U.S. stock funds rose 3.7% in quarter but bonds drew cash
Investors put $126 billion into bond funds and took $58 billion out of U.S. stock funds
You can almost hear fund investors’ lament to their investments: Thank you, stocks. But I have other plans — with bonds.
Fund investors on average have registered modest gains in their stock funds this year, but they have been flocking to bond funds. The average diversified U.S.-stock fund’s total return for the second quarter was 3.7%, according to Thomson Reuters Lipper data, to bring the year-todate return to 3.4%.
International-stock funds were down 2.1% in the quarter, making their year-to-date decline 2.7%.
The U.S.-stock gains aren’t bad. But bond funds were the real story last quarter. No, they didn’t gain much: Funds focused on intermediate-maturity, investment-grade debt (the most common type of bond fund) were down 0.3%, and are now down 1.7% this year. Yet they drew an eye-opening amount of cash from jittery investors.
Investors sent a net $126.72 billion to bond-focused mutual funds and exchange-traded funds in the quarter, according to Investment Company Institute estimates. In contrast, long-term funds focused on U.S. stocks suffered an outflow of $58.72 billion. International-stock funds took in $85.84 billion as investors continued to question how long the bull market in U.S. stocks can last.
“I think it’s a very confusing time,” says Christopher Smart, Barings’s new head of macroeconomic and geopolitical research, based in Boston.
“On the one hand, you have very good balance and what appears to be sustainable growth in the U.S., you have slowing growth in Europe and maybe China — although nothing terribly worrisome — and unemployment and inflation mostly headed in the right direction. But markets still seem a little suspicious. And it’s hard to tell whether that’s because of a lot of political noise, which people spend a lot of time worrying about but not as much thinking about how to quantify.”
Overall, while it’s hard to argue that it is a great time to pour money into the markets, says Dr. Smart, “individual investments, whether on equity or the fixedincome side, seem to offer some good opportunities.”
One beneficiary has been smaller stocks, which are thought to be less vulnerable to global-trade turmoil. Small-cap growth funds were up 8.7% in the quarter, one of the strongest fund sectors. (Small-cap fund managers dominated the latest Winners’ Circle contest, with 12month gains of 40%-plus.)
Then there’s the current darling of investors. “The environment at this point in the cycle should actually become more favourable for bonds,” says Robert Tipp, chief investment strategist and head of global bonds at PGIM Fixed Income, in Newark, N.J.
“I think what people have found out over time is that once the (Fed’s) interest-rate hiking cycle is well under way, the rise in long-term rates should be mostly over and bonds move into the part of the cycle where they tend to outperform both cash, and sometimes even equities.”