In “Running Low on Bonds”, the WSJ today notes that bond funds are increasingly holding stocks because of the shortage of attractive bonds to buy. They cite the Loomis Sayles Strategic Income fund as an example. Common and preferred equity is now 19% of its portfolio, versus 5% in mid-2011.
We’re sympathetic to the argument. Bonds are a horrible investment. But if investors choose a bond fund and the manager buys equities, whatever asset allocation decision made by the client is being distorted. What the Loomis Sayles managers are saying is that their clients should hold less in bonds, and they’re going to help you with that asset allocation shift by doing it themselves. It’s not that stocks are necessarily a poor choice – far from it. But in the next bear market Loomis Sales clients may find they have more equity exposure than they expected to have based on their asset allocation.