To pry shellshocked investors out of their cash positions, several big fund companies are nudging in-vestors into the next least-conservative position: short-term-bond funds.
Janus
Capital Group Inc., MTB Group of Funds, Putnam Investments and
Transamerica Asset Management Inc. in recent months have lowered the upfront sales charges on their short-term-bond funds in the hope of luring investors from the sidelines.
“People are not going to jump from cash to equities,” said Sam Campbell, director of research at Fuse Research Network. “Short-term-bond funds can act as a baby step.”
Despite the rebound over the past 12 months, during which the S&P 500 gained more than 25%, investors are still holding trillions of dollars in cash. Some two-thirds of investors surveyed recently by
Franklin Templeton Investments said that they didn't know that the market rose last year.
For advisers, of course, getting clients out of cash and into short-term-bond funds means that they can make more money, even with the smaller commissions.
“Advisers don't necessarily get paid for people sitting on the sidelines in cash,” Mr. Campbell said.
To that end, short-term-bond funds are preferable to long-term-bond funds, experts said, because many think that interest rates will rise over the next few months.
“When people start to fear rising interest rates, they tend to go to shorter-maturity bonds ... because as rates go up, the pain they will experience is usually a lot less than if they were in longer-term bonds,” said Eric Jacobson, director of fixed-income research at Morningstar Inc.
Last month, Putnam dropped the sales charge on the A shares of its Floating Rate Income Fund, Putnam Absolute Return 100 Fund and Putnam Absolute Return 300 Fund to 1%, from 3.25%. The company also reduced the sales charge on M shares of those three funds to 0.75%, from 2%.
Additionally, Putnam dropped the investment minimum of its fixed-income and absolute-return funds at net asset value to $500,000, from $1 million.
The reduced sales charges are intended to make them more competitive with other short-term-bond funds in the marketplace, said Elaine Sullivan, managing director and head of retail marketing at Putnam.
“There are trillions of dollars in cash on the sidelines looking for the next step back into the markets,” she said. “Short-term-bond funds serve a couple of purposes: They're a good next step back into the markets, and they also are a good place for shorter-term income needs.”
Also last month,
Transamerica made permanent the reduced charges put in place last year for its Short Term Bond Fund.
In May 2009, the firm reduced the advisory fee to 0.55%, from 0.65%; the 12(b)-1 fee to 0.25%, from 0.35%;. In October, the firm reduced the contingent deferred sales charge to 0.75%, from 1%. The fund's board voted to make the changes permanent because it was seeing more demand from investors in the fund, said John Carter, president of
Transamerica's fund division.
Before the firm made the pricing changes, it was seeing $250,000 in monthly inflows in its retail classes. Now it is seeing $144 million in monthly inflows.
The Short Term Bond Fund has $2 billion in assets.
Meanwhile, Janus in February lowered the sales charge on the A shares of its Short-Term Bond Fund to 2.5%, from 4.75%.
“With rates at historically low levels, we thought this was in the best interest of clients,” said Janus spokesman James Abert.
And at the end of last year, MTB reduced the sales charge and the minimum-investment levels on its Short Duration Government Bond Fund and Short Term Corporate Bond Fund. The firm lowered the minimum to $250,000, from $1 million, and the sales charge to 1.75%, from 3%.
“In our conversations with advisers, we saw two camps,” said Chuck Barrett, national sales manager at MTB.
“We saw clients who had moved money that was invested for longer-term purposes to the sidelines and weren't necessarily happy with the yields they were getting,” he said. “And we saw people who were in short-term-bond funds in preparation for rising interest rates.”
MTB made the changes to meet the needs of both sets of clients, Mr. Barrett said.
Although short-term bonds may be an alternative for investors in cash, experts warn that financial advisers should make sure that they understand how the funds work before choosing one.
“Generally speaking, the more yield a fund offers, the more risk that is going to be there,” Mr. Jacobson said. “Advisers need to look under the hood and understand what they own.”
The
Charles Schwab Corp. has been the subject of numerous arbitration claims over its short-term-bond fund, YieldPlus. Plaintiffs in class actions against the firm allege that Schwab marketed YieldPlus as a safe alternative to cash, but its large holdings in mortgage-backed securities caused it to blow up in the wake of the credit crisis.
The fact that different firms are offering different pricing for their short-term-bond funds could cause some advisers to make decisions based solely on their payouts, Mr. Campbell said. At the very least, the discrepancy could expose advisers who choose funds that pay more in commissions to possible litigation.
“There is an appearance of a conflict of interest,” Mr. Campbell said.
E-mail Jessica Toonkel Marquez at [email protected].
