"About $220 billion year-to-date has gone into bond funds," says Michael Rawson, a Morningstar fund analyst. "The percentage of assets that were in bonds started out at about 13% some 10 years ago. That has doubled to about 26%. So there has been this dramatic shift from equities into bonds."
Topping Morningstar's ranking of fixed-income bond funds for the three months that ended on Oct. 31 were John Hancock High Yield Bond, John Hancock Funds 2 High Income and the Nuveen Preferred Securities. Respectively, these funds generated yields of 7.69%, 7.47% and 6.84%, much more than the yield of many equity funds.
Caveat emptor, however: These funds may follow a high-risk path. "Many of these funds' portfolios harbor less-than-investment-grade bonds," Rawson notes. John Hancock Funds 2 High Income, for instance, may invest up to 10% of its assets in securities that are rated in default by Standard & Poor's or Moody's.
The worst performers in the fixed-income category were almost entirely long-term and intermediate-term government bond funds. This reflects the dicey financial status of many city and state governments and the looming fiscal cliff. The biggest losers for the three months ended Oct. 31 were the Pimco Extended Duration Fund (down 7.34%), Vanguard Extended Duration Treasury (down 6.67%) and the Rydex Government Long Bond (down 5.38%).
Despite significant outflows over all, some equity funds had solid performances in the most recent three months. The Vanguard Institutional Index Fund, the largest stock fund tracked by Morningstar, with a portfolio worth upward of $114 billion, uses a classic indexing approach to track the performance of the S&P 500. This fund was up 2.95% for the three months ended Oct. 31 and had gained 15.18% for the latest 12 months.
Equity funds that registered even more impressive results include Century Global Gold (up 24.14% for the latest three months) and Van Eck International Investors Gold (up 24.03%). The 14 best-performing United States equity funds - all of them precious metals funds - registered increases of more than 20%. These elevated numbers raise the question of whether gold has topped out. "No," Rawson says. "I think gold will remain strong. It provides stability in a volatile, possibly inflationary economic environment."
TECH, REAL ESTATE RETREAT
At the other end of the spectrum, two technology funds topped Morningstar's biggest loser list: Fidelity Select Electronics (down 7.86% for the latest three months) and Fidelity Select Computers (down 4.48%). Real estate fared poorly, as well; 16 of the 20 worst-performing equity funds were real estate funds, although many of these funds had solid gains for the latest 12 months, with returns as high as 14.42%.
Laton McCartney is a New York writer who's contributed to Money Management Executive and Information Management.