Lukas
Strobl:
Since
we’ve
exited
the
zero
rate
era,
bonds
are
back
in
demand.
One
problem
with
bonds
is
that
their
high
minimum
subscription
all
but
excludes
smaller
and
retail
investors.
Bond
funds
are
one
popular
way
around
that,
and
specifically
fixed-term
bond
funds
have
seen
massive
inflows
in
the
past
year.
I’m
here
with
Morningstar
fund
analyst
Shannon
Kirwin,
who
has
taken
a
look
at
this
trend
in
a
new
report.
Shannon,
first
off,
what
is
driving
this
massive
influx
of
money
into
these
fixed
term
bond
funds?
Shannon
Kirwin:
Yes,
it’s
true
that
this
category
has
been
immensely
popular
over
the
last
year
and
that
popularity
has
actually
continued
into
the
current
year
as
well.
So,
we
saw
this
category
receive
about
€60
billion
in
net
inflows
in
2023.
In
2024,
Q1,
we
saw
another
€13
billion
coming
into
the
category,
and
that
stands
in
stark
contrast
to
other
asset
classes
in
other
category
groups
that
have
mostly
seen
net
outflows.
So,
if
you
look
across
equity
funds,
across
asset
allocation
funds
or
alternatives,
all
of
these
larger
category
groups
saw
net
outflows
both
last
year
and
in
Q1
of
this
year.
By
contrast,
we’ve
seen
positive
inflows
into
fixed
income
and
those
have
been
dominated
by
flows
into
these
fixed
maturity
or
fixed-term
bond
funds.
The
only
category,
interestingly,
that
actually
had
more
inflows
in
2023
was
money
market
funds.
And
overall,
what
this
picture
is
telling
us
is
that
investors
are
still
very
timid
about
taking
market
risk.
They
want
to
take
advantage
of
those
higher
interest
rates
that
central
banks
have
now
started
offering,
but
they
don’t
actually
want
to
get
out
there
and
actually
put
their
money
into
a
stock
fund
where
you’re
actually
exposed
to
the
market
ups
and
downs.
The
way
that
a
fixed
maturity
bond
fund
works
is
in
a
sense
it
kind
of
tries
to
imitate,
as
you
alluded
to
in
your
opening,
the
structure
of
a
single
bond.
So
essentially,
what
will
happen
is
the
manager
will
select
a
basket
of
bonds
that
all
mature
around
the
same
time,
maybe
a
year
from
now,
maybe
three
years
from
now
or
five
years.
Investors
will
put
the
money
in
the
fund
and
then
their
money
is
essentially
locked
in
for
the
period
of
the
bonds’
maturity.
They
collect
the
coupons
as
interest
during
the
lifetime
of
the
fund.
And
then
when
the
bonds
reach
their
maturity
date,
that
principal
is
returned
back
to
the
investors.
So,
what
I
think
investors
like
about
these
strategies
is
that
you’re
really
insulated
from
the
market’s
ups
and
downs.
If
there
is
a
huge
sell-off
in
the
bond
market,
your
manager
is
actually
never
forced
to
sell
a
bond
into
that
weak
market
and
lock
in
a
capital
loss
because
it’s
just
a
buy
and
hold
strategy.
So,
investors
really
like
that
they
feel
like
they
know
what
they’re
getting
into.
The
yield
is
often
advertised
in
the
prospectus.
And
so,
an
investor
feels
like
they’re
locking
in
a
given
yield
for
a
certain
period
of
time.
However,
there
are
drawbacks
to
the
structure
as
well.
So,
as
I
pointed
out,
you’re
locking
up
your
capital
for
the
period
of
the
fund.
If
there
is
a
big
rally
on
the
market
and
as
an
investor,
you’d
really
like
to
be
able
to
jump
in
and
take
advantage
of
that,
you
can’t,
because
a
lot
of
these
funds
actually
charge
very
punitive
early
withdrawal
fees.
So,
you’re
actually
paying
a
big
penalty
if
you
withdraw
your
money
before
it
reaches
its
maturity
date.
Strobl:
Speaking
of
safety
–
we’re
talking
about
corporate
debt
here,
not
treasuries
–
how
risky
are
these
funds?
Kirwin:
Yeah,
that’s
a
really
important
thing
to
point
out
as
well,
I’m
glad
you
asked
that
question.
A
lot
of
investors
may
mistake
these
bonds
for
the
equivalent
of
a
fixed-term
cash
deposit
at
a
bank.
And
that’s
a
very,
very
misleading
characterization
of
these
strategies.
We’ve
actually
seen
anecdotally
that
some
banks
even
kind
of
market
these
products
this
way
to
investors,
which
is
extremely
misleading.
As
you
point
out,
most
of
these
funds
do
have
very
significant
exposures
to
corporate
bonds.
And
corporate
bonds
carry
credit
risk.
These
are
not
risk-free
products.
They
are
insulated
from
market
ups
and
downs
in
a
way
that
regular
bond
funds
are
not.
But
that’s
not
to
say
that
there
are
no
risks
in
these
products.
And
in
fact,
looking
at
the
underlying
credit
quality,
which
is
a
measure
of
essentially
what
the
risk
of
a
default
occurring
in
the
portfolio
is,
we
see
that
there’s
a
non-insignificant
exposure
to
high-yield
or
junk-rated
bonds
within
these
strategies
as
well.
The
median
fund
in
Morningstar’s
fixed
maturity
bond
category
has
about
20%
exposure
to
high-yield
or
junk-rated
debt.
And
if
we
look
at
the
history
of
this
asset
class,
there
have
been
periods
in
time
where
there
have
been
noticeable
default
exposures
among
some
of
these
strategies.
In
2020
and
2021,
we
saw
several
of
these
strategies
run
into
problems
because
they
had
sought
to
take
advantage
of
seemingly
attractive
higher
yields
in
the
emerging
market
corporate
bond
space.
And
a
lot
of
funds
actually
had
to
stomach
very
significant
capital
losses
when
they
had
exposures
to
Chinese
real
estate
developers,
which
actually
defaulted.
And
that
was
very
painful
for
investors
in
those
funds.
Though
I
think
it’s
important
to
point
out
that’s
not
the
typical
experience
that
investor
will
have
in
these
funds,
especially
funds
that
have
focused
on
largely
investment-grade
debt.
On
average,
the
funds
in
this
category
have
actually
slightly
outperformed
equivalent
funds
in
the
Euro
corporate
bond
category
over
their
lifetime.
But
it’s
incredibly
important
to
point
out
that
these
credit
risks
do
exist,
and
investors
need
to
really
pay
attention
to
what’s
actually
in
their
portfolios.
Strobl:
And
there’s
been
quite
a
bit
of
geographical
divergence
in
these
funds’
fortunes,
correct?
In
Europe,
they’ve
done
fairly
well.
Kirwin:
Yes,
that’s
true.
Compared
to
their
Asian
counterparts
–
so
we
actually
looked
at
the
broader
cross-border
universe
for
these
strategies.
The
funds
that
I
mentioned
earlier
that
had
the
most
exposure
to
Chinese
real
estate
developers,
for
example,
those
will
often
have
been
funds
that
were
marketed
towards
Asian
investors.
Many
were
domiciled
in
Singapore
or
Taiwan.
Over
the
maybe
15
years
that
this
asset
class
has
really
existed,
we’ve
actually
seen
European-domiciled
funds
greatly
outperform
Asian-domiciled
funds.
And
it’s
because
of
the
risks
that
typically
they’re
taking.
Strobl:
Now,
you
briefly
touched
on
fees
earlier.
That’s
a
big
one
here
because
we’ve
seen
the
beginning
of
an
emergence
of
ETFs
in
the
fixed
term
bond
fund
space.
Do
you
see
potential
for
these
ETFs
to
steal
the
lunch
of
active
managers
in
the
long
term
like
we’ve
seen
in
equities?
Kirwin:
Yeah,
I
think
the
entrance
of
ETFs
into
this
universe
is
actually
really
interesting.
One
of
the
major
drawbacks
within
this
category
is
that
fees
have
historically
been
very
high
compared
to
what
you’re
actually
getting.
So,
these
are
buy
and
hold
strategies.
There’s
not
a
lot
of
active
management
happening.
There’s
not
a
lot
of
administrative
overhead
or
costs.
And
yet,
the
typical
fund
in
the
fixed
maturity
bond
category
actually
charges
a
higher
fee
than
the
typical
fund
in
the
Euro
corporate
bond
category.
There’s
really
no
justification
for
that.
And
so,
these
ETFs
charge
incredibly
low
fees.
Another
advantage
that
they
have
is
that
they’re
very
diversified.
So
yeah,
I
think
they
offer
a
lot
of
the
things
that
investors
are
looking
for
at
a
much,
much
more
attractive
price
point.
Strobl:
Looks
like
this
will
be
a
very
dynamic
category
of
funds
in
the
future.
You
should
all
read
Shannon’s
latest
report
in
the
Morningstar
research
portal.
Thank
you
for
all
these
insights,
Shannon.
For
Morningstar,
I’m
Lukas
Strobl.
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