After the Fed: Some top bond-fund man­agers are telling clients don’t lose hope.»

The Denver Post - - BUSINESS - By Stan Choe

R ising rates don’t have to mean de­spair for bond-fund in­vestors.

Yes, the Fed­eral Re­serve raised short-term rates Wednes­day, the lat­est move higher in what econ­o­mists ex­pect to be a long cam­paign. Bond in­vestors have his­tor­i­cally seen ris­ing rates as the en­emy be­cause they re­sult in fall­ing prices for the bonds they own.

High-pro­file bond fund man­agers are urg­ing their share­hold­ers not to lose hope. Ex­pect lower re­turns than in ear­lier years of the decades-long bull mar­ket, for sure, but don’t give up. Ford O’Neil of the Fi­delity To­tal Bond fund and Mary Ellen Stanek and War­ren Pier­son of the Baird Core Plus Bond fund were all nom­i­nees for this past year’s Morn­ingstar fixed-in­come fund man­ager of the year. (O’Neil’s team won.) Here are some points they’re mak­ing: • Bonds will stay in de­mand. Pop­u­la­tions around the world are get­ting older. As they move into re­tire­ment, just like the Baby Boomers are do­ing, they’ll be look­ing for in­vest­ments that pro­vide in­come. That should set a base level of de­mand for bonds, re­gard­less of how many times the Fed­eral Re­serve pushes rates higher.

Plus, the world has been hun­gry for in­come given how the Fed­eral Re­serve kept short-term rates pinned at nearly zero for years fol­low­ing the 2008 fi­nan­cial cri­sis. That de­mand from in­sur­ance com­pa­nies, pen­sion funds and other in­vestors look­ing for in­come also should help limit the rise in rates. • There is an up­side to ris­ing rates. When rates rise, prices for older bonds fall, but new bonds pay more in in­ter­est. As long as the rise is grad­ual, the higher in­come can off­set the price de­clines for older bonds.

“The Fed­eral Re­serve has moved from be­ing ref­er­ees of the game to be­ing par­tic­i­pants on the field,” O’Neil said. “If we do get what we ex­pect — mod­estly ris­ing in­ter­est rates — we’re on the path to nor­mal­iza­tion. And that, to me, is a re­ally good out­come.” As long as the rise is grad­ual, the higher in­come can off­set the price de­clines for older bonds.

“The Fed­eral Re­serve has moved from be­ing ref­er­ees of the game to be­ing par­tic­i­pants on the field,” O’Neil said. “If we do get what we ex­pect — mod­estly ris­ing in­ter­est rates — we’re on the path to nor­mal­iza­tion. And that, to me, is a re­ally good out­come.” • • All All the the po­ten­tial po­ten­tial change change com­ing com­ing out out of Wash­ing­ton is dizzy­ing.

Not only are in­vestors won­der­ing about the pace of rate in­creases from the Fed, they also have to con­tend with the wide range of pos­si­bil­i­ties com­ing out of Capi­tol Hill and the White House.

Repub­li­cans have talked about a tax cut, but they haven’t given many de­tails. They’ve talked about re­vamp­ing trade deals, but in­vestors don’t know how that will play out. An in­fra­struc­ture plan could jolt the econ­omy. But, again, the de­tails. Each of those is­sues could have a big im­pact on the bond mar­ket, but man­agers don’t know which way they’ll go. • Con­trol what you can. “The range of pos­si­ble out­comes is so wide, so we say: Con­trol what you can con­trol,” Stanek said. For reg­u­lar in­vestors, that in­cludes keep­ing costs low by in­vest­ing in funds with low ex­pense ra­tios. With re­turns likely to be lower, keep­ing as much as pos­si­ble of it is key. • Ex­pect more volatil­ity. The smooth ride bond funds pro­vided for many years is also likely over. With the Fed fi­nally back in the mode of rais­ing rates, bond in­vestors are con­stantly pric­ing in — and out — their ex­pec­ta­tions for up­com­ing hikes, and bond prices move up and down ac­cord­ingly.

Newspapers in English

Newspapers from USA

© PressReader. All rights reserved.