Bonds: Partying Like It’s 1999?

Taxable bonds gathered $17 billion of inflows in April, says Morningstar, as JPMorgan continues its fund-flow momentum

Taxable-bond funds continued to dominate fund inflows, according to Morningstar data released Monday, raising the question: Is it 1999 for bond funds?

Morningstar logo“The late 1990s equity and early 2000s housing markets were classic asset bubbles,” said Morningstar editorial director Kevin McDevitt, CFA, in the report. “Whether the current bond market is on the same path is a matter of debate, but late-1990s equity-fund flows offer interesting comparisons with recent bond-fund inflows.”

In April, taxable-bond funds collected nearly $17 billion in flows, down from last month’s roughly $25 billion. Yet, taxable-bond funds have collected $96.9 billion in year-to-date inflows and are on track to match 2009’s record $282.5 billion, according to Morningstar.  

Across all fund types, long-term fund flows declined to $20.8 billion in March from $29.3 billion in April. Money-market funds lost $17.3 billion, as U.S-stock outflows rose to $9.3 billion.

The newly formed sector-stock asset class received about $560 million, says Morningstar, most of which went into real-estate funds. Diversified emerging-markets funds once again carried international-stock flows with $2.4 billion in new money.

According to another research group, EPFR Global, bond funds took in a net $7.1 billion worldwide in the week ended May 2, while equity funds absorbed $3.8 billion. Plus, for the full month of April, stock fund outflows were the largest since at least 1996, EPFR Global reported.

Return to Late ‘90s?

Looking at the absolute numbers, McDevitt says, “current bond-fund mania has eclipsed the late equity frenzy.”

From 1995 to 2000, U.S.-stock funds collected $655 billion. Since early 2009, taxable-bond funds have amassed $728 billion. Plus, during that time, total taxable-bond assets doubled to about $2.2 trillion from $1.1 trillion.

Still, the Morningstar expert notes, “the vast majority of 1990s equity inflows likely came from new contributions rather than exchanges from other asset classes.” And, unlike today, money-market flows remained positive during the late 1990s.

Much of the $728 billion in bond-fund inflows since January 2009 have come from investors “either abandoning equity funds or leaving money-market funds in search of higher yields,” explains McDevitt.

In addition, the current rush into bond funds may be no more prudent than what occurred in the late 1990s, but it is at least “less speculative,” the fund expert says.

“Fear, along with a desire for income, rather than greed seems to be the dominant emotion. An aging population and volatile equity markets have likely led some investors to cut back on equity exposure. At the other end of the spectrum, the Fed’s zero-interest-rate policy has pushed savers reluctantly out of money-market funds and into bond funds in a desperate search for income,” McDevitt said in the report.

Fund Families

Despite a recent $2 billion trading fiasco, JPMorgan “has been one of the more impressive growth stories in recent years” when it comes to funds, says Morningstar.

Over the past three years, the firm’s asset base grew to $158 billion from $62.8 billion. And not just bond funds but actively managed equity funds—JPMorgan Large Cap Growth, JPMorgan Equity Income, and JPMorgan U.S. Equity—can take some credit for this achievement.

With about $158 billion in fund assets, JPMorgan trails Vanguard, PIMCO and T. Rowe Rice, while it is ahead of Dimensional Fund Advisors and DoubleLine.

Meanwhile, PIMCO Total Return led all funds with $2.7 billion in inflows; the fund’s best monthly inflows since August 2010. DoubleLine Total Return’s inflows have slowed in recent months, but the fund still absorbed $1.3 billion.

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