11
Morningstar FundInvestor
February 2
013
Last month we shared some ideas on investing in
some of the least popular categories, and now let’s
look at some of the most popular categories of
2012
.
Flows are a contrarian indicator that tells you that an
asset class may be overheated and that investors may
be tuning out some risks because of recent success.
Short-Term Bond: Vanguard Short-Term Invest
ment-Grade
VFSTX
The popularity of this fund category (number two in
2012
) is a reflection of just how averse to risk inves-
tors were coming into the year. Most short-term bond
funds take limited interest-rate and credit risk. But
that also makes for limited reward, particularly at
a time when bond yields are historically low: This
fund, which took in $
3
.
7
billion in
2012
, paid out a
2
.
2%
yield over the past year—compared with a
3
.
7%
12
-month yield three years ago—and its payout
fell to just
1
.
1%
over the past
30
days. Those num-
bers are especially paltry because this fund’s corpo-
rate-bond focus comes with more credit risk than
its typical peer (which has an even smaller payout).
Simply put, investors are getting little for their
money here at the moment. No, this fund won’t blow
up. It’s just that you are accepting a small return.
High-Yield Bond: Ivy High Income
WHIAX
On the other end of the risk spectrum, some investors
chased yield, which explains the inflows into this
category ($
23
billion) and this fund ($
3
.
4
billion, which
is nearly half the fund’s asset base). Today, junk-
bond yields are near all-time lows, giving investors a
low margin of safety. This fund still sports a fairly
plump yield: It has paid out
5
.
9%
over the past
30
days, about
1
percentage point higher than its typical
category peer. But manager Bryan Krug has taken on
quite a bit of credit risk in the process. The fund
stashes
24%
of its assets in bonds rated lower than B,
which is double the category norm. Furthermore, its
yield has fallen significantly as high-yield bonds have
rallied: Its
12
-month yield is
7
.
3%
, which is in turn
1%
lower than its
12
-month yield in September
2011
.
Reaching for yield with this fund isn’t for those with
weak stomachs.
Diversified Emerging Markets: Oppenheimer
Developing Markets
ODMAX
This was the most popular equity fund category in
2012
, and this fund was the second-largest cash
magnet within it—investors poured $
5
billion into its
coffers. (Only the passive
Vanguard Emerging
Markets Stock Index
VEMAX
took in more.) Justin
Leverenz has done an excellent job navigating vol-
atile markets since he took the helm in May
2007
. But
the fund has reached $
31
billion in assets, and
Leverenz manages another $
2
.
7
billion outside of it.
Although emerging markets are more liquid these
days and the fund has never been a rapid buyer and
seller of stocks, that’s still a lot of money to move
in developing markets. Indeed, the fund owns more
than
10
days’ worth of trading volume in six of its
top eight holdings for which that data is available.
Thus, the fund might have trouble dumping some
disappointing holdings quickly. There is no other evi-
dence of bloat—the fund’s holdings list hasn’t
expanded—but investors ought to keep their expecta-
tions in check here.
Real Estate: Vanguard REIT Index
VGSLX
This entrant from the popular real estate category
raked in $
6
.
3
billion from investors in
2012
, a sizable
chunk of its $
16
billion asset base. It’s a passive,
market-cap-weighted fund that moves at a snail’s
pace (annual portfolio turnover is typically in the
low teens), so capacity isn’t a concern. But
REIT
s have
mounted a spectacular rebound since
2008
’s sharp
decline. The typical real estate fund has jumped
264%
from stocks’ March
2009
bottom through mid-
January
2013
, and this fund has gained
274%
. Mean-
while, the healthy yields that have drawn investors
to real estate funds have declined—this fund paid
out
3
.
6%
over the past
12
months. So the risk/reward
profile has changed here, and not for the better.
œ
Contact Greg Carlson at
Avoid the Loved
Red Flags
|
Greg Carlson
What is Red Flags?
Red Flags is designed to alert
you to funds’ hidden risks.
Such risks can take many forms,
including asset bloat, the
departure of a solid manager,
or a focus on an overhyped asset
class. Not every fund featured
in Red Flags is a sell, and in
fact, some are good long-term
holdings. But investors should
be prepared for a potentially
bumpier ride in the near future.
