Bond Bandwagon Leaves Fixed-Income King in Dust

PIMCO Total Return investors flock to the exits.

PIMCO Total Return investors flock to the exits
By SHARE

Sometimes it's not all that good to be king.

With investors panicked about the prospect of rising interest rates, the country's two bond monarchs, PIMCO's Bill Gross and DoubleLine's Jeffrey Gundlach, have been experiencing bruising outflows.

It is Gross, however, who has snagged the most attention, due primarily to the sheer volume of withdrawals from his flagship fund, PIMCO Total Return. As of earlier this month, Total Return had shrunk by $41 billion since May, according to Morningstar.

Nonetheless, even after experiencing more in outflows than most funds will ever see in inflows, Total Return still has a staggering $251 billion under management and has comfortably retained its position as the world's largest mutual fund.

[Read: What's Next for Government Bonds?]

In part, Total Return is caught up in the same narrative as the rest of the bond industry. Indeed, the last month that bond funds saw net inflows was in May, according to data compiled by the Investment Company Institute. The worst month this year was June, when investors yanked nearly $60 billion from bond funds.

These outflows came in the aftermath of a prolonged period of success for bond funds. Before June, the last time bond funds saw net monthly outflows was August 2011.

This year, though, the prospect that the Federal Reserve will scale back its massive bond-buying program has kept bond investors on the defensive. That's because a retreat from so-called quantitative easing would allow interest rates to rise and cause bond prices to fall.

Concerns over the Fed's policies, however, can only go so far in explaining outflows from PIMCO Total Return. The other piece of the puzzle is that Total Return has long been something of a bandwagon investment, a destination for "hot" money supplied by investors who are chasing returns by piling into popular funds under the assumption that strong past performance guarantees future success.

[Read: Bond Basics: Price and Yield.]

"It's the kind of money that you expect to retreat when there's the least bit of trouble," says Eric Jacobson, a senior analyst at Morningstar. And this year, trouble has come in the form of something that Gross has long managed to avoid: negative returns. Indeed, as of Friday, the fund was down nearly 4 percent so far this year.

Jacobson says the scope of the outflows represents a "knee-jerk reaction" on the part of Total Return investors. Despite this year's struggles, Jacobson retains faith in Gross's long-term track record. "I think a lot of people are jumping the gun," he says.

Jeff Tjornehoj, Lipper's head of Americas research, says that although it may make sense for some investors to ditch bonds in favor of stocks, the potential for rising rates is not enough to warrant significant changes to long-term allocation plans.

"If you were jumping into bonds only because you were scared of equities, then it would make sense for you to pull out of bonds," he says. "[But] if you are ... in retirement, you can't forget that the losses year to date in bond products are single digits still. This is not a disaster by any means."

[See: 12 Surprising Facts About Boomer Retirement.]

For his part, Gross preached conservatism in the latest of his monthly investment commentaries. After sharing some thoughts on baseball ("I say anyone as ugly as Pete deserves a free pass to Cooperstown or any town for that matter ..."), Gross urged investors to find safe options.

"[C]ommonsensically, in an unstable global economy that is increasingly difficult to stabilize, an investor should seek out the most stable of assets," he wrote.