(PUB) Investing 2015

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“Prediction is very difficult, especially about the future.”
Neils Bohr
Coming into 2014, prognosticators had the fixed-
income markets all figured out. Many posited that it
would be a rough year for U.S. Treasuries and
other rate-sensitive bonds as the Fed unwound its
bond-buying program. Meanwhile, riskier assets,
including junk bonds and bank loans, seemed poised
to outperform against the backdrop of manageable
corporate-debt levels, decent economic growth, and
strong investor appetite. Munis were a trouble
spot against the backdrop of bad news out of the
Motor City and Puerto Rico, while many thought
of Russia as a relatively high-quality name in the
emerging-markets arena.
It’s fair to say the script played out differently. Here
are several of the biggest stories from 2014.
An Unanticipated Bond Rally
The year showed once again how hard it is for fixed-
income managers to get interest-rate bets right,
especially over the short term. Against the backdrop
of geopolitical risk, a softer-than-expected global
economic outlook, and pension fund rebalancing, long
U.S. Treasuries enjoyed an unexpectedly strong rally.
That caught many intermediate-term bond managers,
who had positioned their funds for an increase in
bond yields, flat-footed. But some, including the team
at Western Asset Core Plus Bond WACPX, which
has a Morningstar Analyst Rating of Silver, benefited
from a decision to favor longer-maturity bonds.
Junk Bonds in Trouble
After starting the year strong, things turned ugly
for high-yield bonds in the second half of the year.
Energy companies, driven by a surge in shale oil
drilling, had issued a ton of cheaply priced debt in
recent years’ borrower-friendly high-yield markets
and had grown to the largest sector in the high-yield
market. With oil prices plummeting, energy-related
high-yield names got slammed. All in all, the category
had its worst year since 2008, and a number of funds
lost money in 2014. Relatively conservative funds,
such as Vanguard High-Yield Corporate VWEHX ,
held up well, while some more-adventurous funds
with meaningful equity stakes, including Fidelity
Capital & Income FAGIX, enjoyed solid gains.
Challenges Abroad
With conflict between Russia and Ukraine dominating
headlines for much of the year and the recent plunge
in energy prices, there were plenty of potholes to
avoid in global bond markets. The situation intensified
in the first weeks of December as the ruble tanked
and Russian sovereign debt took a sharp tumble.
Meanwhile, a decisive rally in the dollar against
almost all major currencies meant trouble for funds
with meaningful exposure to nondollar currencies.
That led to a particularly wide spread in returns for
funds in the world-bond Morningstar Category,
with funds sporting gains of up to 15% and losses as
steep as 5% in 2014. Templeton Global Bond
TPINX, which sports stakes in Ukraine, Russia (albeit
small), and Poland, landed near the world-bond
category midpoint with a 1.6% gain.
Munis Rebound
Munis were one of the hardest-hit sectors in 2013,
thanks in part to a run of bad headlines out of Detroit
and Puerto Rico. However, the recovery in Treasury
yields stood the muni market in good stead in 2014.
Supply remained relatively muted, while Morningstar’s
muni-bond categories enjoyed $25 billion in net
inflows for the year to date through November,
providing a supportive technical environment for the
sector. Meanwhile, headline risk faded as Detroit
exited bankruptcy and many municipalities saw
improving finances. Even Puerto Rico, whose fate is
far from clear given the territory’s cash-strapped
fiscal state and continued economic stress, saw a
rally in its bonds. Long-term muni funds, such as
Franklin Federal Tax-Free Income FKTIX, enjoyed
a nice bounceback during the year. œ
Contact Sarah Bush at
A Year Full of Surprises
Income Strategist | Sarah Bush