"I'm too sexy for my shirt," said no bond fund ever.
Plenty of stock funds sing that old song by Right Said Fred. But bond funds? No. To mix old-school, pop-culture metaphors, it's more like Bronson Pinchot in "Beverly Hills Cop" saying "Not sexy."
Sure, there are star bond fund managers who get featured on TV, but the only reason is because they make predictions. TV loves predictions, so there's room for those guys.
Another instance when a bond fund got huge media attention was last year, when PIMCO co-founder Bill Gross decamped for Janus. There was some justification for the attention: PIMCO's Total Return Fund (PTTRX) is the world's largest bond fund, with more than $220 billion in assets. Of course, that was after $70 billion in withdrawals in the previous year and a half, as investors (mostly institutional) became impatient with market-lagging performance.
As active funds go, the PIMCO Total Return Fund isn't horrible. These days, its assets total about $98 billion, according to Morningstar. That's still large, even at a shadow of its former self.
These days, the largest bond fund is no longer PIMCO Total Return, but the Vanguard Total Bond Market Index Fund (VBTIX). A comparison of the two shows that on an annualized basis, the PIMCO fund has outperformed over the long term. On a one-year basis, the Vanguard fund wins. Over the past decade, the PIMCO fund has outperformed the Vanguard fund six times.
Both funds fall under Morningstar's Intermediate-Term Bond category, but they are hardly close relatives. PIMCO managers are free to pursue global themes, such as strength or weakness in currencies like the euro or yen, for example. The Vanguard fund simply tracks performance of the Barclays U.S. Aggregate Float Adjusted Index.
That index measures a wide swath of public, investment-grade, taxable, fixed income securities in the U.S.
There are some investors who dislike bond index funds like Vanguard's, which rely more heavily on U.S. government debt than PIMCO's. About 65% of the Vanguard index fund consists of Treasuries or quasi-governmental agency bonds, such as mortgage-backed securities. You can guess the reasons why some prefer corporates: Interest rates are sure to rise at some point, possibly even very soon.
They've been sounding that clarion call for a few years now, as have all the rate-hike alarmists.
But here's the real issue: Your bond holdings should not be the growth-producing portion of your portfolio. In addition, bonds typically show low correlation to stocks. Not all the time, but most of the time. So if you are seeking performance from a bond fund, you're looking at it the wrong way.
Retirees who had properly allocated portfolios in 2008 were able to withdraw living expenses from the bond portion of their portfolios, and weren't forced to cash out stocks that were already beaten down.
As most of the readers know, I prefer the low costs and lack of manager guesswork -- oops, I meant to say "strategic input" -- of a passively managed fund. However, in either case, be sure you are not holding your bond investments to the same expectations as your stocks.
But in a market environment like 2008, it's the bond funds that look just a little sexier in their shirts. Until everybody forgets about them again.