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15
Morningstar FundInvestor
October 2016
and federal securities, U.S. government securities, you
could probably get a
2
.
5%
return without an awful
lot of problems. So, you’ve got
4%
for stocks,
2
.
5%
for
bonds, and I’ll use a
50
-
50
portfolio, because it makes
the math easier, as around
3%
for a balanced portfolio.
American Funds Estimates Tax Bills
American Funds has come out with an early estimate
on capital gains distributions for year-end. For the
most part, they are pretty mild. The highest is for
American Funds Growth Fund of America
AGTHX
,
which is estimated to make a
5%
–
7%
payout on Dec.
22
. The fund’s trailing five-year returns are an annual-
ized
16%
, so this level of capital gains distribution is
not out of line. The next highest estimate is for
Amer-
ican Funds Washington Mutual
AWSHX
, expected
to distribute a
4%
–
6%
gain on Dec.
20
.
The other major fund companies usually post their first
estimates on their websites in mid- to late-October,
so check the tax sections of their websites for updates.
A Mixed Quarter for Bond Funds
All eyes were once again on the Federal Reserve in
the third quarter. Although the Fed didn’t hike, the
broader-rates environment was mixed. Perhaps the
biggest story of the quarter was the continued rally
in credit-sensitive bonds.
The Fed made news in July and September with its
decision not to raise short-term policy rates. In her
speech following the September decision, Fed chair
Janet Yellen noted that economic conditions had
strengthened since the first half of the year, signaling
an openness to a potential hike later in the year.
There were other signs that a hike might be on the
table in December, including dissents from three
Federal Reserve regional bank heads. As of Wednes-
day, Sept.
28
, the Fed funds futures markets were
pricing in a bit more than a
50%
chance of a rate
increase by December.
Despite the Fed’s inaction, bond yields increased
across most maturities during the third quarter before
prices bounced back in the final weeks of the
quarter. Yields on the
10
-year Treasury note bottomed
at
1
.
37%
in early July and got as high as
1
.
73%
on
Sept.
13
before falling again to
1
.
56%
as of Sept.
27
.
That increase in yields and a strong supply of new
issuance in the municipal market meant modest losses
for some muni categories. That said, the modest
backup in yields during the quarter hasn’t had a
meaningful impact on what’s still been an impressive
run for longer-maturity bond funds so far in
2016
.
Libor was also on the rise during the quarter. Libor
rates, which are widely used as a global benchmark
for variable-rate loans, had been moribund for much
of
2014
and
2015
before spiking at the beginning
of
2016
and once again during the third quarter. As
PIMCO
’s Jerome Schneider explained to us, one
of the biggest drivers of the increase in Libor is the
looming implementation of money market regula-
tions. Assets have surged out of prime money market
funds, thus lowering demand for the certificates
of deposit and commercial paper that many financial
institutions use for funding. That has created opportu-
nities for ultrashort- and short-term bond funds,
including Silver-rated
PIMCO Short-Term
PTSHX
,
which had a strong quarter.
Since oil prices bottomed on Feb.
11
, credit markets
have enjoyed eye-popping gains, with returns on
the major high-yield indexes of roughly
20%
, a touch
above the return on the S
&
P
500
during the period.
That trend continued into the third quarter as the con-
vertibles and high-yield bond categories were poised
to come out tops among U.S. fixed-income categories.
The gains were more muted in investment-grade
credit, although the corporate sector was once again
the strongest-performing sector within the recently
renamed Barclays Bloomberg U.S. Aggregate Bond
Index, providing support for that benchmark’s rela-
tively modest
0
.
7%
gain for the quarter through Sept.
27
. The typical intermediate-term bond fund was
up a little more than
1%
during the period, and funds
with large corporate stakes did particularly well.
Within high yield, funds with large allocations to
energy have prospered. Energy bonds, which bore the
brunt of
2015
losses together with metals and mining
related names, have seen a surge in defaults, but the
energy sector of the high-yield index has rebounded
sharply from lows suffered earlier this year.
K