Bond Funds Soar Above Stocks Funds
Jul. 09, 2002
%mlink(STRY:; PHOTO:; AUDIO:%)
NEW YORK (AP) _ Throughout the stock market's malaise and the economic slump, bond funds have delivered solid returns, proving that sometimes the safe havens do pay off.
Bond funds rallied again in the second quarter while stock prices continued to crumble on a combination of fears about earnings and terrorism and doubts about corporate accounting.
The quarter's best performers were intermediate U.S. Treasury funds with a return of 5.2 percent, according to Lipper Inc., which compiles statistics on mutual fund performance. It was the category's best quarterly return since the second quarter of 1995, when it returned 5.4 percent.
Other top performers: U.S. mortgage funds returned 3.3 percent, while funds that hold A-rated corporate debt returned nearly 3 percent.
Meanwhile, nearly all stock funds suffered declines in the second quarter. The performance of bond funds, meager by the high standards of the last bull market, has won the notice of investors now looking for any gains they can get.
``Over the last year and a half, I have been seeing a lot more (clients) asking about bond funds. I think they realize now it could cushion a stock-heavy portfolio,'' said Vernon Lee, a financial planner in Raleigh, N.C. ``But it is good for portfolio diversification anyhow.''
The current popularity of bond funds, also called fixed-income funds, is a switch from the low profile they had in the late 1990s, when investors poured money into stock funds, particularly those in such riskier sectors as technology and telecommunications.
Stock broker Charlotte Herr said more of her clients are asking about stocks that pay dividends and about bonds and bond funds.
``Two years ago ... they certainly weren't interested in bonds,'' said Herr, who works for Stephens Inc. in Dallas. ``Now, I am (selling) a lot more dividend-paying stocks, like natural gas pipelines that are structured to pay out dividends, and bonds.''
But financial planners caution investors against jumping into or diverting a large portion of their portfolio into bond funds just because those funds happen to be outshining stock funds. Rather, they say the decision to buy bond funds, as with any investment, should be part of investors' overall financial strategy.
``Investors should keep the allocation of their assets consistent. Pick an allocations that you are happy with and stick with it,'' said Carlos Vasquez, senior financial adviser at Signator Financial Network in Bethesda, Md.
As with any investment, investors should understand how bonds work. First, bonds are considered safer because investors are basically holding IOUs issued by a government or a corporation. Investors buy bonds on the premise they will recoup their investment along with some interest by the specified maturity date.
Investors should coordinate the maturity dates on bonds with their financial goals. If the investment is to be used to finance college in a few years, a shorter maturity date is in order than if the fund is marked for retirement in the more distant future. U.S. Treasury bonds range in maturity dates of one, two, five, seven, and 10 years.
It's also important to keep in mind that bonds don't operate in a vacuum, that their fortunes are tied somewhat to what's happening in the stock market and the economy.
Bond prices are linked to interest rates, both those set by the Federal Reserve and those that rise and fall within the bond market itself. Prices and bonds move in opposite directions.
Other bonds have a tendency to react similarly to stocks. For example, the performance of corporate bonds was hampered somewhat in the second quarter amid reports of accounting problems at companies such as WorldCom, Tyco International and Xerox. Companies saw their debt ratings, as graded by Moody's Investor Service, Standard & Poor's and Fitch, falling, some to junk bond status.