Bond funds buying stocks (from Barron's)

Diffusion

My comment: so it is not the Great Rotation, it is the Great Spillover. Fed print money to buy bonds, but bonds cannot hold it anymore, so it spilled over to equities.

Bond Funds Lighten Up On Bonds, Buying Stocks Now
By Michael Aneiro

As I wrote my Current Yield column this week (and have touched upon repeatedly in this blog), prevailing market conditions are increasingly favoring stocks over bonds for investors seeking income. Even if both are overvalued, bonds look more overvalued than stocks. Many companies’ stock dividend yields are higher than their 10-year bond yields, and yields on all types of bonds are scraping along at all-time lows, pushing more investors to seek income in other markets.

Joe Light offers a similar take in today’s Wall Street Journal, citing data showing the number of bond funds that own stocks is at “its highest point in at least 18 years”:

The $15.4-billion Loomis Sayles Strategic Income fund has ratcheted up its stock and preferred-stock allocation to more than 19%, from 5% in mid-2011. Co-portfolio manager Matt Eagan said that the fund’s managers decided most bonds were so overpriced that it was worth taking on some stock risk to avoid pain in bonds.

“We’re in the first cycle of a rising rate environment. You really have to start thinking about how your portfolio is positioned and your vulnerability,” he said. The fund’s prospectus allows it to put up to 35% of its portfolio in stocks.

Some say this is an inevitable consequence of an overheated, Fed-fueled bond market at the end of a three-decade bull run. But others see problems with bond funds investing more and more in stocks, given that the two are fundamentally different things and that stocks expose investors to significantly greater potential losses:

When bond-fund managers buy stocks, “They’re reaching for yield,” in the form of dividends, said Russ Wermers, a finance professor at the University of Maryland who studies mutual funds….

Some financial advisers aren’t fans of the trend. Accredited Investors Inc., an Edina, Minn., registered investment adviser with $1.2 billion under management, last year cut its allocation to the Loomis Sayles Bond Fund by a third after finding out that the fund had started to buy stocks, said Accredited investment manager Jacob Wolkowitz. As of the latest portfolio disclosure, the fund had about 6% of its assets in stocks and preferred stocks.

“We’re completely sympathetic to arguments regarding yield and rising interest rates, but you can’t be making decisions by yield alone,” said Mr. Wolkowitz. He said he is concerned that the stock allocation will make the bond fund more volatile and move more in tandem with stock indexes.

hellofriend

either big up or big crash? hehe

coexist

First big up and then big crash.

oldfox