In any popularity contest among mutual fund investors, funds that invest in U.S. government bonds would finish a distant last.
While funds of most other varieties have been booming for years, the world of long-term Treasury bond funds is steadily shrinking.
But a few hardy contrarians haven’t stopped caring about them completely. Indeed, these analysts and investors say, the very disfavor surrounding long-term Treasury funds may make them worth a fresh look.
In 1996, reports FundRate Market Monitor in Boston, assets of the fund industry as a whole climbed 22.1 percent, increasing by more than half a trillion dollars for the second year in a row.
Among the government funds, however, assets fell by $7.84 billion to $77.01 billion. The category now represents less than 2.5 percent of the industry.
What went wrong? Obviously, people still invest in huge numbers in Uncle Sam’s bonds, which support the entire federal government and its budget deficit. Big institutions and small investors alike can buy Treasury securities easily, either directly from the government or through brokerage firms and banks.
But almost everybody seemed to sour on government-bond mutual funds in 1994, when credit-tightening by the Federal Reserve pushed interest rates higher, driving bond prices into a steep decline.
As measured by Morningstar Inc. in Chicago, long-term government bond funds posted an average total return of minus 7.06 percent in 1994, meaning that even after receiving the income on those securities the typical investor finished the year with only 93 cents for each dollar invested 12 months before.
This wasn’t the sort of experience conservative investors, who tend to invest in Treasury securities for safety, had in mind. They fled in droves.
Yet as practitioners of the doctrine of contrary opinion know, any investment that is universally despised and neglected may be a candidate for a comeback.
As it happens, long-term government funds, for all their volatility, haven’t performed so badly on balance. Morningstar calculates their average annual return over the past 5- and 10-year periods at between 7.5 percent and 7.75 percent.