Morningstar Advisor - April/May 2012 - (Page 18)

Talking Points No Clarity on Bonds What Morningstar analysts are hearing about the bond market. The Issues The market confounded bond bears’ predictions in 2011. By year-end, the 30-year U.S. Treasury led all other bond sectors with a 35% gain. Meanwhile, areas perceived as less interestrate-sensitive—including high-yield corporates, floating-rate bank loans, and local currency emerging-markets debt—produced low-singledigit returns to single-digit losses. The market is still caught in a tug-of-war between central banks’ reflationary efforts and macro deflationary forces, a sentiment many diversified bond managers have echoed in their 2012 outlooks. There’s less agreement, however, about how to prepare for 2012. For instance, Bill Gross and BlackRock’s Rick Rieder took opposite sides of the duration debate in early 2011 (for and against, respectively), and they’ve now reversed their positions. Bond managers’ ability to get 2012 exactly right won’t determine whether a fund makes a good long-term investment. It’s more important to understand how and to what extent a fund may be mining less-traditional areas, both to ensure that it’s filling the right role in a portfolio and to give investors the fortitude to stick with it during what could be a bumpy year. Quotable “With gold where it is, and the 10-year Treasury yielding 2%, what we have is a market that is simultaneously placing a very high price on both inflation and deflation insurance. In effect, the market’s message is that “tail” risk is very elevated, but investors have not reached a definitive conclusion as to what direction that tail risk might take us.” Tad Rivelle Metropolitan West Total Return Bond MWTRX “In general, I think we’re somewhat neutral right now on Treasuries. Our active funds have a little bit of an overweight to corporate credit, and a little bit of an underweight to Treasuries, but it’s very small. We’re very close to our benchmark because there’s a lot of uncertainty that can result in Treasuries continuing to rally.” Ken Volpert Head of taxable bonds for Vanguard The Points r The U.S. government debt-laden Barclays Capital U.S. Aggregate Bond Index proved a formidable foe; more than 85% of the intermediate-term bond category failed to keep up with its 7.8% gain last year. The third quarter marked the worst relative showing on record for Bill Gross’ PIMCO Total Return PTTRX; it lagged the Barclays Capital U.S. Aggregate Bond Index by 488 basis points. r While many managers acknowledge today’s uncertainty, they also seem to agree that the Aggregate Bond index, despite its 2011 triumph, won’t hold the key to success in 2012 and beyond. They point to its minuscule 2.2% yield (its lowest ever), 2011’s 3.0% increase in the consumer price index, and unprecedented levels of central bank easing here and elsewhere in the developed world to argue we’re entering a prolonged phase of financial repression in which high-quality bonds will struggle to keep pace with inflation. r Many now argue in favor of one or more out-of-index bets in areas, such as high yield (Fidelity Total Bond FTBFX), convertibles (Loomis Sayles Bond LSBRX), “cleanest dirty shirt” sovereign debt (PIMCO Total Return PTTRX), nonagency residential mortgage bonds and mortgage derivatives (DoubleLine Total Return DBLTX), emerging-markets currencies (Templeton Global Bond TPINX), and munis (just about everyone). r Some managers who kept their funds’ durations low in 2011 see no reason to capitulate now that bond yields have dropped even further (Dodge & Cox Income DODIX, Metropolitan West Total Return Bond MWTRX). 18 Morningstar Advisor April/May 2012

Table of Contents for the Digital Edition of Morningstar Advisor - April/May 2012

Morningstar Advisor - April/May 2012
Contents
Contributors
Letter From the Editor
We’re Too Smart
How Do You Use Alternatives?
Taking the Lead
How to Find Economic Moats
The Beauty of Currencies
No Clarity on Bonds
Four Picks for the Present
Investment Briefs
Performance Chasing, Evaluated
Technology’s Slim Pickings
How Much Is Enough?
The Fear Bubble
Three Traits of a Successful Long-Short Equity Manager
Why Absolute-Return Funds Fail to Deliver
An Economist’s Response to Crises
Undiscovered in Plain Sight
Untangling ETF Tax- Efficiency Myths
Central Banks Driving the Gold Rush
U.S. Industrials Could Add Some Magic to Europe-Weary Portfolios
No-Hesitation Allocation Funds
Our Favorite Mutual Funds
50 Most Popular ETFs
Undervalued Stocks With Wide Moats
The Greatest Story Ever Told

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