Asset managers of fixed-income portfolios have profited
handsomely from three decades of falling interest rates. But it
might be time to pay the piper. When Federal Reserve chairman
Ben Bernanke this spring announced that he might take away the
honey pot and begin tapering the Feds $85 billion-a-month
bond buying program as early as September, investors sold off
bonds and the yield on the ten-year Treasury note rose to as
high as 2.6 percent. As expected, fund shareholders panicked as
bond funds declined in value. Bill Grosss Pimco Total
Return Fund, the largest mutual fund, lost a record amount of
client money in the spring.
Firms have a lot to lose if clients bolt or even moderate
the money theyre socking away in bond funds. Indeed, some
of the biggest managers on the II300 Institutional
Investors annual ranking of the 300 largest U.S.
money managers, which oversee an aggregate $38.14 trillion in
assets are bond behemoths. However, big allocations to
fixed income can still make good sense. Robert Smith III,
president of Sage Advisory Services, an $11 billion investment
firm based in Austin, Texas, says that despite the short-term
volatility, fixed-income investments are generally stable
because of factors hardly going away, such as demographics.
Older investors tend to have big bond holdings, he explains.
Corporate defined benefit plans are also big buyers of fixed
income, as are insurance companies. There is a long-term
durability to this asset class, he says.
Read more in the July/August Americas edition of
Institutional Investor magazine.