The fear of rising interest rates is causing investors to lose their stomach for core bond funds — and not even bond titans Jeffrey Gundlach and Bill Gross have been immune to the drop-off in enthusiasm.
The intermediate-term-bond category has seen its average monthly net inflows plummet 71% over the past three months to $2.5 billion, from $9.1 billion last year, according to Morningstar Inc.
Mr. Gundlach's flagship $41 billion DoubleLine Total Return Fund (DBLTX) has averaged just $584 million a month in net inflows over the past three months. That is down 62% from the $1.54 billion it averaged per month last year when it was the top-selling mutual fund in the industry.
The $442 million in net inflows at DoubleLine last month were the fund's lowest monthly haul since July 2011, according to Morningstar.
Bill Gross, Mr. Gundlach's chief rival for the bond king crown, likewise has seen a slowdown in net inflows for his flagship fund. The $293 billion Pimco Total Return Fund (PTTAX) has averaged $793 million a month over the past three months, down nearly half from the $1.5 billion it averaged last year.
These kinds of slowdowns typically coincide with a drop-off in performance, but that hasn't been the case with either bond guru's fund. In fact, both are handily trouncing the benchmark Barclays U.S. Aggregate Bond Index so far this year.
The DoubleLine Total Return Fund had a 2.19% return through May 16, while the Pimco Total Return Fund had a 1.04% return. Meanwhile, the benchmark bond index was up just 0.36%.
Mr. Gundlach's fund has also more than doubled the return of the average intermediate-term-bond fund, with which Mr. Gross is right in line.
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Nevertheless, industry experts said that investors are moving away from funds tied to the Barclays Aggregate and toward funds that offer more freedom in where to invest.
“Advisers are less likely to put new income into core bond funds and more likely to put it into more-niche bond products or equity products,” said Mike Rawson, mutual fund analyst at Morningstar. “It doesn't seem to matter if you're a star manager.”
To wit: Nontraditional bond funds, world bond funds and multisector-bond funds have seen their inflows spike over the past three months, according to Morningstar.
Nontraditional bond funds are averaging $4.2 billion a month, up from $489 a month last year.
Likewise, world bond funds are averaging $2.1 billion, up from $821 million. And multisector-bond funds are averaging $2.2 billion, up from $1.8 billion.
Pimco's Unconstrained Bond Fund (PUBAX) is the top-selling bond fund over the past three months, a dramatic turnaround. For the first half of 2012, that fund recorded net redemptions.
Over the past three months, the fund has taken in an average of $1.6 billion a month.
The $73 billion Templeton Global Bond Fund (TPINX), the largest world bond fund, has seen a similar surge of interest. The flagship fund has taken in $2.8 billion over the past three months, after net inflows of just over $2 billion last year.
The flagging interest in core bond funds is likely to continue as long as the threat of rising interest rates looms.
In the past two weeks, the 10-year Treasury's yield has jumped to 1.95%, from 1.66%, stroking fears that interest rates are finally set to rise again. A 1-percentage-point rise in interest rates would equal a 4% to 5% loss for the Barclays Aggregate Index, which has an average duration of about 4.5 years.
Certainly, increased chatter about the Federal Reserve slowing down or ending its monthly asset purchasing program has put investors on high alert about a possible rout in the medium-term-bond market.
Such a route likely wouldn't catch either Mr. Gross or Mr. Gundlach by surprise.
Mr. Gross recently tweeted that the 30-year bull market in bonds likely ended April 29.
For his part, Mr. Gundlach likewise has been playing down expectations. In an early January conference call for investors, he was asked what his growth expectations are for this year
“We're not looking for huge asset gathering during 2013, based upon a whole host of factors,” Mr. Gundlach said.
