(PUB) Investing 2016

15

October 2016

Morningstar FundInvestor

and federal securities, U.S. government securities, you could probably get a 2 . 5% return without an awful lot of problems. So, you’ve got 4% for stocks, 2 . 5% for bonds, and I’ll use a 50 - 50 portfolio, because it makes the math easier, as around 3% for a balanced portfolio. American Funds Estimates Tax Bills American Funds has come out with an early estimate on capital gains distributions for year-end. For the most part, they are pretty mild. The highest is for American Funds Growth Fund of America AGTHX , which is estimated to make a 5% – 7% payout on Dec. 22 . The fund’s trailing five-year returns are an annual- ized 16% , so this level of capital gains distribution is not out of line. The next highest estimate is for Amer- ican Funds Washington Mutual AWSHX , expected to distribute a 4% – 6% gain on Dec. 20 . The other major fund companies usually post their first estimates on their websites in mid- to late-October, so check the tax sections of their websites for updates. A Mixed Quarter for Bond Funds All eyes were once again on the Federal Reserve in the third quarter. Although the Fed didn’t hike, the broader-rates environment was mixed. Perhaps the biggest story of the quarter was the continued rally in credit-sensitive bonds. The Fed made news in July and September with its decision not to raise short-term policy rates. In her speech following the September decision, Fed chair Janet Yellen noted that economic conditions had strengthened since the first half of the year, signaling an openness to a potential hike later in the year. There were other signs that a hike might be on the table in December, including dissents from three Federal Reserve regional bank heads. As of Wednes- day, Sept. 28 , the Fed funds futures markets were pricing in a bit more than a 50% chance of a rate increase by December. Despite the Fed’s inaction, bond yields increased across most maturities during the third quarter before prices bounced back in the final weeks of the quarter. Yields on the 10 -year Treasury note bottomed at 1 . 37% in early July and got as high as 1 . 73% on

Sept. 13 before falling again to 1 . 56% as of Sept. 27 . That increase in yields and a strong supply of new issuance in the municipal market meant modest losses for some muni categories. That said, the modest backup in yields during the quarter hasn’t had a meaningful impact on what’s still been an impressive run for longer-maturity bond funds so far in 2016 . Libor was also on the rise during the quarter. Libor rates, which are widely used as a global benchmark for variable-rate loans, had been moribund for much of 2014 and 2015 before spiking at the beginning of 2016 and once again during the third quarter. As PIMCO ’s Jerome Schneider explained to us, one of the biggest drivers of the increase in Libor is the looming implementation of money market regula- tions. Assets have surged out of prime money market funds, thus lowering demand for the certificates of deposit and commercial paper that many financial institutions use for funding. That has created opportu- nities for ultrashort- and short-term bond funds, including Silver-rated PIMCO Short-Term PTSHX , which had a strong quarter. Since oil prices bottomed on Feb. 11 , credit markets have enjoyed eye-popping gains, with returns on the major high-yield indexes of roughly 20% , a touch above the return on the S & P 500 during the period. That trend continued into the third quarter as the con- vertibles and high-yield bond categories were poised to come out tops among U.S. fixed-income categories. The gains were more muted in investment-grade credit, although the corporate sector was once again the strongest-performing sector within the recently renamed Barclays Bloomberg U.S. Aggregate Bond Index, providing support for that benchmark’s rela- tively modest 0 . 7% gain for the quarter through Sept. 27 . The typical intermediate-term bond fund was up a little more than 1% during the period, and funds with large corporate stakes did particularly well. Within high yield, funds with large allocations to energy have prospered. Energy bonds, which bore the brunt of 2015 losses together with metals and mining related names, have seen a surge in defaults, but the energy sector of the high-yield index has rebounded sharply from lows suffered earlier this year. K