Mutual Fund Trends: Bonds Still in Demand

Experts say bonds are less attractive than stocks. Whatever.

Investors are continuing to pour money into bond mutual funds despite the warnings from Wall Street. So far, those investors have looked smart for doing so. Bond funds have delivered solid returns despite dour predictions. That, plus some other trends from around the mutual fund industry:

— INVESTORS STILL WANT BONDS.

Bond fund investors got a reminder last year that even relatively safe investments can lose money. The average intermediate-term bond fund lost 1.4 percent, and at the start of this year many analysts were forecasting continued struggles.

But intermediate-term bond funds instead returned 4.1 percent through the end of June. Investors noticed, and they plugged a net $3.48 billion into those funds last month, according to Morningstar. Intermediate-term bond funds are the largest category of bond funds by assets, with $956 billion in total.

It's part of a wider move back into bond funds, which as a group attracted $70.53 billion in net investment in the first six months of 2014. Last year, investors pulled a net $37.12 billion.

Investors, meanwhile, have remained ambivalent about stocks, which are setting record highs. Investors pulled more money out of U.S. stock funds last month than they put in, the second straight month that's happened.

Still, many analysts along Wall Street continue to say stocks look like a better investment than bonds. Analysts are worried about interest rates, which they predict will rise due to a strengthening economy and the Federal Reserve letting up on the accelerator for stimulus. Rising rates hurt prices for existing bonds, whose yields suddenly look less attractive.

— FUND MANAGERS LIKE CONSUMER STOCKS.

We're all swiping our credit cards at CVS while on the way to vacations booked on priceline.com. At least, that's what many mutual fund managers are hoping.

After surveying 485 mutual funds with $1.4 trillion in assets, a Goldman Sachs review found that Visa, Priceline Group, CVS Caremark and MasterCard are among their favorites. To determine which were indeed favorites, the bank's strategists identified those that had higher fund ownership than one would expect, relative to their size in stock indexes.

Visa, for example, makes up 1 percent of the average mutual fund's portfolio, when it represents just 0.6 percent of its benchmark.

By sector, Goldman Sachs found that mutual fund managers appear most optimistic about companies that sell non-essential items to consumers. A strengthening job market would help consumers spend more, and employers have added more than 200,000 jobs in each of the last five months. The last time that happened was in 1999-2000.

Fund managers appear to be least confident about utility stocks, which many say have become too expensive relative to their earnings following strong stock-price gains.

— JUST BEING AVERAGE IS AN ACCOMPLISHMENT.

Everyone would like to be the best. It's why investors consider the higher fees charged by actively managed mutual funds. These funds hire stock pickers to buy winning stocks, all in hopes of beating their peers and broad-market indexes.

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