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Invincible American Funds takes a hit

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After successfully dodging the bond-market storm earlier this year, The Wall Street Journal reports, several big mutual funds thought the worst was over. It was a bad call, according to the paper, and now they’re feeling the pain.

The result: Some funds with great long-term track records – including American Funds and Legg Mason – have taken significant hits in just the past month or so. Some that have long been top performers are now posting below-average returns and lagging behind the broad bond market by anywhere from one to nearly five percentage points, a huge gap for bond funds.

Some of these funds used a “bull-market strategy” of buying on a dip, Jeffrey Gundlach, TCW Total Return Bond Fund manager and Morningstar’s fixed income manager of the year, told the Journal. That strategy “doesn’t work in a bear market,” he said. Gundlach’s bond fund has largely avoided the recent problems of his competitors.

Gundlach focuses on mortgage-backed securities and continues to shy away from investments tied to lower-quality mortgage securities. That’s helped lead to a 6.9 percent gain so far this year, beating 97 percent of the competition, according to the paper.

And of course, Pacific Investment Management’s Pimco Total Return Fund, managed by Bill Gross, has steered clear of investments like these and has maintained its track record.


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