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In Tom Wolfe's iconic 1987 novel Bonfire of the Vanities, Master of the Universe Sherman McCoy isn't a stock picker; he's a very wealthy bond trader. Like McCoy, asset managers that have focused on fixed-income investing have gotten very rich over the last three decades as interest rates have steadily fallen.

But things are about to get a lot harder for these asset managers. After an unprecedented five years of loose monetary policy in the U.S. and around the world that has pushed interest rates to historic lows, the returns investors can expect from fixed-income investments have changed dramatically. In May and June, investors got a taste of the damage that rising rates can do to bonds, whose prices fall as rates rise. In May, when Federal Reserve Board Chairman Ben Bernanke first hinted that the Fed could reduce its bond-buying program as early as this fall, prices of bonds tumbled; they fell again in June when Bernanke reiterated those comments rather than walking them back, as many in the market had been expecting. According to Cambridge, Massachusetts–based EPFR Global, which tracks individual and institutional fund flows, investors yanked $57.8 billion from global bond funds in the four weeks ending June 28. The largest mutual fund, Pacific Investment Management Co.'s Pimco Total Return fund, managed by Bill Gross, had $9.9 billion in outflows in June, after posting a negative return of 2.65 percent for the month.

The asset management industry has made a killing overseeing bond funds because of both a rise in the value of these assets as well as the scale efficiencies in managing bonds. In 2012, according to the Washington, D.C.–based Investment Company Institute, a trade group for mutual funds, investors put $304 billion into U.S. bond funds, up from $125 billion the year before. In 2009, bond funds saw a record $380 billion in net inflows. Global revenue from 2000 to 2012 for fixed-income managers grew 109 percent versus equity managers' growth of 73 percent in the same period. Among the top 10 firms on the II300, Institutional Investor's annual ranking of the 300 largest U.S. money managers, are such fixed-income behemoths as BlackRock, Pimco and Prudential Financial.

Now all fixed-income managers need to change their investment process, and that won't be easy, according to a new report from Casey Quirk & Associates, a Darien, Connecticut–based consultant for investment managers. Yariv Itah, a partner at Casey Quirk, says he expected that when rates rose, investors would dump their fixed-income investments. But his research showed something different happening. Even before rates started rising in May, investors were starting to move away from core investments into different types of bond strategies. "Among retail and institutional investors, there's not much appetite to decrease their overall allocation to fixed income. But there is a huge shift into other types of debt investments than they are in now," says Itah. Casey Quirk expects that as investors face uncertain bond markets they will shift $1 trillion of assets — about 15 percent of their portfolios — away from traditional fixed-income areas such as core, core plus, government bond and benchmark-oriented strategies tied to popular indices. Those funds will be directed toward what Itah calls next-generation debt investments, including global bonds, emerging market bonds, high-yield and bank loan investments, structured products and portfolios managed to protect investors' principal against the ravages of inflation.