Fearing a backlash from investors who are still piling into bond funds, mutual fund companies are rolling out sales and marketing campaigns to encourage investors to shift assets into other products.
Fearing a backlash from investors who are still piling into bond funds, mutual fund companies are rolling out sales and marketing campaigns to encourage investors to shift assets into other products.
Rising interest rates are likely to cause a decline in bond fund values. But fund companies are afraid that investors will blame them for their losses.
Whatever their future problems, bond funds currently dominate all other asset classes; they attracted $28 billion in net inflows last month, according to Morningstar Inc. Fixed-income funds now represent about 30% of the mutual fund market, up from 19% at the end of 2007.
What to do is a thorny issue for fund companies, many of which are still working to regain investors' confidence in the wake of the recession and equity market decline, said Jim Jessee, president of MFS Fund Distributors Inc.
“People have unrealistic expectations of what a portfolio manager can do in a rising-rate environment,” he said at an InvestmentNews mutual fund round table in New York on Feb. 9.
As a result, MFS is educating its sales force about what to expect, anticipating that the message will flow from wholesalers to financial advisers to investors, Mr. Jessee said.
Franklin Templeton Investments is taking a different tack. As part of its new 2020 Vision marketing campaign, the firm is distributing a brochure to advisers encouraging them to discuss the importance of equities with clients.
“Clients have been so roiled by the market that they have been shifting completely out of equities and were not interested in having a conversation about it,” said David McSpadden, senior vice president of global client marketing for Franklin Templeton.
The response from The Dreyfus Corp., a unit of The Bank of New York Mellon Corp., has been to focus on the importance of global investing. The firm is running print ads featuring global and international funds subadvised by Walter Scott & Partners Ltd.
“The next ad we're doing is a broader, global investing theme, which will feature both global equity and international fixed-income solutions,” Patrice Kozlowski, a spokeswoman for the firm, wrote in an e-mail. ”Further, we are developing a new client brochure that will be available next month on the importance of global investing.”
Whether the fund companies' efforts will work is an open question.
“The fact is, investors are always looking for someone to blame for their mistake,” said Scott Kays, president of Kays Financial Advisory Corp., which manages $120 million in assets. “I'm not sure there's anything the fund companies can do to avoid that.”
Nor should fund companies try to “hype” alternatives to fixed income, said Stephen Gorman, president of Gorman Financial Management, which manages $100 million in assets.
“Even as rates rise, bonds are not necessarily a bad investment,” he said.
Mutual fund companies, however, have little choice but to try to get investors to diversify, said Don Phillips, a managing director with Morningstar.
“There's a very legitimate risk that based on the amount of money going into bond funds today, investors don't fully appreciate the risks they are taking,” Mr. Phillips said.
It would be very easy for the industry to continue to push popular fixed-income products, he said, but suggested that the industry learned its lesson about stoking a hot market from the fallout of the tech bubble. According to Mr. Phillips, Janus Capital Inc. is still trying to recover from pushing tech funds long after it became evident that doing so was dangerous.
“That experience taught the industry to be a little more paternalistic,” he said.
There are other, less altruistic reasons for fund companies to encourage investors to allocate cash away from bond funds, said Benjamin Poor, a director at Cerulli Associates Inc.
One reason is that bond funds are a relatively low-margin business compared with equity funds, he said.
Another is that the bond fund arena is dominated by one player, Pacific Investment Management Co. LLC.
Mr. Poor questioned the assumption that investors don't understand the inverse relationship between interest rates and bond prices.
“Investors are not just chasing the hot money and getting conservative at the wrong time. I believe some of the preference for bond funds is due to a long-term shift in mindset — a realization that they can handle only so much risk,” Mr. Poor said.
But even if many investors are surprised by the bond fund losses they may incur as rates rise, mutual fund companies won't have too much to worry about, said Burton Greenwald, a mutual fund consultant.
“Realistically, there aren't many alternatives to mutual funds,” he said. “The real challenge for the fund companies is to have a broad selection of funds that gives the investor a wider choice.”
E-mail David Hoffman at dhoffman@investmentnews.com.
