Investors vote with their feet. Morningstar analysts vote with medals, or lack thereof. The polls don't always agree.
Here's a look at four funds with Morningstar Analyst Ratings of Bronze, Silver, or Gold that had a lot of net redemptions in 2013. Each of the Morningstar Medalist funds that saw the most outflows in 2013 were on the wrong side of macro and/or industry trends but still remain strong options in their respective categories.
When Right Is Wrong
Bill Gross must be ruing the day he warned investors that the long bond rally was over. Sometimes it hurts to be right. His PIMCO Total Return (PTTRX), which dominated annual fund inflows for years, set outflow records last year. It saw $42 billion leave as it dropped 1.9%. That's more money than all but about 30 mutual funds in the United States have under management, and about 14% of Total Return's total assets of a year ago.
Some of Gross' and PIMCO's bets on interest rates in 2011 and 2013 didn't work out, though the fund did beat its benchmark last year and finished in the middle of its peer group. Oddly enough, however, the real reason for the investor exodus is investors' growing desire for fixed-income funds that have the flexibility to make even bolder duration wagers--in either direction--than this fund will. Nearly five years into a bull market, a lot of investors may be ditching bonds to jump on the equity bandwagon, while others may be raising cash.
Gross has the experience, acumen, and resources to be as adaptable as many of the latest go-anywhere bond funds. He, however, remains committed to keeping this fund a core bond holding that takes carefully calibrated risks versus its Barclays U.S. Aggregate Bond benchmark. He contends he has all the flexibility he needs to stay competitive with that benchmark and the intermediate-term bond category. Morningstar is inclined to agree with this multiple Fixed-Income Fund Manager of the Year award winner on that score. The Gold-rated fund is still a very good and, if you can get the institutional or front-load share classes, affordable core bond option.
Similar stories played out at Vanguard Inflation-Protected Securities (VIPSX) and Vanguard GNMA (VFIIX), which saw outflows of $14.6 billion and $12 billion, respectively, in 2013. That's about 30% of their total assets in 2012. The funds aren't doing anything different or wrong, but investors' opinion of what they do changed. Investors have been fleeing anything with interest-rate sensitivity, and Vanguard Inflation-Protected Securities, with its nearly eight-year average duration (a measure of interest-rate sensitivity), is more sensitive than most. It didn't help that Treasury Inflation-Protected Securities in general had a poor summer. TIPS' underperformance relative to the rest of the bond market and their illiquidity surprised and turned off a lot of investors. Vanguard also notes that about one third of Vanguard Inflation-Protected Securities' 2013 outflow was the result of the family changing the component funds of its Vanguard Target Retirement funds. Early last year Vanguard replaced Vanguard Inflation-Protected Securities with a newer Vanguard Short-Term Inflation-Protected Securities Index fund in the Target Retirement series of funds of funds.
Meanwhile, the Federal Reserve's decision to begin slowing purchases of mortgage-backed securities sent many of Vanguard GNMA's investors packing, as the beginning of the end of the Fed's quantitative-easing program hurt the performance of agency MBS. GNMAs, which have little credit risk because of their government backing but still are exposed to interest-rate risk, actually fared worse than the broader MBS market. That startled some investors who had previously viewed these securities as low risk.
These Gold-rated funds still provide cheap, no-nonsense exposure to their bond sectors, though; Vanguard Inflation-Protected Securities and Vanguard GNMA will prove their worth again in the event of inflation or a flight to safety.
The Battle of the Bulge
If Vanguard Total Stock Market Index (VTSMX) has been the main beneficiary of the steady flow of money from active to passive funds in recent years, American Funds Growth Fund of America (AGTHX) has been one of the main benefactors. It has seen nearly $90 billion in outflows over the past five years, which is among the most of any U.S. fund in that period and about 75% of the fund's total assets at the end of 2008. Despite the exodus, size remains an issue. Active share, one measure of how indexlike a fund is, has fallen over the years. A lot of investors wonder how much value a $136 billion fund with nearly 270 holdings can add over its benchmark index. Morningstar shares investors' concerns over creeping mediocrity but still thinks the Bronze-rated fund can be competitive because of its low fees and management structure that lets seasoned, bottom-up stock-pickers run independent sleeves of the fund.
(Editor's Note: Information about Vanguard Target Retirement funds was added to this article after publication for clarification purposes.)
For a list of the open-end funds we cover, click here.
For a list of the closed-end funds we cover, click here.
For a list of the exchange-traded funds we cover, click here.
For information on the Morningstar Analyst Ratings, click here.
Dan Culloton owns shares in PTTRX.