More money than ever is flowing to mutual funds that buy both stocks and bonds, a sign that individuals are starting to return to equities during the most volatile bull market since 1942
More money than ever is flowing to mutual funds that buy both stocks and bonds, a sign that individuals are starting to return to equities during the most volatile bull market since 1942.
About $18.6 billion was added to so-called hybrid funds last quarter, the most since the Investment Company Institute started tracking the data in 1984. The record flows show that while investors remain skittish after the worst financial crisis since the Great Depression, they want more equities in the wake of the S&P 500's having doubled since March 2009.
Europe's sovereign-debt crisis and rising oil prices are spurring the widest price swings since 1942, providing investors with another reason to limit purchases after pumping 232 times more money into debt funds than equity funds over the past two years. That is bullish to Fiduciary Trust Co. and Credit Suisse Asset Management, which said that the doubts mean more money is available in the biggest rally since 1955.
“It's a chicken step into the equity market,” said Michael Mullaney, who manages $9.5 billion at Fiduciary Trust.
“Very few investors, especially on the retail side, have been on board with this rally,” he said. “That's why we think this market still has legs to run, because one major investor still hasn't shown up to the party.”
FUND INFLOWS
Funds that buy stocks and bonds absorbed $1.24 billion in the one-week period ended April 6. Equity funds, with seven times more in assets, took in $2.44 billion. Bond funds got $5.22 billion, data from the ICI show.
Investors added $604 billion to debt funds from March 2009 through March 31, compared with $2.6 billion for equities, according to ICI data. The S&P 500 has gained 104%, including dividends, over the past 25 months, while Barclays Capital's index of U.S. investment-grade corporate bonds returned 35%.
“People have been traumatized by equities in the U.S. and have started to look for a more balanced approach,” said Adrian Zuercher, who helps oversee $150 billion in asset allocation strategies at Credit Suisse. “Given all the money that has gone into government bonds, sooner or later, they have to bring back some money into the equity segment.”
Hybrids include balanced funds, which maintain a specific mix of equities and bonds, and flexible funds that can put any portion of its assets in stocks, debt or money market securities. They make up 6.5% of the $12.1 trillion U.S. mutual fund industry, according to the ICI.
As of December, the average hybrid allocated 60% to stocks, 34% to bonds and the rest to cash, options, warrants and other securities. That compares with 58% in equities and 36% in debt the previous year.
St. Denis J. Villere & Co.'s $83 million Villere Balanced Fund, created in 1999, has returned 30% in the past 12 months, about three times more than the S&P 500, making it the top performer among 225 balanced U.S. equity funds tracked by Bloomberg. The biggest holding as of March 31 was 3D Systems Corp., a maker of imaging systems, whose shares have risen more than 230% in the past year.
'VIABLE INVESTMENT'
“A lot of clients, having gone through the dark days of "08 and "09, want peace of mind,” said George Young, co-owner with three family members of the century-old asset manager, which oversees about $1.5 billion. At the same time, “they realize now that equities are a viable investment,” he said.
The firm started buying more stocks and high-yield bonds in April 2009, just after equity indexes bottomed, boosting share holdings from a low of 60% to as high as 685%, said Mr. Young, who helps oversee the balanced fund. Its assets have grown from about $50 million last August, mostly through gains in asset prices.
The rally in equities may slow amid turmoil in Greece, Libya and Japan, said Sybren Brouwer, the global head of equity research at ABN Amro Bank NV's private-banking division. He said that his team reduced its allocation for shares to “neutral,” from “overweight.”
“We've had the Europe debt crisis and increasing inflation concerns in the emerging markets, and on top of that, we had unrest in the Middle East and Africa — and of course, the natural disaster in Japan,” said Mr. Brouwer, who helps oversee more than $200 billion. “Adding that all up makes us a little bit more concerned on equity markets in the short term.”
GREEK BOND YIELDS
Yields on 10-year Greek bonds reached 13.84% three weeks ago amid concern that Europe's most indebted nations will be forced to restructure. Oil climbed as high at $113.46 a barrel April 11 and Japan raised the severity rating of the nuclear crisis at Tokyo Electric Power Co.'s Fukushima Dai-Ichi plant to the same level as the 1986 Chernobyl disaster.
Historical volatility for the S&P 500 has averaged 19.5 since March 2009, higher than the first two years of all rallies dating back to 1942, based on 30-day data compiled by Bloomberg and research firm Birinyi Associates Inc. The measure of daily swings is above the levels of 16.3 during the 2002 rally and 13.2 from the 1990 advance, data compiled by Bloomberg show.
The prospect of higher interest rates may be driving fixed-income investors to hybrids. Bond prices dropped 5.5 cents from Sept. 30 to as low as 105.93 cents Feb. 8, the least since June, sending yields up 59 basis points, according to Bank of America Merrill Lynch's U.S. Corporate Master Index.
Credit analysts at firms such as Bank of America Corp. and The Goldman Sachs Group Inc. forecast that returns will be below 10% from corporate bonds this year.
The yield on 10-year Treasury notes, which stood at 3.41% on April 15, will reach 4.05% by next March, according to the median estimate of 66 economists surveyed by Bloomberg.
Balanced funds have beaten U.S. investment-grade company debt for seven of the past eight months, returning 17 percentage points more over the period, according to data compiled by Bloomberg and Barclays. They have increased 4.6% this year, trailing the 5.5% advance — including dividend payments — of the S&P 500.
“The whole area of balanced-fund investing has really made a resurgence,” said Hayes Miller, head of asset allocation in North America at Baring Asset Management Inc., which oversees $51.6 billion. For individuals, “the safest way they feel they can go about it is to pass that asset allocation decision along to a professional.”
