US bond funds actively managed by industry heavyweights like Pacific Investment Management Co. attracted the most new investment last year as money returned after a two-year dry spell.
A majority of the top 10 bond mutual funds, based on net inflows, were active ones attracting a combined $74 billion in assets, according to data compiled by Morningstar Direct. The cohort outpaced their passive counterparts. Among the six active funds receiving the most flows were the Pimco Income Fund, Dodge & Cox Income Fund, and Capital Group’s The Bond Fund of America.
All told, US active bond funds hauled in $261 billion in 2024, the most since 2021, Morningstar data show. The money poured in despite the unexpected bond selloff since September when the Federal Reserve cut interest rates for the first time in four years.
The winners are so-called core and income bond strategies which are more conservative and seen as less risky in an uncertain interest-rate environment. These strategies capture investors who are still hesitant to dive into bonds after suffering record double-digit losses in 2022, when the Fed raised rates aggressively.
Core fund strategies own “high quality bonds that provide diversity in periods of stress,” and appeal to investors “in a world where people want more consistency in returns and more diversification benefits,” said Anmol Sinha, investment director for Capital Group’s The Bond Fund of America.
Bonds have become attractive for investors with exposure to equities and credit, which by various measures trade at hefty valuations. On top of that, investors have to navigate through the uncertainty of a Trump administration with its pro-economic growth and inflationary policies which are expected to keep the Fed on the sidelines with rate reductions. Markets are pricing in the next rate cut for July.
Treasury yields have inched closer to the key 5% level heading into 2025. So far this month, the yield on the 10-year note has gone from 4.5% to 4.8% and back to 4.65% in the wake of solid employment data and a subsequently softer read on consumer prices.
“It’s a pretty good time to own Treasuries given where the yields are relative to the average of the last 20 years,” said Ford O’Neil, a portfolio manager at Fidelity Investments.
“If you look at credit spreads, whether it’s investment grade, high yield, those have never been tighter,” he added, the asset class “doesn’t have a lot of upside from a spread tightening perspective.”
As of Dec. 31, the Pimco Income Fund saw a net inflow of $26.8 billion, reinforcing its status as the largest US actively managed fund, but trailed the $33.4 billion into the Vanguard total bond market index fund which topped the Morningstar list. Pimco Income’s return of 5.4% last year outperformed the Vanguard Total Bond Market II Index Fund’s 1.25% advance.
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