With the benchmark Standard & Poor's 500 Index up around 25 percent
for the year, financial advisors are looking to sell some of their
worst-performing bond funds before the end of December, in order to
book losses to offset capital gain taxes on their stock portfolios.
While tax-motivated selling is common at the end of any year, what
makes 2013 different is that investors are offloading popular bond
funds offered by giants like Pimco, T. Rowe Price and Vanguard,
rather than riskier stock funds.
"There's not a whole lot of other losses out there," said Timothy
Courtney, who oversees $1.2 billion in client assets as the chief
investment officer at Oklahoma City-based firm Exencial Wealth
The broad bond market is down more than 4 percent for the year, hurt
by expectations that the Federal Reserve would soon begin pulling
back on its $85 billion a month stimulative bond purchases.
Some advisors say they may not move money back into bond funds in
2014, even after the 30 days they are required to wait before
repurchasing an investment on which they claimed a loss.
"Every year we see investors running from bad performance when they
set their new asset allocations," said Todd Rosenbluth, director of
mutual fund research at S&P CapitalIQ. "Investors want their money
to work for them, and bond funds certainly haven't been delivering
like they used to."
Bond funds are supposed to be stable investments that provide a
steady dividend income at lower risks than alternatives. But
uncertainty over the Fed's move has dogged the market in the second
half of 2013 and helped push bond prices down, sending yields
Investors plowed $131 billion into the bond market in the first half
of the year, before pulling some $85 billion out of U.S. bond mutual
funds between June and November, according to estimates from Lipper,
a Thomson Reuters company.
Outflows may accelerate towards the end of the year, said Tom Roseen,
head of research services at Lipper, due to so-called "window
dressing," when portfolio managers pull losers out of their
portfolios before clients can read about them in year-end reports.
For the year to date, the $14.6 billion iShares Core US Aggregate
Bond index — a proxy for the U.S. bond market as a whole — has
dropped 4.1 percent. Some sectors — such as inflation-protected
bonds and emerging market debt — had steeper declines as commodity
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An unusual number of the year's worst-performing large mutual funds
and ETFs are primarily invested in bonds. Typically, they are tilted
more towards stock funds or commodities funds, both of which tend to
take larger risks or use leverage that can compound losses.
This year, however, 73 out of the 168 mutual funds with more than a
$1 billion in assets and losses of more than 3 percent for the year
are bond funds, according to Lipper data.
Several investor mainstays are among the underperformers. The $16.8
billion PIMCO Real Return fund, which focuses on inflation-protected
bonds, has tumbled more than 8.5 percent for the year. The $3.9
billion T. Rowe Price International Emerging Markets Bond fund has
dropped 8.3 percent, while the $1.5 billion Vanguard Long-Term
Treasury fund has shed 12 percent for the year.
Those losses have put bond fund managers on the defensive. In an
August letter to clients, Pimco's Bill Gross urged investors to not
"give up on bonds."
"Bonds — while containing a certain amount of maturity risk by very
definition — will never be antiquated," Gross wrote. The Pacific
Investment Management Co is a unit of Allianz SE.
The Pimco Real Return fund has had outflows of $6.9 billion in its
combined share classes for the year through the end of November,
according to Morningstar, compared with net inflows of 1.8 billion
in 2012 and 1.3 billion in 2011.
Courtney, the Oklahoma money manager,
said that he has already completed his selling for the year, and he is not
planning on adding more bond exposure in the new year.
"We're expecting to be underweight bonds for a while," he said.
(Additional reporting by Jennifer Ablan;
editing by Linda Stern, Tiffanu Wu and Grant McCool)
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