The best-selling fund in the U.S. is a bond fund. That’s a sign of the times.
By Hank Kim
December 2001
Institutional Investor Magazine
Despite a recently rejuvenated stock market, bonds have still outperformed equities for the year. Although the Standard & Poor’s 500 index is down 13 percent through November 27, the Lehman Brothers long Treasury bond index is up 6.7 percent, and corporate bonds have risen 11.4 percent.
As a result, many bond funds continue to attract substantial net new cash flows. None has been more successful in this pursuit than the $51 billion-in-assets Pimco Total Return Fund, now the top-selling fund in the U.S. The intermediate-term bond fund pulled in nearly $7 billion in net new cash flow through the end of September and returned 8.6 percent through November 27, versus an average 7.3 percent return for its peers.
William Gross, Pacific Investment Management Co.'s well-regarded cio, was buying short-term Treasuries ahead of the game with the contrarian view that the yield curve would steepen. “Gross’s strategy has enabled Pimco to outperform,” says Alan Papier, an analyst at Morningstar.
Another Pimco institutional offering, the $265.4 million Long-Term U.S. Government Fund, was the top-performing long-term bond fund last year, according to Morningstar. It returned 20.38 percent in 2000, versus the 11.8 percent average for the category, and remains strong this year, returning 7.76 percent through November 27, versus the 7.1 percent group average.
Although fixed-income investors had expected the 30-year bond to disappear at some point, when the Treasury Department announced in October that it would stop selling the traditional long bond, the sudden scarcity caused prices to spike and yields to decline. After a wobbly stretch in which bond investors alternately worried about looming inflation sparked by fiscal stimulus and focused on an imminent recession, 30-year Treasuries settled back to yield a recent 5.25 percent, up from a three-year low of 4.88 percent on the day of the Treasury announcement.
Gross, for one, has been enthusiastic about bonds other than Treasuries. “Most investors think of corporates and mortgage-backeds as a bit more risky than the 30-year T-bond, but they don’t have to be,” he says. “The Ginnie Mae, for example, has a complete Treasury guarantee, so the risk is more in prepayments than in credit.”
Before the Treasury scrapped the long bond, Ted Giuliano, director of the fixed-income group at Neuberger Berman, had preferred premium coupon mortgages, Treasury inflation-protection securities and blue-chip corporates to Treasuries. “We’re now holding and adding to our 30-year Tips,” Giuliano said shortly after the Treasury announcement.
Extending maturities clearly paid off in 2000. While institutional long-term bond funds returned an average 11.8 percent, short-term funds returned just 7.95 percent.
Loomis Sayles & Co.'s U.S. Government Securities Fund, with almost $17 billion in assets, posted a robust 17.65 percent total return last year and a 5.20 percent return through November 27, 2001.
Curt Mitchell, a fixed-income portfolio manager at Loomis Sayles, believes that the biggest questions hovering over the bond market cannot be answered: Will there be further terrorist attacks on the U.S., and if there are, how will capital markets react?
Mitchell, for one, thinks that the Federal Reserve Board will flood the markets with liquidity and further cut short-term rates should the U.S. face another attack. “The Fed will keep the yield curve steep to help the healing process,” he says.
