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Morningstar’s Christine Benz writes a fascinating article today, about how individual investors have fared in the five years since the end of the Financial crisis.
So how did bond investors do? Well poorly by all accounts. Taxable-bond investors, on an asset-weighted basis, captured returns that were 30% lower than the asset-weighted returns for the category.
Municipal-bond funds’ investor returns were even worse. The weakness was widespread, but especially notable in some of the more specialized categories that investors have been gravitating to during the past several years.
But they did better than those who invested in nontraditional bond, bank-loan, and emerging-markets bonds, all of which provided lousy returns, with investors capturing 34%, 63%, and 42%, respectively, of the categories’ average returns.
So why the poor performance? Morningstar analyst and asset-flows expert Mike Rawson says that: “Many of the funds in these groups saw their strongest returns in the earliest part of the period examined, but investor dollars didn’t flow into them in earnest until a few years ago.”
Which implies that most investors missed the boat with these bonds, transitioning into them way too late. In fact, it seems many private investors were buying into these funds just as many institutional investors were selling them.
All of this reinforces the importance of building a properly balanced portfolio and monitoring it regularly. Performance chasing has never worked well for investors, who always seem to arrive at the part long after everyone else has left.
The private investors that did best over the last five years were those which invested in all-in-one stock/bond vehicles–especially target-date funds–which tend to encourage disciplined, placid behavior that translates into strong take-home returns. On an asset-weighted basis, investors in hybrid/stock bond funds earned 93% of the funds’ total returns–the highest of any asset class.
You can read the full article here.
Bernardi Securities: – Rally opportunity & Fed watch Wednesday. – Despite continual mutual fund outflows, the municipal market has kept pace with a significant rally in the Treasury market over the course of the last two months.
BusinessInsider: – Puerto Rico’s debt crisis: Puerto pobre. – Puerto Rico’s debt has long been a staple of American municipal-bond funds because of its high yields and its exemption from federal and local taxes–of particular appeal to investors in high-tax states. That let Puerto Rico keep borrowing despite its shaky economic and financial condition, until Detroit’s bankruptcy in July alerted investors to the threat of default by other governments in similar penury.
Learn Bonds: – A closer look at zero-coupon bonds. – Given the dearth of investment articles on zero-coupon bond opportunities, I thought I’d write a bit about what I discovered when recently searching for currently-available zeros trading on the secondary market.
Morningstar: – Corporate bond market continues to recapture losses. – The demand for corporate bonds should push corporate credit spreads tighter, says Morningstar’s Dave Sekera.
BroadwayWorld: – U.S. Corporate bond market seeks new trading solution as QE tapering looms. – Danger signs in the US corporate bond market are flashing like a lighthouse’s beacon and according to new TABB Group research, the market is searching for new alternatives to trade credit as low interest rates have driven credit issuance to all-time highs.
HighYieldBond.com: – Coca-Cola sets 5-part benchmark to repay $3.15B debt through 1Q. – The Coca-Cola Company, which is among the lowest-cost borrowers around, is in the market with a refinancing-driven benchmark offering of SEC-registered senior notes across three-year fixed- and floating-rate notes, and five-, seven- and 10-year fixed-rate issues, sources said.
Tabb Forum: – U.S. corporate bond trading 2013: In search of a new market structure. – Danger signs in the corporate bond market are flashing like a lighthouse’s beacon. Issuance is at an all-time high, dealer inventories are at an 11-year low, and regulators are reducing leverage through Basel III and the Liquidity Coverage Ratio (LCR). The market and liquidity risk historically held by dealers now squarely rests with investment managers. With the threat of tapering looming, a shift in interest rates could be traumatic, especially if the corporate bond market structure does not function properly.
CNN Money: – Bond rates unlikely to soar again. – So much for the bond bubble bursting. And that may be great news for consumers, especially those looking to buy a house or refinance their mortgage.
WSJ: – Fed balance sheet not seen returning to normal until at least 2019. – The Fed’s balance sheet, which is fast approaching $4 trillion in total assets, won’t return to normal until sometime between mid-2019 and mid-2021, according to new projections prepared by central bank researchers.
Equities.com: – A long taper ahead? – Bill Gross is confident that the Fed will keep rates low and that the “taper” will take place over the long-term, at least through 2016, simply because that is the only conceivable path by which the central bank can return to a more neutral function.
Financial Advisor: – Treasury plans to issue ‘retirement bonds’. – Plans to create “retirement bonds” to encourage savings by risk-averse Americans not enrolled in company-sponsored pension programs are on the front burner of the Treasury Department, Treasury Deputy Assistant Treasury Secretary (Tax Policy) for Retirement and Health Policy Mark Iwry said.
High Yield Investing: – Junk bonds poised to outperform. – Junk bonds are already up more than 6% so far in 2013 – a year when other types of bonds have stumbled – but that doesn’t preclude high yield from continuing to outperform. So says ING Investments in its latest fixed-income report.
4Traders: – BMO’s Scott Kimball sees opportunities in the upper end of high yield. – BMO’s Scott Kimball says there are opportunities in the upper end of the high yield market. You just have to do a little extra credit work to find them.
ETF Trends: – Junk bond ETFs loving a no tapering world. – The May peak to June trough decline for the iShares iBoxx $ High Yield Corporate Bond ETF, the largest high yield bond ETF by assets, was 7.5%. That decline was induced primarily by speculation the Federal Reserve was preparing to taper its quantitative easing program.
Bloomberg: – Is your pension courting catastrophe? – One of the best ways to blow yourself up in financial markets is to sell lots of cheap insurance against risks you don’t fully understand. Traders call this “picking up pennies in front of a steamroller,” since the strategy appears profitable right up until you lose everything. It’s therefore somewhat concerning to read, per Bloomberg News, that pension funds are attempting to boost their returns by putting more money in catastrophe bonds and other insurance-linked securities.
ETF Trends: – Punishment could be a gift for EM bond ETFs. – They always say it is darkest before the dawn. Perhaps the proverbial “they” were referring emerging markets bonds and the exchange traded funds that hold those bonds.
WSJ: – Emerging markets, U.S. corporate debt expected to be among better fixed income performers through 2018, according to Standish. – Emerging market debt and U.S. corporate bonds are expected to be among the better performing fixed income segments through 2018, although asset returns are likely to be below historical averages over the next five years, according to the five-year outlook published by Standish Mellon Asset Management Company LLC, the Boston-based fixed income specialist for BNY Mellon.
Bond Vigilantes: – Will the Fed push EM over the edge? – We’ve been very worried about emerging markets for a couple of years, initially because of surging portfolio flows, better prospects for the US dollar and historically tight valuations. But increasingly recently our concern has been driven by deteriorating EM fundamentals. A combination of miscommunicated and misconstrued Fed speak in May brought things to a head, and EM debt crashed in May to July, although the asset class has since recovered roughly half of the losses. So where are we at now?
Investors.com: – Foreign Bond ETFs: Strategist see role in portfolio. – With interest rates in an uptrend in the U.S. and lots of volatility and uncertainty in the U.S. markets, adding international fixed-income ETFs to one’s portfolio can be a useful diversification strategy.
AOL Finance: – New ‘secure’ bond paying 6.5% interest a year. – To take advantage of this rising demand for high-income bonds, lots of companies have started issuing retail mini-bonds aimed squarely at private investors. However, these bonds would be more popular if companies would offer nervous investors more security, both for their capital and income.
Fox Business: – International bond ETFs breakout. – Investors may be able to play U.S. bond ETFs during the rally, however the income paid out remains low and the rally will not last forever. A better option is to look outside the borders of the U.S. at international bond ETFs. Both developed and emerging market international bond ETFs are offering higher yields as well as more upside potential.
Gross: All risk asset prices artificially high. When won’t they be? When they don’t produce growth in real economy. Is 2% GDP enough?
— PIMCO (@PIMCO) October 29, 2013
Gross: Think abt this Fed: Capitalism depends on carry. When carry (yld, risk spreads,etc.) gets too low, capitalism stalls. @federalreserve
— PIMCO (@PIMCO) October 29, 2013
Taxable investment grade supply last week was 22 deals for $24.9BIL; 65% was financials.
— Fixedology (@Fixedology) October 29, 2013