The great skedaddle has forever changed view of debt instruments as safe haven
Bond mutual funds broke an almost two-year streak of inflows in June as investors' infatuation evaporated into a full-fledged stampede for the exits.
Investors yanked a record $60 billion out of bond funds last month, the first month of net outflows since August 2011 and nearly 50% more than the previous record of $41 billion in outflows in October 2008.
The selling hit its apex in the final week of the month, when investors pulled an eye-popping $28 billion from the funds during the seven-day period ended June 26, topping the previous weekly record of $17.6 billion in withdrawals in October 2008.
The $268 billion Pimco Total Return Fund (PTTAX) and the $38.8 billion DoubleLine Total Return Fund (DBLTX), the two most popular bond funds of the past few years, both suffered record outflows, as not even the star power of managers Bill Gross and Jeffrey Gundlach was enough to stem the tide of negativity.
Pimco Total Return, the world's largest mutual fund, watched $9.9 billion walk out the door, almost five times its previous worst month of outflows, and DoubleLine Total Return saw investors redeem approximately $1 billion, its first month of negative flows since its mid-2010 launch.
“Asset classes go through a cycle no matter how good the manager is,” said Diane Pearson, a wealth manager at Legend Financial Advisors Inc.
Ms. Pearson reduced client holdings to both funds in June, despite still having confidence in both Mr. Gross and Mr. Gundlach, after watching rising interest rates result in losses in both funds.
Ms. Pearson moved bond assets into classes that are less sensitive to changes in interest rates, such as bank loan funds.
Interest rates jumped more than 100 basis points to 2.66% during June, after starting May at 1.6%, because of concerns that the Federal Reserve Bank will begin to slow down its bond purchases this year.
The Pimco Total Return Fund lost 2.66% in June and 3.7% in the second quarter, which trailed 97% of peers, according to Morningstar Inc.
It was hit particularly hard by its Treasury inflation-protected securities and emerging-markets-debt holdings, said Eric Jacobson, a mutual fund analyst at Morningstar.
“It was a very bad environment for TIPS,” Mr. Jacobson said. “Anytime inflation is low and real rates are rising, you're going to get whacked from both sides.”
The DoubleLine Total Return Fund, which invests mainly in mortgage-backed securities, fared much better, losing 1.5% in the second quarter, better than 90% of intermediate-term-bond funds, according to Morningstar.
Still, even top-of-category performance wasn't enough to stop the widespread selling.
“It's not surprising,” Mr. Jacobson said. “A considerable amount of the money that's come in over the last few years was hot money. There was almost certainly some performance chasing going on.”
From the beginning of 2009 to the end of May, investors put more than $1 trillion into bond funds.
Mr. Gross and Mr. Gundlach have both tried to calm investors.
In a recent impromptu webinar, Mr. Gundlach called June's bond liquidation over and said there are now deals to be found in the bond market.
“I do think the worst is over. Now we have corroborative evidence from the markets,” Mr. Gundlach said.
TITANIC WORRIES
In his latest investment outlook, Mr. Gross compared the bond market to a sinking ship but warned investors not to start jumping overboard.
The Fed's forecast of the economy, he wrote, is far too optimistic. Inflation is way off target and bond yields have overadjusted, he added.
“Sailors, don't panic ... if you see someone that's afraid, yell at them! Yell, "This ship's going to make it to port,' Fed, Pimco and Pimco co-captains willing,” he wrote. “Those icy Atlantic money market waters are likely to be with us for a long, long time. Have a cocktail, tell the band to stop playing dirges, because you're gonna be just fine with Pimco at the helm.”
But bonds' reputation as the safe part of a portfolio may be beyond repair, for now.
“The days of having large bond holdings in retirement in order to provide you with income are over,” Ms. Pearson said. “We need to look at different strategies to provide income going forward.”
jkephart@investmentnews.com Twitter: @jasonkephart
