Friday 19 January 2018

Fund managers hit with $61.7bn withdrawals

Mary Childs

INVESTORS who poured $1.26 trillion into bond funds in the past six years pulled out record amounts of cash last month, leaving the world's biggest fixed-income managers struggling to stem the flow.

The funds saw $61.7bn (€47.6bn) of withdrawals as money market mutual fund assets rose sharply in the week ended June 25, according to TrimTabs Investment Research. Bank of America Merrill Lynch's Global Broad Market Index dropped 2.9pc in the past two months, the most since the inception of the daily gauge in 1996, as Federal Reserve chairman Ben Bernanke laid out possibilities for reducing his quantitative easing measures.

Market bears say losses are just getting started because yields barely exceed inflation, leaving little relative value in bonds as the global economy improves. Pimco, Blackrock and other asset managers, said the worst is already over because the securities are fairly valued.

"We are at a definite inflection point," said Richard Schlanger of Pioneer Investments in Boston.

"If this thing continues in this vein, people are going to throw in the towel and you're going to get this pain trade. And the markets can't take it. They'd rather see a gradual rise in short-term rates versus a precipitous rise."

The Bank of America Merrill Lynch US Broad Market index has plummeted 3.5pc in May and June, the worst decline since a 3.9pc dive in the two months ended October 2008 as the failure of Lehman Brothers ushered in the worst financial crisis since the Great Depression. Treasuries lost 3.3pc in the last three months, for their third straight quarterly decline.

"Fixed income was there to provide stability and yield," said Chris Acito, of Gapstow Capital, a New York-based alternative investment firm focused on credit. "Now both of those are gone."

Record bond-fund redemptions in the month ended June 24 surpassed the previous high of $41.8bn set in October 2008, according to TrimTabs in Sausalito, California.

In the most-recent period, investors pulled $52.8bn from bond mutual funds, typically owned by individuals, and $8.9bn from exchange-traded funds, or ETFs, which both institutional and private investors buy. Equity funds shrank by $2bn.

Investors often retreat to money-market mutual funds during times of financial stress, accepting lower yields compared with bonds in exchange for higher liquidity. Assets surged during the credit crisis to a peak of $3.92 trillion in January 2009, according to data from the Investment Company Institute. Money funds held $2.59 trillion in the week ended June 26.

Money-fund yields averaged 0.04pc this year with the yield for the week ended June 26 at 0.03pc. US equity mutual funds had assets of $6.61 trillion in April. Bond fund assets were $3.56 trillion.

The benchmark 10-year Treasury yield rose 11 basis points on May 22 after Bernanke indicated the central bank had given thought to reducing its stimulus at some point. The yield then rose 17bps on June 19 after the central bank chief said it would be "appropriate" to moderate the pace of purchases later this year.

With coupons so low, bond investors are seeing little return on their money. Real yields on 10-year Treasuries, after subtracting the annual inflation rate, are 1.08 percentage points, compared with the 6.4pc aggregate earnings yield of US stocks.

An improving economy is dimming the lure of bonds as a haven. Consumer confidence is up, as are home prices. The economy is adding jobs at the fastest pace since 2005.

"The labour market has continued to improve," Bernanke said at his June 19 press conference. "Job gains, along with the strengthening housing market, have in turn contributed to increases in consumer confidence and supported household spending."

Higher market rates triggered by Bernanke's comments may hamper further improvements in the economy. The average rate for 30-year home loans has jumped to 4.46pc from 3.40pc in little more than two months. "Rates going higher clearly will impact growth," said Michael Lillard, of Prudential in New Jersey.

"Housing is one of the most sensitive sectors to interest rates and the mortgage rate has moved a lot, not just because of Treasuries but also because mortgage spreads have widened as well," said Mr Lillard. "I think you begin to see it take some of the steam out of the housing rally."

US GDP expanded at a revised 1.8pc annualised rate from January to March. The US economy will grow 1.9pc for 2013, economists believe. Bond bulls see the higher rates as a buying opportunity.

"July will not be the same type of month" as June, claims Jeffrey Gundlach, chief investment officer of Los Angeles-based DoubleLine Asset Management. "There are profits to be made in the bond market between now and the end of the year."

Yields and spreads over Treasuries were too low two months ago and "the Fed tilted over-risked investors to one side of an overloaded and over-levered boat," believes Pimco boss Bill Gross. "Stay calm and don't panic."

For BlackRock, the world's largest asset manager, "a reduction in the Fed's asset purchases is not Armageddon – it is actually healthy" because trillions of dollars of stimulus have failed to spur much credit growth and economic activity, a group led by Peter Fisher said in a mid-year outlook posted June 27 on the New York-based firm's website.

Bernanke may have altered investors' views about the Fed's goals more than he expected with his comments in May indicating the central bank had given thought to reducing its stimulus at some point, said Martin Fridson, chief executive officer at New York-based FridsonVision, a financial research firm.

"(Mr Bernanke's comments in May) have been more fundamental in nature and it's changing people's view," adds Fridson, who started his career as a corporate debt trader in 1976. "It's not wise to conclude that everyone who's going to leave has already left." (Bloomberg)

Irish Independent

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