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.