In a year of record withdrawals from taxable bond funds, no category has been harder hit than the biggest broad market strategies managed by firms from Pacific Investment Management Co. to JPMorgan Chase & Co.
Investors yanked $61.8 billion from intermediate-maturity debt funds in the first nine months of the year, while pouring $46.2 billion into bonds maturing in less than three years, according to data compiled by Morningstar Inc. Buyers are showing a preference for shorter-maturity and high-yield bonds that are less sensitive to rising benchmark borrowing costs as the Federal Reserve weighs curtailing the pace of its unprecedented stimulus that’s bolstered credit markets.
Concern is mounting that a general basket of bonds won’t preserve income and generate returns for investors who reaped average annual gains of 6.3% from the start of 2009 through last year. As the central bank prepares to start slowing its bond buying, the Bank of America Merrill Lynch U.S. Broad Market Index is on pace for its first annual decline since 1999.
“People aren’t getting enough income from their bond portfolios as they need,” Michael Rawson, a fund analyst at Morningstar in Chicago, said in a telephone interview. “You’re going to see money come out of intermediate bond funds and into these more income producing bond categories.”
Investors withdrew $28.1 billion from Pimco’s $247.9 billion Total Return Fund in the first nine months of the year, the most among all intermediate bond strategies, Morningstar data show. JPMorgan’s $24.6 billion Core Bond Fund had the third biggest outflow with $4.6 billion of redemptions, while American Funds’ $28.2 billion Bond Fund of America reported $4.8 billion of withdrawals.
In the same period, non-traditional bond funds that give managers more flexibility in how they invest received $45 billion of deposits, Morningstar data show.
“While core bond categories have experienced outflows industry-wide, we have continued to see inflows into our absolute return and unconstrained strategies,” Mark Porterfield, a spokesman for Newport Beach, California-based Pimco, said in an e-mailed statement.
JPMorgan’s Core Bond Fund, which was started on Dec. 31, 1983, and focuses on investment-grade notes with medium-term maturities, reported a $2.3 billion withdrawal on Oct. 28, spurring the biggest weekly outflow from U.S. investment-grade debt funds since June, according to data compiled by Bloomberg.