Welcome to the 10th installment of our weekly fund review, in which we review the latest notable fund news and tell you what it means for Foolish investors.
Bill Gross hears the bear's growl
A year ago, PIMCO's Bill Gross declared that the bear market for Treasury bonds was at an end. However, Gross now feels that robust global growth and mild inflation will likely keep a lid on bonds in the near future. He said he thinks yields will peak at a higher level than previously forecast in the next few years. Bill Gross is not the only bond manager with this outlook. In recent weeks, many bond fund managers have reacted by moving to the shorter end of the yield curve in anticipation of rising short-term rates. Some managers have also reported that they are shifting into other sectors such as emerging-markets debt and high-yield bonds to try to find more attractive opportunities.
PIMCO shareholders should be aware that they may see the firm moving into slightly more high-risk areas in the coming months. Gross sees a bear market for bonds and anticipates moving into alternative sectors in an attempt to counteract subpar returns in the Treasury market. Likewise, fixed-income investors in general should be aware that there may be difficult times for bonds ahead. Although bonds are typically thought of as a "safe" investment, that doesn't mean that they can't go down in price. It is possible to lose money on bonds. Despite that fact, bonds are an essential tool for reducing volatility in investment portfolios. Don't run away screaming from bonds because Bill Gross thinks a bear market is imminent. If you keep your overall long-term strategic focus, you'll be able to ride out any market bumps.
401(k) plans moving away from retail funds
More and more 401(k) plans are forgoing retail mutual funds in favor of commingled funds, also known as collective investment trusts. This shift has likely been brought on by increased scrutiny of fees within retirement plans. Commingled funds typically offer investment objectives and holdings that are similar to those of retail funds. However, these investments are less heavily regulated than mutual funds and usually offer lower costs. As a result, commingled funds have been gaining in popularity among 401(k) plan administrators. According to research by Greenwich Associates, only 54% of plans offered retail funds in 2006, as opposed to 64% of plans two years ago.
In general, this is a positive move for those participating in the plans. Investors will directly benefit from lower expenses. It's also reassuring to see trustees taking proactive steps to lower fees and provide the best possible investment options. Just remember that you should still look carefully at the commingled funds within your 401(k) plan before investing. This is made somewhat more difficult because of the lack of readily available information on these investments. But try to find out as much as you can about the fund, its management, and its investment process before committing your money. Commingled funds have definite cost advantages over retail mutual funds, but you should be sure to know the differences between the two, and how that affects your investment.
Annual Russell rebalance
June brings warm weather, weddings, and the annual rebalancing of the Russell Investment Group's family of indexes. Unlike Standard & Poor's, which makes continuous adjustments to its indexes, Russell reconstitutes its indexes once a year. This year, Russell says it plans on adding 277 stocks to the Russell 3000 Index and taking out 174 companies, a relatively uneventful transition. New rules will also allow U.S.-listed companies that are incorporated abroad to be included in the index for the first time. Schlumberger
Because Russell's methodology is relatively straightforward, some investors try to anticipate which stocks will be dropped or added and engage in front-running. Selling those stocks dropping off or buying those entering the index can artificially lower or raise the prices for these stocks before the actual rebalance. This could affect you if you hold any of these stocks directly or indirectly, through your mutual funds. Ultimately, there is little you can do about this effect, other than to be aware of it. If you own a fund that tracks one of the Russell benchmarks, know that your fund holdings will be changing. While you may not wait eagerly for the Russell rebalance each year, at the very least keep it in mind and know that some of the holdings in your own portfolio may be affected as result.
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Fool contributor Amanda Kish lives in Rochester, N.Y., and does not own shares of any of the companies or funds mentioned herein. Tyco is an Inside Value recommendation. The Fool has a disclosure policy.