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Bonds, Equities Back in Favor

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The latest fund flow figures from Morningstar show that investors added close to $40 billion to long-term U.S.-domiciled mutual funds in March. This movement included “strong flows” to developed international markets as well as “a rebound” in flows to intermediate-term bond funds.

“Core intermediate-term bond funds attracted $4.3 billion in inflows, the first monthly inflow for the category in 11 months and the strongest since January 2013,” explained Michael Rawson, CFA, in a study released in mid-April. “With the U.S. equity market appearing fully valued, investors may be taking the opportunity to rebalance into bonds,” Rawson said.

But fixed-income giant PIMCO continued to see outflows: $7.4 billion moved out of its funds in March, while $15.5 billion was withdrawn by investors in the first quarter, Morningstar reports. PIMCO’s flagship Total Return Fund, for instance, experienced $3.1 billion in outflows in March. Other funds in the intermediate-term bond funds had $7.4 billion of inflows during the month.

One factor influencing PIMCO’s shift in popularity is Morningstar’s recently lowering of PIMCO’s overall fund-family rating—or Parent Pillar score—to neutral from positive; the fund group, though, has reaffirmed PIMCO Total Return’s gold rating. (Other factors include the departure of then-CEO Mohamed El-Erian in January, and discussions about his exit by co-founder Bill Gross.)

“Given PIMCO’s fixed-income focus, it came as no surprise that the firm faced large outflows in 2013 as interest rates rose,” noted Rawson. Still, PIMCO kept losing assets in the first quarter of 2014, when other mutual fund firms saw $141 billion in inflows.

“For example, the annualized first-quarter organic growth rate for PIMCO Total Return was negative 13%,” he added. Though the overall category had a negative 1% growth rate for Q1’14, the intermediate-term bond category would have had an inflow, if the $232-billion PIMCO Total Return Fund had been excluded.

There’s also mixed news for the PIMCO All Asset All Authority Fund, which averaged $544 million of inflows per month for the trailing three years through 2013. In Q1’14, the fund had monthly outflows of $865 million on average.

Equity Movement

The $2.8 billion inflow into U.S. equity mutual funds in March didn’t really explain investor sentiment for the period, Rawson says. During the month, Fidelity moved some $6.5 billion from equity mutual funds to collective investment trusts.

“Adding that transfer back would result in a $9.3 billion inflow for U.S equity funds,” he noted. “In the trailing five months through February 2014, U.S. equity mutual fund inflows averaged $8.2 billion, so last month’s adjusted inflow was in line with that average.” The three Fidelity funds that had transfers to CITs are the Fidelity Contrafund, Fidelity Growth Company Fund and Fidelity Low-Priced Stock Fund.

As for international-equity funds, foreign large-blend experienced the greatest inflow, at $6.6 billion. The Vanguard Total International Stock Index Fund topped the category, with inflows of $1.8 billion inflow, followed by the Dodge & Cox International Stock Fund with $834 million and the Oppenheimer International Growth Fund with $720 million.

“If we add back the transfer of Fidelity fund assets to Fidelity collective investment trusts, PIMCO was the only fund provider among the top 10 to experience net outflows during the first quarter,” Rawson said.

Fund Families

The top three fund families, Vanguard, Fidelity and American Funds, remain in the dominant positions as of March 31. Their market shares are 18%, 11% and 10% respectively.

With some $2 trillion in fund assets, Vanguard had inflows of $13.8 billion in March and $35.5 billion in Q1’14. American Funds had inflows of nearly $900 million in March and close to $1 billion for the quarter; its overall fund asset base is $1.1 trillion.

Vanguard’s inflows of $35.5 billion put it at the top of the list for Q1’14. JPMorgan drew about $8 billion during the period, followed by Dimensional Fund Advisors with $7.7 billion and T. Rowe Price with $7.5 billion. In March, when Vanguard had nearly $14 billion of inflows, JPMorgan experienced $2.4 billion of inflows, and DFA some $2.2 billion.

Lipper Analysis

Judging from their recent behavior, investors seem confident that first-quarter performance trends will continue. During the period, equity funds were just able to post their seventh-consecutive quarter of positive returns.

They improved 1.47% on average, with sector-equity funds rising 4.05%, according to Lipper. U.S. diversified-equity funds increased 1.33%, while world-equity funds squeezed out an improvement of 0.40%).

The strongest performers were commodities-agriculture funds (16.15%) and precious-metals equity funds (12.21%). Funds that weakened most in the period include dedicated short-bias funds (-4.56%), Japanese funds (-4.45%) and China region funds (-4.40%).

After a strong run-up in 2013, especially in the fourth quarter, investors “cautiously continued to bid up the market in first quarter 2014,” says Tom Roseen, head of research services for Denver-based Lipper.

“While investors began to take some of their hard-won profits off the table during first quarter 2014—adding volatility to the market, they continued to inject net new money into the fund industry … to the tune of $41.5 billion,” Roseen explained in his latest quarterly report.

During Q1, 78 of Lipper’s 95 equity and mixed-equity fund classifications posted positive returns. The period saw the dollar rise modestly against the euro, though it declined against the pound and the yen.

Commodity prices improved, with gold rising about 7% to end the quarter at $1,283.40 an ounce.

Bond Business

Municipal bonds “turned a corner as buyers came back to the asset class,” says Jeff Tjornehoj, head of Lipper Americas Research. Lipper’s high-yield muni debt funds group, for instance, posted returns of 5.25% to become Q1′s best-performing bond group.

“Munis would not have risen so high if Treasuries hadn’t rallied. Yields on the 10-year note settled down from 3.04% on Dec. 31, 2013, to 2.73% on March 31, 2014, to help general U.S. Treasury funds gain 3.63% for the quarter,” Tjornehoj explained.

High-yield funds improved 2.61%, putting their performance below that of investment-grade returns but slightly ahead of international income funds (2.32%).

Emerging-markets hard currency debt funds gained 2.44% during the period.

Overall, bond funds “started the year with a bang and helped investors put a disappointing 2013 behind them,” the Lipper fixed-income expert shared. “The market’s most widely watched barometer, the Barclays Aggregate Index, gained 1.84% for Q1’14, after losing 2% for 2013.”


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