Role Reversal

Role Reversal

Stocks return historically 7% a year… at least that’s what we are told. But what about under these strange market conditions?

The Vanguard 500 Index (the most widely held mutual fund) is sitting on a -2.60% YTD. The Munder Mid-Cap Growth fund, a favorite of mine, has squeaked out a +2.43% YTD. I’d venture to bet that if you check most of the “stock based” mutual funds you’ll find them in this range -2.5% to +2.5%, with some small deviation.

So why then would bond funds be doing so amazingly well? Keeping in mind we are not even 2/3rds of the way done with the year yet… the numbers are staggering:

Templeton Global Bond (TGBAX), which I wrote about in November of last year is at +4.57% not counting monthly distributions of about 0.4%. Which for those trying to do the math in your head is another 2.8%.
MFS Intermediate Income Trust (MIN) is sitting at +3.73% YTD. Add in a monthly distribution of ~0.7% and you have another 4.9% .
New America High Income Fund (HYB) is sitting at +10.39% YTD. Again add in a monthly distribution of ~0.68% and you add another 4.76%.
Even the Vanguard GNMA fund (VFIIX) which is 80% Mortgage backed is up 3.95% plus distributions…

Many of these funds are not climbing back to where they once were, most are hitting new highs. So why then are these funds being pumped up so much?

Coupon notes in the corporate bond markets have been going sky high, read any of my blog posts about preferred stocks and you’ll see the rates are amazing. For this reason any fund investing in corporate bonds is getting great yield (see HYB at 93% & MIN 48% corp bonds).

In order to attract investors countries and municipalities are having to raise their bond rates too. This is very evident with international bonds. TGBAX takes advantage of this holding 80% bonds, of which 60% are foreign. Look at their top holding, it is the commonwealth of Australia, and was issued at 5.75%. Third on their list is one from New South Wales (also Australia, but a state this time) issued at 6%. More risky notes such as Brazil are issued at 10%. Now there can be no question as to why the distributions are so high.

So a question to ask yourself, retirement age or not, do I want to start collecting this type of distribution income? In your 20’s or 30’s many are saying put all your money in stocks (or 90% in stocks), but is that advise you should be following in these uncertain times? For now I will allow my accounts to get “heavy” in the bond and fixed income areas, I think I will be quite happy that I have.