The December issue of our Bond Fund Intelligence, which was sent to subscribers Wednesday morning, features the stories, "WSJ on Investors Swapping Bond Funds for Bond ETFs," which reviews the shift in assets from bond funds to bond ETFs, and "Weitz Core Plus Income Profiled in Latest Barron's," which reviews a recent profile piece. BFI also recaps the latest Bond Fund News and includes our Crane BFI Indexes, which show that bond fund returns rebounded in November while yields were mixed. 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.) (Reminder: For those of you attending at our Money Fund University tomorrow (12/15) in Boston, you may access the conference materials at the bottom of our "Content" page or via our "Money Fund University 2022 Download Center.")
Our "Investors Swapping" article says, "Readers of our bond fund news know that bond ETFs have been gaining asset share over bond mutual funds for years now. But a rare look at the trend and reasons behind it appeared this week in The Wall Street Journal. They write, in, 'Bond Investors Swap Mutual Funds for ETFs at Record Pace,' 'Worn down from record losses, investors have fled bond mutual funds en masse. But many aren't quitting on bonds -- they are just turning to exchange-traded funds. One main reason: taxes. Some investors sell beaten-down positions in bond funds to harvest tax losses. In many cases this year, investors have opted to put cash into similar ETFs to maintain bond exposure.'"
It continues, "The Journal quotes Simon Hamilton, from Raymond James, 'More sophisticated investors are employing tax strategies, as well as trading up in credit quality.' They comment, 'This year is shaping up to be the biggest 'wrapper swap' on record. Roughly $454 billion has been pulled from bond mutual funds on net while $157 billion has entered bond exchange-traded funds through the end of October. That would be the largest net annual swing toward ETFs by a wide margin, according to Strategas. 'The Fed is at its most aggressive in 40 years,' said Todd Sohn, ETF strategist at Strategas. 'Along with inflation, that has absolutely crushed bonds. It's set off the acceleration of wrapper swapping that we have seen in equities for a while. Now we're finally getting it in bonds.'"
Our "Weitz Core" piece states, "Barron's recently wrote, 'Meet Omaha's Unsung Fund Managers. Here's Their Winning Formula <i:https://www.barrons.com/articles/bond-fund-income-corporate-debt-treasuries-51669150874>`_.' They state, 'If volatile derivatives such as futures and credit default swaps are ‘financial weapons of mass destruction' ... what are they doing in your low-risk bond funds? Look at the annual reports of some of the largest bond funds, and chances are you will see several pages devoted to riskier financial contracts that can add both leverage and unique liquidity, as well as counterparty risks to their portfolios. That's one thing you won't find in Weitz Core Plus Income (WCPNX).'"
It continues, "The profile explains, 'It's a U.S.-dollar cash-bond fund, i.e., good, old fashioned fixed-income investing,' says the fund's co-manager, Nolan Anderson. 'There are no derivatives, no options, no foreign currencies, no non-U.S. dollar-denominated debt.' Anderson, 42, and co-manager Tom Carney, 58, seek to minimize downside risk. They also avoid hewing too closely to the Bloomberg U.S. Aggregate Bond Index.... 'We allocate capital based on the best risk-adjusted returns we can find in the market broadly, whether or not that is something that’s in the index.'"
Our first News brief, "Returns Rebound, Yields Mixed in Nov," states, "Bond fund returns rebounded strongly in November while yields were mixed after rising for 12 months in a row. Our BFI Total Index rose 2.80% over 1-month but is down 8.19% over 12 months. The BFI 100 rose 2.88% in Nov. but lost 9.45% over 1-year. Our BFI Conservative Ultra-Short Index was up 0.55% over 1-month but is down 0.32% for 1-year; Ultra-Shorts rose 0.55% and -1.32%. Short-Term rose 1.20% and -4.91%, and Intm-Term rose 3.35% and -11.54% over 1-year. BFI's Long-Term Index rose 4.53% and -15.12%. High Yield rose 2.03% in Nov. but fell 6.84% over 1-year."
A second News brief, "The New York Times Says, 'The Picture Improves for the Treasury Bond <i:https://www.nytimes.com/2022/12/09/business/bond-market-economy-investing.html>`_.' They write, 'This has been an awful year for U.S. bonds -- so bad that 2022 may end up as the worst calendar year in history. But what do terrible bond returns in 2022 mean for the future? ... At the very least, a repetition of the shocking level of the losses of 2022 isn't likely.'"
Another brief quotes Barron's "Take a Look at Junk Bonds. They Now Yield Over 8%.' They write, 'Their 'Income Investing' column tell us, 'High-yield bonds have struggled alongside most of fixed income amid a spike in interest rates from the Federal Reserve. The question now: Is it time to dip in? ... 'It's a nice, clean asset class for investors looking to generate yield,' says Ashish Shah, chief investment officer of public investments at Goldman Sachs Asset Management. Falling prices have pushed junk yields up to an average 8.4%, based on the ICE BofA US High Yield Index. That’s nearly double the average yield of 4.35% at the end of 2021.'"
A BFI sidebar, "MStar: Best BFs for Rebalance," explains, "Morningstar published, 'The Best Funds for Rebalancing in 2023,' which says, 'Those looking for solid core bond ETFs or mutual funds should begin their search with highly rated funds in the intermediate core bond or the intermediate core-plus bond Morningstar Categories. Funds in both categories invest largely in investment-grade U.S. fixed-income issues, including government, corporate, and securitized debt; they usually maintain durations that range from 75% of 125% of the three-year average effective duration of the Morningstar Core Bond Index. The difference: Core-plus funds have more flexibility to own noncore bonds, such as corporate high-yield, bank-loan, and emerging-markets debt. Funds in both categories therefore provide a lot of diversification in a single holding, and as a result they don't court excessive interest-rate or credit risk.'"
Finally, another sidebar, "BF Assets Jump Back in Nov.," explains, "Bond fund assets Jumped in November after falling for 10 out of past 11 months. Total assets rose by $62.1 billion to $2.628 trillion last month, according to BFI. YTD, assets are down $601.9 billion (through 11/30/22), and over 1-year they're down $711.6 billion, or -21.3%."
