(PUB) Morningstar FundInvestor

July 2 014

Morningstar FundInvestor

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not up to the official 2 . 00% Fed target. By stopping at zero, the Fed will avoid bear markets. Rather, we’ll have low-returning markets of about 3% – 4% returns for bonds and 4% – 5% for stocks in the coming years. That bond forecast makes sense, but I wouldn’t put much stock in Gross’ stock forecasts. He’s been brilliant with bond forecasts but impressively inaccu- rate on stocks, maybe because his firm sells bond funds, not stock funds. ( OK , it has a couple of stock funds, but PIMCO benefits greatly from investors believing in bonds over stocks.) This year PIMCO Total Return PTTRX and near clone Harbor Bond HABDX have lagged their peers because PIMCO was betting that rates of long-term Treasuries would spike, but they’ve actually rallied. Despite the misstep, PIMCO still has a lot going for it. It has made wrong calls before, but the record shows PIMCO is right more than most people. Michael Hasenstab is even more bearish on Treasuries, but his fund isn’t positioned cautiously. Templeton Global Bond TPINX aims to have no correlation with Treasuries by having negative duration in the U.S. and also by buying some emerging-markets bonds that others are scared of. He likes South Korea, Turkey, Mexico, and even Ukraine. Now that’s bold. Hasenstab says he can make a lot of money for inves- tors by pursuing contrarian moves like those above and patiently waiting for them to pay off, just as he did in Ireland a few years ago. Outflows in U.S. Stock and Bank-Loan Funds Flows into U.S. equity funds reversed in May, when we saw $6 . 8 billion in net outflows after nearly a year of steady inflows. It could be just a blip or the start of something big. There’s no obvious trigger, though, so we’ll have to wait and see. Meantime, investors were enthusiastic about most of the rest of the world. Foreign-equity funds took in a net $7 . 7 billion, and taxable bonds netted a robust $9 . 5 billion. Allocation funds, muni bonds, and sector funds also had solid inflows.

Another interesting reversal came in bank-loan funds, where $1 . 7 billion went out the door. We’ve seen pretty strong inflows there the past few years, but it reversed in April with $1 . 1 billion in outflows. Bank- loan funds are far larger than they were in 2008 , so we’re really in uncharted waters when it comes to seeing how they’ll handle outflows. Bank loans are not terribly liquid. U.S. growth funds of all market-cap levels also suffered redemptions in May. (Some of that came from conversions to collective investment trusts, though, so it’s a little overstated.) On the plus side, foreign large blend, nontraditional bond, and diversified emerging markets enjoyed strong inflows. On the fund level, PIMCO Income PONDX took in $1 billion in May and a total of $4 . 1 billion for the year. That fund is up 6 . 1% for the year to date, so no surprise that it’s drawing interest. Metropolitan West Total Return Bond MWTRX and Dodge & Cox International DODFX are also getting solid inflows. PIMCO Total Return leads the way with outflows of $4 . 2 billion. That’s a big number, but it’s not a big percentage for a fund with $228 billion. Thornburg International Value TGVAX shed $1 . 4 billion and has lost $8 . 5 billion for the year. The fund has weak three- and five-year performance. œ Overall, $12 . 7 billion flowed into passive funds and $10 . 4 billion went to actively managed funds.