17
Morningstar FundInvestor
October
2013
rocket ship that everyone seems to be imagining,”he
noted. In particular, he’s concerned that corporate
earnings could be less impressive than anticipated,
while upcoming unemployment data could
also disappoint.
Does that mean investors should hurtle headlong
into high-quality, long-duration bonds (duration is a
measure of interest-rate sensitivity), which have
tended to hold up well in recent periods of economic
and stock market weakness? After all, long-term
Treasuries were the best diversifiers of all during the
2008
financial crisis and even the debt-ceiling
standoff in the summer of
2011
.
Not necessarily. That’s because some of the factors
that could roil stocks in the future—the prospects of
Fed tapering as well as rising interest rates—are
also likely to rattle long-duration bonds. In August, for
example, a confluence of bad earnings news and
worries over Fed tapering pushed the S
&
P
500
and
Treasuries down at the same time.
What’s a well-meaning investor to do? The first step
is to make sure you haven’t inadvertently cast your lot
with a single macroeconomic outcome by empha-
sizing stocks and lower-quality, credit-sensitive bonds.
If investors get nervous about the economy’s trajec-
tory, it’s still a safe bet that high-quality bonds will
hold up best, so they remain a must-own for all inves-
tors who wish to stay truly diversified.
Even though it’s wise to maintain space for high-
quality bonds in a portfolio, it’s not unreasonable to
limit the duration risk of those bonds. Long-duration
bonds may well perform the best in a true market
shock, but many investors don’t have the stomach
for the bonds’sometimes-extensive volatility and,
indeed, their potential for real losses in a prolonged
period of rising interest rates. Past results from
the asset class reflect an extremely favorable envi-
ronment—a period of declining interest rates that
has spanned nearly three decades.
Instead, sticking with short- and intermediate-term
bonds, as well as cash, for the portion of your port-
folio you expect to tap within the next five or so years
looks like a prudent course of action.
It’s also wise to revisit high-quality but focused
investments that have performed well in the past but
could be in for tough sledding such as dedicated
GNMA
funds. Gold-rated
Vanguard GNMA
VFIIX
and
Fidelity GNMA
FGMNX
fit the bill. Better-
diversified funds, such as those that populate Morn-
ingstar’s short- and intermediate-term bond cate-
gories, have the leeway to graze across bond market
sectors, giving them flexibility that funds wedded
to a single bond-market sector do not have.
œ
Contact Christine Benz at
Morningstar Categories
Estimated Net Flow ($Mil)
August
YTD
Bank Loan
7,551
46,158
Nontraditional Bond
5,002
40,359
Ultrashort Bond
2,236
7,671
Short-Term Bond
1,910
17,820
Inflation-Protected Bond
(2,078)
(14,546)
High-Yield Muni
(2,355)
(7,575)
Muni National Interm
(2,924)
(5,930)
High-Yield Bond
(2,945)
(7,450)
Muni National Long
(2,963)
(8,715)
Intermediate Government
(4,159)
(24,595)
Intermediate-Term Bond
(18,204)
(48,898)
Best-and Worst-Selling Bond Funds August 2013 Estimated Net Flow ($Mil)
Best-Sellers
August
YTD
Oppenheimer Senior Floating Rate Fund 1,726
7,441
JPMorgan Strategic Income Opps Fund 1,518
6,336
PIMCO Short Term Fund
1,369
1,958
Goldman Sachs Strategic Income Fund
1,165
5,144
BlackRock Strategic Income Opps Port
682
4,106
Lord Abbett Floating Rate Fund
645
3,892
Worst-Sellers
PIMCO Invstmnt Grd Corporate Bnd Fund (770)
(2,255)
Vanguard Total Bond Market Index Fund (831)
(4,322)
JPMorgan Core Bond Fund
(832)
(3,827)
PIMCO Real Return Fund
(833)
(5,084)
Vanguard Inflation-Protected Securities (1,067)
(11,786)
DoubleLine Total Return Bond Fund
(1,130)
173
Vanguard GNMA Fund
(1,587)
(8,793)
PIMCO Total Return Fund
(7,720)
(22,631)
Data as of Aug. 31, 2013.
Investors Shun Core Bond
Funds for the Fringes
