Amid the turmoil in the equity markets, bond funds could be poised for a Comeback.
The sudden erosion in the value of investors' stock holdings has reminded them, better than any amount of jawboning could, that diversification is a virtue.
The market decline "speaks to the need for all portfolios to have proper asset allocation, which requires a fixed-income component," said Tony Fadool, national sales manager at Federated Investors of Pittsburgh.
With that in mind, American Banker canvassed 10 leading fund companies regarding their bond offerings. The informal survey asked them to pick a single bond fund they thought made the most sense for investors at banks, given current market conditions. (See chart on this page.)
Fund executives said they expect investors to favor bond funds that offer security and relatively high returns, such as municipal bond funds, balanced funds that contain equities and bonds, and strategic bond funds, which mix high-grade and high-yield bonds.
A large-scale shift into bond funds is not yet evident and may not occur unless the stock market performs poorly for several more months.
But some bank brokerages report that investors are shifting money into short-term, liquid instruments such as certificates of deposit and money market funds, and they said this shift could portend a move into bond funds.
"When individuals realize their returns are in the 3% to 4% range, they decide where to go," said Thomas Spalding, senior investment officer at John Nuveen & Co., Chicago.
A shift to bond funds would be like old times for banks. They broke into the mutual fund business in a big way in the early 1990s by offering bond funds. The funds were well received by a conservative customer base hungry for higher-yielding alternatives to insured deposits.
In recent years bank brokerage customers have grown more sophisticated and more comfortable with the risk-and higher returns-in equity funds.
But because the stock market had performed so well for so long, until July, many investors' portfolios may have become overly weighted with stocks.
Executives of mutual fund businesses said they are not offering special incentives to brokers or trying to promote specific bond funds.
"We believe this is a needs-based business, and our partners at the banks are the ones in a position to best assess" investors' needs, said William F. O'Grady, head of sales at the arm of Fidelity Investments that distributes funds through banks and other intermediaries.
Mutual fund companies' wholesalers are reminding bank brokers that they offer bond funds and giving advice about their suitability for certain kinds of clients.
And because of increased interest in bond funds among brokers and investors, fund company wholesalers are spending more time on the asset class during conferences with brokers, fund companies said.
Kemper Funds of Chicago is undertaking a "modest campaign" that involves educating brokers in person and through newsletters, a spokeswoman said.
Dreyfus Corp., a subsidiary of Pittsburgh's Mellon Bank Corp., has been promoting short-term bond funds in recent statement stuffers.
And some, such as Pacific Century Financial Corp. and OppenheimerFunds, are running print ads. Oppenheimer's ads tout "fixed-income funds that appeal to the generation weaned on oversized performance."
In the past year Oppenheimer has encouraged bank sales representatives to reallocate their clients' portfolios so that they are not overweighted toward stocks, said Maryann Bruce, who until last week was the company's head of bank sales.