(PUB) Morningstar FundInvestor

October 2013

Morningstar FundInvestor

17

Not necessarily. That’s because some of the factors that could roil stocks in the future—the prospects of Fed tapering as well as rising interest rates—are also likely to rattle long-duration bonds. In August, for example, a confluence of bad earnings news and worries over Fed tapering pushed the S & P 500 and Treasuries down at the same time. What’s a well-meaning investor to do? The first step is to make sure you haven’t inadvertently cast your lot with a single macroeconomic outcome by empha- sizing stocks and lower-quality, credit-sensitive bonds. If investors get nervous about the economy’s trajec- tory, it’s still a safe bet that high-quality bonds will hold up best, so they remain a must-own for all inves- tors who wish to stay truly diversified. Even though it’s wise to maintain space for high- quality bonds in a portfolio, it’s not unreasonable to limit the duration risk of those bonds. Long-duration bonds may well perform the best in a true market shock, but many investors don’t have the stomach for the bonds’sometimes-extensive volatility and, indeed, their potential for real losses in a prolonged period of rising interest rates. Past results from the asset class reflect an extremely favorable envi- ronment—a period of declining interest rates that has spanned nearly three decades. Instead, sticking with short- and intermediate-term bonds, as well as cash, for the portion of your port- folio you expect to tap within the next five or so years looks like a prudent course of action. It’s also wise to revisit high-quality but focused investments that have performed well in the past but could be in for tough sledding such as dedicated GNMA funds. Gold-rated Vanguard GNMA VFIIX and Fidelity GNMA FGMNX fit the bill. Better- diversified funds, such as those that populate Morn- ingstar’s short- and intermediate-term bond cate- gories, have the leeway to graze across bond market sectors, giving them flexibility that funds wedded to a single bond-market sector do not have. œ Contact Christine Benz at christine.benz@morningstar.com

Morningstar Categories

Estimated Net Flow ($Mil) August

Investors Shun Core Bond Funds for the Fringes

YTD

Bank Loan

7,551

46,158

Nontraditional Bond

5,002

40,359

Ultrashort Bond

2,236

7,671

Short-Term Bond

1,910

17,820

Inflation-Protected Bond

(2,078)

(14,546)

High-Yield Muni

(2,355)

(7,575)

Muni National Interm

(2,924)

(5,930)

High-Yield Bond

(2,945)

(7,450)

Muni National Long

(2,963)

(8,715)

Intermediate Government

(4,159)

(24,595)

Intermediate-Term Bond

(18,204)

(48,898)

Best-and Worst-Selling Bond Funds August 2013 Estimated Net Flow ($Mil)

Best-Sellers

August

YTD

Oppenheimer Senior Floating Rate Fund 1,726

7,441

JPMorgan Strategic Income Opps Fund 1,518

6,336

PIMCO Short Term Fund

1,369

1,958

Goldman Sachs Strategic Income Fund

1,165

5,144

BlackRock Strategic Income Opps Port

682

4,106

Lord Abbett Floating Rate Fund

645

3,892

Worst-Sellers PIMCO Invstmnt Grd Corporate Bnd Fund (770)

(2,255)

Vanguard Total Bond Market Index Fund (831)

(4,322)

JPMorgan Core Bond Fund

(832)

(3,827)

PIMCO Real Return Fund

(833)

(5,084)

Vanguard Inflation-Protected Securities (1,067)

(11,786)

DoubleLine Total Return Bond Fund

(1,130)

173

Vanguard GNMA Fund

(1,587)

(8,793)

PIMCO Total Return Fund

(7,720)

(22,631)

Data as of Aug. 31, 2013.

rocket ship that everyone seems to be imagining,”he noted. In particular, he’s concerned that corporate earnings could be less impressive than anticipated, while upcoming unemployment data could also disappoint. Does that mean investors should hurtle headlong into high-quality, long-duration bonds (duration is a measure of interest-rate sensitivity), which have tended to hold up well in recent periods of economic and stock market weakness? After all, long-term Treasuries were the best diversifiers of all during the 2008 financial crisis and even the debt-ceiling standoff in the summer of 2011 .