Mutual fund research consultant Financial Research Corp. Inc., Boston, has begun a death watch on fixed-income mutual funds.
Despite recent and comparatively slight inflows into bond mutual funds, a FRC study outlined the "quantum shift" in the mutual fund industry during the past decade, during which bond funds lost their early dominance in the market.
FRC said that by the end of 1989, total assets in fixed income funds were $289 billion, or 52% of the long-term mutual fund market. Between 1989 and October 1997, bond fund assets rose 2-1/2 times to a total of $719 billion, or a 27% market share.
By comparison, equity mutual funds experienced eight-fold growth during the same period to $2.2 trillion, or 73% of long-term mutual fund assets.
Commodity-oriented mutual funds that invest in U.S. government securities, municipal bonds and investment-grade bonds had three years of massive outflows, following terrible performance in 1994. Investors moved a net $17.1 billion out of commodity funds from January 1995 to October 1997.
During the same period, almost $29 billion (net) moved into high-yield bond funds as investors chased their double-digit returns.
FRC officials expect commodity-oriented bond fund growth to remain poor, even if there is a prolonged down equity market preceded by higher bond yields. High-yield bond funds will continue to attract the largest share of assets allocated to fixed-income funds, the study's authors said.