Yields are rising in the US in anticipation of higher rates and increased government spending on infrastructure. This means that bond prices are falling and will most likely continue to fall. Given the amount of money that has flowed into bond funds, a systematic reversal of this trend could be brutal for those holding longer bonds. ‘Everyone’ knew that rates were too low, but money kept on flowing into bond funds. Bonds even started being issued at negative yields. This was crazy, but it soon seemed completely normal because everyone was doing it. Institutional investors ‘had no choice’. Wrong. You always have a choice. I still can’t believe that there investors that bought 5 year German Bunds with a zero coupon above par…
Over the past 10 years there has been a massive migration of investor money from mutual funds to ETFs.
Much of this makes sense. The vast majority of ETFs charge smaller fees than managed funds with similar investment mandates, and most fund managers can’t beat their benchmark index net of fees.
What gets forgotten in this argument is that there is still considerable value in choosing the right fund for the right climate.
For example, for the past year or so we have decided to entrust our European equity mandate to a mutual fund rather than an ETF. The decision was based on having met the fund managers and having been very impressed by their acumen and previous ability to have ridden out difficult markets. Another characteristic of the fund was the ability to take on short positions, which theoretically could offer a degree of protection in falling markets. We felt this was important given the ongoing trials and tribulations in Europe. Valuations were attractive, but uncertainty remained. Still, as long term investors it is our job to seek out opportunities that we think will pay off down the road.