Mutual Funds: Bonds not foolproof
NEW YORK – The squalls that have rolled over Wall Street since stocks sold off in late February have sent some investors looking to shore up their portfolios with bond funds. But for many, simply moving into bonds won’t afford as much diversification as they might think.
The Feb. 27 sell-off, which shaved more than 3 percent from major U.S. stock indexes, ushered volatility back to Wall Street after unusual calm during the second half of 2006. It left behind frayed nerves as well as a fresh set of questions. Some investors apparently felt exposed and sought safety. From March 1 through March 26, investors put $5.66 billion into bond mutual funds, according to data from Trim Tabs Investment Research. During the same time, investors pulled $1.03 billion from U.S. equities funds.
The February selloff, as well as emerging concerns about subprime mortgage lenders (which make loans to people with poor credit) have buffeted investor sentiment. Later, comments from the Federal Reserve Board that Wall Street regarded as favorable for interest rates helped restore some of the wealth lost after the late February pullback. So with volatility, a regular character on Wall Street, back indefinitely, investors looking at the fixed-income market for safety and stability should first consider what types of bonds they might need. Types range from the safest government Treasury notes to high-yield, or junk, bonds which carry more risk.
Greg Hopper, portfolio manager of the Julius Baer Global High Income Fund, still sees opportunity in the high-yield market. He contends investors’ unease about high-yield bonds amid a slowing economy has been overblown.
“I think people are way too concerned about high yield. Default rates are bumping along at 2 percent – very low historically,” he said. “Corporate cash flows are still quite healthy. The U.S. economy is slowing, but it’s not going into recession.”
Hopper, whose fund has assets of about $141 million, said he can pull out of positions in the high-yield market at the first whiff of trouble.
“Because we are more nimble than most of the big behemoths we also have a stop-loss discipline that we in fact can execute,” he said, adding he’d rather be cautious than sorry.
The fund, which started in 2002, has a three-year annualized return of 9.26 percent. Hopper sees the fund as one part of a well-balanced portfolio.
“I’m not sitting here trying to create 20 percent returns. That’s for the equity guys and for the equity portion of the investor’s portfolio. I’m here to generate yield and do it in as efficient and diversified fashion as possible,” he said.
“People in high-yield and in emerging-markets bonds should certainly be aware that we’ve enjoyed an incredibly long stretch of strong returns that could end at any time and could bring losses.” The Federated Total Return Bond Fund, with assets of about $1.8 billion and an annualized five-year return of 5.6 percent, invests in bonds ranging from Treasuries to investment-grade corporate bonds to high-yield bonds.