By Charles Stein and Christopher Condon
Sept. 30 (Bloomberg) -- Mutual-fund investors are mostly sitting out the stock-market rally that lifted share prices 57 percent since March, helping bond manager Pacific Investment Management Co. increase sales while American Funds loses assets.
Bond funds attracted net deposits of $209.1 billion in the first eight months of the year while stock funds drew $15.2 billion, according to Morningstar Inc., the Chicago-based research firm that tracks the $10.6 trillion industry. Nine of this year’s 10 best-selling funds buy bonds and only one, Vanguard Total Stock Market Index Fund, focuses on equities.
By putting money into bond funds in 2009, investors missed an opportunity to increase their stock fund holdings during a rally that added $3.5 trillion in market value to the Standard & Poor’s 500 Index since it reached a 12-year low on March 9.
Martha Schilling, a financial planner in Dresher, Pennsylvania, said many of her clients were shaken by stock market volatility over the last 18 months.
"Owning bonds is giving them the ability to sleep better," Schilling said in a telephone interview.
Investors still benefited from existing stock holdings. As of Aug. 31, there was $4.51 trillion in stock mutual funds and
$1.97 trillion in bond funds, according to the Investment Company Institute.
The trend in favor of bond funds has benefited Pimco, based in Newport Beach, California. Pimco funds took in $45.3 billion in the first eight months of 2009, second to Valley Forge, Pennsylvania-based Vanguard Group Inc., which captured $65.6 billion, according to Morningstar. Vanguard, the largest stock and bond fund manager, oversees $961 billion in fund assets, compared with $279 billion for Pimco.
Pimco Total Return
Pimco, a unit of Munich-based insurer Allianz SE, reaped inflows of $31 billion in its $178 billion Total Return Fund, the most among all funds. Pimco Total Return, the world’s biggest bond fund, is managed by Bill Gross and gained 4.8 percent in 2008, Bloomberg data show. The fund advanced 13 percent this year through Sept. 28.
"That fund has become everyone’s safe haven," Geoff Bobroff, president of Bobroff Consulting in East Greenwich, Rhode Island, said in an interview.
American Funds experienced outflows of $17.4 billion through August, the most of any fund lineup, Morningstar data show. Four of the five funds with the biggest outflows were American Funds. The funds are run by Los Angeles-based Capital Research & Management Co., a unit of Capital Group Cos.
Chuck Freadhoff, a spokesman for Capital Group, declined to comment.
They’ll Be Back
Michael Kim, an analyst who follows asset-management firms for Sandler O’Neill & Partners LP in New York, said investors are likely to shift money into stocks as they become more comfortable taking on risk.
"They will come back into equities in a much bigger way,"
he said in a telephone interview.
The Standard & Poor’s Index of Asset Managers and Custody Banks climbed 27 percent this year through Sept. 28 as investors speculated that a market recovery will boost fee-generating assets at fund companies.
Bobroff, the consultant, said the preference for bond funds is probably a temporary phenomenon driven by reaction to last year’s stock sell-off. Investors may move out of bonds and return to stocks if interest rates rise in 2010, he said. Bond prices typically fall when rates go higher.
"People use yesterday’s performance as a reason to buy,"
Bobroff said.
Feeling Losses
Investors pulled $173.9 billion from stock funds in 2008, Morningstar data show. Management companies charge an average annual fee of 1.05 percent of assets on bond funds and 1.4 percent on stock funds, according to the firm.
"People feel losses more than they feel gains," said Pamela Hess, director of retirement research at Hewitt Associates Inc., the benefits-consulting firm based in Lincolnshire, Illinois.
Hewitt tracks the investing habits of about 3 million retirement investors in plans such as 401(k)s. Those investors haven’t shifted money back into equities in a noticeable way this year, Hess said in an interview.
Bond funds returned an average of 7 percent in the third quarter through Sept. 28. High yield accounted for the two best performing bond categories, with municipal and taxable funds both averaging 13 percent.
John Hancock junk-bond funds managed by Arthur N.
Calavritinos took the two top spots in a ranking of all fixed- income mutual funds, Morningstar data show. Junk-bond funds invest in debt rated below Baa3 by Moody’s Investors Service and BBB- by S&P.
John Hancock Funds
The $420.5 million John Hancock Funds II-High Income Fund, which puts at least 80 percent of its assets in non-U.S. bonds rated below investment grade, climbed 29 percent in the quarter, including reinvested interest, according to Morningstar. The
$709.9 million John Hancock High Yield Fund returned 29 percent.
It devotes at least 80 percent of assets to U.S. junk bonds.
U.S. equity funds returned an average 15 percent including reinvested dividends, compared with the 16 percent gain by the S&P 500. Real-estate funds jumped 35 percent, the most among equity categories tracked by Morningstar.
Miller’s Performance
Bill Miller’s $1.9 billion Legg Mason Opportunity Trust, which beat all diversified equity funds in the previous quarter, was the second-best performing U.S. stock fund since June 30, gaining 38 percent. Miller trailed the $124.1 million Aegis Value Fund, which surged 42 percent.
Miller, 59, is best known for guiding his $4.8 billion Legg Mason Value Trust to a better record than the S&P 500 for 15 straight years through 2005. Value Trust, which trailed the index from 2006 through 2008, rose 21 percent in the third quarter.
Mario Gabelli’s $305.5 million Gabelli ABC Fund was the worst-performing diversified stock fund in the quarter, according to Morningstar, gaining 2.2 percent.
The industry’s biggest equity fund, the $143.3 billion Growth Fund of America, climbed 14 percent.