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U.S. Fund Investor - 2022 Q1 Money Moves

edited April 21 in Fund Discussions
"After seven straight quarters of inflows, investors started to pull their money from bond funds. Only $50.9 billion was withdrawn from the $5.3 trillion category group, but it marked the end of a streak that resulted in $1.1 trillion of inflows."

"As growth strategies struggled for the second consecutive quarter, investors put more money into value funds. On an absolute basis, investors pulled the most from the large-growth Morningstar Category, taking out $20.1 billion, causing it to shrink by 1.19%. But the $4.9 billion pulled from the mid-cap growth category had a more severe impact."

"While bond funds overall saw outflows, investors still sought refuge in strategies that offer some protection from rising interest rates. Bank-loan funds replaced inflation-protected bond funds as the inflation-fighting vehicle of choice, and long government-bond funds saw inflows."

"Russia's invasion of Ukraine caused volatility to spike in international markets and left the future for funds that invest in Russian securities uncertain, but it didn't spook investors from putting their money into broad international-equity funds."

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  • edited April 22
    and long government-bond funds saw inflows."
    Last I checked long term treasury index funds are down over 17%. Please help on why these bonds attract investors?

    In addition, there is likely several rate hikes this year and 2023.
  • You got me!
    I don't understand the attraction for long-term government bonds.
  • edited April 22
    Sven said:

    “and long government-bond funds saw inflows."
    Last I checked long term treasury index funds are down over 17%. Please help on why these bonds attract investors?
    I agree @Sven that it appears counterintuitive.

    However, you can’t buy past performance (or underperformance). If you buy those bonds today you’re not buying that negative 17%. Folks buying bonds / bond funds today might believe the sell-off is overdone and that some modest recovery may occur. Furthermore, it might also constitute a calculated wager that the Fed will push the economy into a deep recession by hiking rates too far too fast and that longer dated bonds will benefit as a result.

    Full disclosure: I bought some longer dated bonds today - iShares GNMA etf.


    Added: To some extent bonds are a “hedge”. Should equities plunge from here, government backed bonds should hold up relatively well - might rise in value. And if equities reverse direction and soar to new heights, you might not mind having lost some money on those bonds.
  • The point of going to short duration bonds is to minimize interest rate risk, especially when are more rate hikes coming until 2023. Going to long duration bonds make sense when rates are falling.

    Bank loan bonds referred in the article are short duration junk bonds. They are about break even so far this year when the broader bond index is down 9%. I prefer taking credit risk over duration risk as the YTD return reveals the direction of bonds. Stable value fund is also good but they are not readily available to many investors.

    This year is challenging when the asset correlation between stocks and bonds are not working.
  • edited April 24
    Floating-rate/bank-loans (FR/BL) are a subclass of HY even though M* created a separate category in 03/2003. M* intent then was to focus on this subarea, but the M* article author linked in the OP treats FR/BL as something entirely differently from HY.

    Keep in mind the following:

    1. FR/BL simply act as short-term HY when the rates are down or flat. But they are good when rates are rising. Many B&H investors have gotten burned by holding FR/BL through thick or thin.

    2. Their short-duration is because of the rate-reset mechanism; their maturities are NOT short and some may be quite long. Basically, their duration becomes the rate-reset frequency. But if something disrupts that mechanism, watch out. Cannot happen? Look up adjustable rate preferreds (ARPs) in 2008-09 when their rate-reset mechanism failed - there were just NO rate bids and their sponsors REFUSED to honor any guarantees ("contract" said they had an obligation to be the bidders of the last resorts but they weren't). Most ARPs have just disappeared - interesting how the Wall Street buries the stuff that blows up.

    3. Know that FR/BL are used by startups and early-stage companies that cannot tap the regular bond market. So, they tap this FR/BL market and it seems like a win-win for everybody until something goes wrong.

    So, invest in FR/BL being fully aware of their risks and potential volatility. In the periods of rising rates, their volatility may be low and investors may start to think of them as cash-alternatives (a very dangerous term) and then poof! There is that ST-HY volatility.
  • A HY fund I have always liked is Buffalo High Yield. Website shows the following for portfolio. I let the pros decide where and when to allocate to the different categories.

    18.9%-Bank loans
    6.4%-convertible bonds
    63.9%-Corporate bonds
    2.8%-Preferred stock
    4%-REIT
    4.2%-Cash

    https://buffalofunds.com/high-yield/

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