Time to close bond funds for investors' own good?

Clients are piling into bond funds at exactly the wrong time. If inflation kicks in, investors in longer term funds will be stuck with puny interest rates. They could sell, but likely at a big loss. No wonder some experts say it may be time to bar new investors from the funds.
JUL 18, 2012
Perhaps it's time mutual fund firms protected investors by closing bond funds to new investors amid record levels of demand and historically low yields and risk. Paul Haaga, chairman of Capital Research and Management Company, the adviser to American Funds, raised the question Thursday at the Investment Company Institute's General Membership Meeting. Moderating a panel of of top executives from Charles Schwab Investment Management, Fidelity Investments, Morgan Stanley Investment Management, and Dodge & Cox, Mr. Haaga asked “Why not just close your bond funds and tell people they can't have anymore because it's no good for them?” It's a question that has picked up steam over the past year as money continues to flow out of equities and into bond funds. Assets in bond funds have more than doubled since 2008, to more than $2.1 trillion, according to Morningstar Inc. “Investors are at their maximum allocation to bonds when yields are at their lowest,” said Kenneth Oliver, chairman and CEO at Dodge & Cox. The flows have come during a period of record low interest rates, which have equaled record low yields — and with the prospect of rising interest rates wrecking principal prices. “I'm not sure investors are ready for the kind of negative returns that could be coming to bond funds,” said Marie Chandoha, president of Charles Schwab Investment Management. Even with the risks to bonds, the panelists maintained that bonds still play an important role in portfolio construction, so closing bond funds isn't necessarily the answer. Instead, more education is needed. “The demand for bonds is really the demand for income,” said Ronald O'Hanley, president of asset management at Fidelity. “Part of the solution is educating investors about other ways of getting income, like dividend paying stocks and non-U.S. bonds.” The demand for fixed-income isn't likely to die down anytime soon as volatility in the stock markets will likely continue. A recent survey of high net worth investors at Fidelity found that the three factors keeping investors out of the stock market were the U.S. election, the Euro crisis and the U.S. debt ceiling. “Two of those three things aren't going away anytime soon,” said Mr. Hanley.

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