High Bond Fund Redemptions an “Aberration”

July 12, 2013 (PLANSPONSOR.com) – The surprising rise in interest rates that began in early May and spiked in June triggered a 2.4% average loss for all bond funds during June.

Some investment strategies, such as tax-free bond funds and emerging market bond funds, lost more than 4% for the month on average. Subsequently, many bond funds experienced redemptions during June.

Industrywide, bond funds net redemptions reached 1.8% of their total assets in June, equal to $59 billion, excluding exchange-traded funds (ETFs), according to Strategic Insight, an Asset International, Inc. company. The most significant net redemptions (as a percentage of assets managed) were experienced among bond funds focusing on high-yield corporate, high-yield tax-free, GNMA, Treasury inflation-protected securities (TIPs), emerging market debt, and long-duration and intermediate-duration U.S. government funds. At the same time, however, a number of bond fund categories continued to experience positive flows in June, including floating rate, absolute return and ultra short-term bond strategies.

“The high redemptions among bond funds during June should be reviewed as an aberration. Historically, stock or bond fund redemptions driven by sharp price corrections have always been limited in magnitude, short in duration—a few days, a few weeks—and non-recurring. Similarly, bond fund flow activity moderated in July and modest bond fund inflows to selected categories would resume during the second half of 2013,” suggested Avi Nachmany, Strategic Insight’s director of Research. “I also expect further gains in demand for stock funds in the second half of 2013—adding to the $219 billion invested in stock and balanced funds and ETFs in the first half of 2013—as slow but steady economic improvements persist.”

Stock funds continued to attract net inflows in June, setting a new flows record for intake at $158 billion. The previous record for first half stock fund flows was set in 2004 with $155 billion. Domestic equity funds netted $4 billion in June, bringing flows for the first half of 2013 to $68 billion. Demand for international equity funds remained positive, netting $9 billion during the month, increasing flows for the first half of the year to $90 billion.

Exchange-traded products (including ETNs) turned to net redemptions, driven by international equity (-$7 billion) and bond (-$8 billion) strategies. Domestic equity ETPs experienced another month of positive demand led by growth, financial sector and leveraged strategies. 

More about Strategic Insight, a mutual fund industry research and business intelligence provider, is at http://www.sionline.com