-date and over the past several years, it's clear that bond funds and bond ETFs are in the midst of one of the biggest asset bubbles in history. We'd wager that the bubble will burst very soon, but, unlike climate change disciples, we know better than to try to predict the future. But clearly the end must be nigh. While our prediction may be suspect, we review the latest on flows and signs of a market top below."
It continues, "The Wall Street Journal's Jason Zweig probably agrees, writing in, "Bond Funds Are Hotter Than Tesla," explains, "Tesla Inc.'s stock isn't the only hot asset. Nearly four decades into a bull market for bonds, investors still have a ravenous appetite for them, even though interest rates are near historic lows around the world. Much of the influx into bonds has come from individual investors. But that doesn't make them the 'dumb money,' especially because many giant institutions are investing just as avidly."
Our "Touchstone Ultra Short" profile reads, "This month, Bond Fund Intelligence interviews Fort Washington Investment Advisors' Senior Portfolio Manager Brent Miller and Portfolio Manager Laura Mayfield, who manage investments for the Touchstone Ultra Short Duration Fixed Income Fund. We discuss their focus and policies, why spread duration is an underappreciated metric and how the pair navigate the 'flat relative value landscape.' Our Q&A follows."
BFI says, "Give us some history." Miller answers, "Fort Washington has been involved in the ultra-short space since 1995. Scott Weston and I have been running ultra-short duration portfolios together at Fort Washington since 2001, and Laura Mayfield joined our team in 2010. Touchstone started offering funds in 1994. The Ultra Short Duration Fund was acquired by Touchstone in 2006, and then Fort Washington began sub-advising it in 2008. Fort Washington also sub-advises Touchstone Active Bond Fund, High Yield Fund and Ohio Tax Free Bond Fund. Touchstone also has other funds sub-advised by other institutional asset managers."
BFI also asks, "What's new with this fund?" Mayfield tells us, "At the portfolio level, with the strong rally in corporate bond spreads at the end of the year, we've rotated out of some of our corporate exposure at relatively tight levels, and rotated more heavily into structured products -- CMBS, ABS and RMBS -- where we continue to find pockets of value. We're always a structured-product focused fund, but even more so today than we have been over recent years."
Our Bond Fund News includes the brief, "Yields Plunge, Returns Jump in January," which tells us, "Bond fund yields fell sharply and returns surged last month. Our BFI Total Index returned 1.13% over 1-month and 7.18% over 12 months. The BFI 100 returned 1.31% in Jan. and 7.92% over 1 year. Our BFI Conservative Ultra-Short Index returned 0.27% over 1-mo and 2.76% over 1-yr; Ultra-Shorts averaged 0.34% in Jan. and 3.11% over 12 mos. Short-Term returned 0.64% and 4.86%, and Intm-Term gained 1.69% last month and rose 8.69% over 1-year. BFI's Long-Term Index returned 2.44% in Jan. and 12.07% for 1-yr; our High Yield Index rose 0.12% in Jan. and 8.14% for 1-year."
In another News brief, we quote the Morningstar piece, "Bond Funds Dominate in 2019 Fund Flows." They tell us, "The strong long-term inflows owed almost entirely to record inflows for both taxable-bond and municipal-bond funds, which collected $413.9 billion and $105.5 billion, respectively. With greater 2019 flows than their active counterparts, passive taxable-bond funds now have a third of that market."
In "The Year in Bond Funds 2019," Morningstar also comments, "This past year was one of the best since the financial crisis for fixed-income returns.... Every bond fund Morningstar Category had positive returns in 2019, led by the 19.3% average return on long-term bond funds, while the worst-performing category (ultrashort bond) still posted a respectable average return of 3.1%. The Bloomberg Barclays U.S. Aggregate Bond Index, a proxy for typical U.S. core bond exposure, returned 8.7%, its best year since the financial crisis."
A third News update covers the The New York Times' article, "The Great Bond Party of 2019 Is Ending," which tells us, "With Federal Reserve rate cuts behind us and recession fears waning, don't expect much from bond funds this year. Economic worries last year turned out to be great news for bond investors ... the most profitable calendar year for bond fund investors since 2002. Core investments such as the Vanguard Total Bond Market Index mutual fund and the iShares Core U.S. Aggregate Bond exchange-traded fund gained nearly 9 percent in 2019. Investors playing it safe in high-quality short-term bonds profited, too. The 3.5 percent gain for the Schwab Short-Term U.S. Treasury E.T.F. was more than a percentage point above inflation. The Baird Short-Term Bond fund gained 4.7 percent. But the bond party of 2019 is expected to give way to a bit of a hangover this year."
BFI also features a sidebar entitled "BlackRock Bets on Bond ETFs." It says: "BlackRock CEO Larry Fink commented on the company's latest earnings call, 'Fixed income ETFs will be one of the largest drivers of BlackRock's growth over the next decade.... The combination of BlackRock's history as a bond manager, our expertise in ETFs and our industry leading technology and data capabilities has created significant differentiation for iShares. After having pioneered the first fixed income ETF in 2002, iShares fixed income AUM surpassed $565 billion and generated a record $112 billion of net inflows in 2019, compared to the previous record of 2017 of $67 billion.'"
Finally, we wanted to remind you again about our fourth annual ultra-short bond fund event, Bond Fund Symposium, which will take place March 23-24, at the Hyatt Regency Boston. Crane's Bond Fund Symposium offers a concentrated and affordable educational experience, as well as an excellent networking venue, for bond fund and fixed-income professionals. Registrations are being accepted ($750) and sponsorship opportunities are still available. (Tickets are also available to select Crane Data clients and PMs. Let us know if you'd like more information.) See the latest agenda here and click here for details or to register.
