Investors pile into bond funds just as smart market money turns away

“The big win was to hedge at that point,” he said. He added, “You have to remember the pundits and dynamos of the industry are traders.

“A lot gets lost in communication between that and the retail side of the industry.”

There is definitely an argument to be made for having a slight overweight to cash when you start to feel wary on both sides of market, viewing both equities and bonds from a peak down. Nine to 12 months of cash reserve, rather than just six months, is the new norm for greater security, and to take some risk off the table and wait for a better opportunity to reinvest, he said.

Boneparth also is favoring bond managers who use unconstrained total return approaches, the style employed by Gross and Gundlach, among others, to tactically allocate across the entire global fixed-income universe.

“Rates have been going up and look at yesterday,” he said. “I was looking at core bond funds to see if any total return funds were really rocked and the meter didn’t move that much. Across the board, it didn’t look too detrimental.”

“A downtick in bonds is not same as a downtick in equities,” said Mike Loewengart, vice president of investment strategy at E-Trade Financial. He said even in previous rate increase environments, when bond income is received and reinvested, that can keep returns in positive territory and help investors get through fixed-income volatility. “Maybe it is the end of a 30-year bull run in bonds, but I still think if rates rise gradually, most diversified fixed income portfolios should fair OK.”

Boneparth has no concerns about sticking with bonds for the long-term and doesn’t believe clients will, either. “No matter how tactical you are trying to be with bonds they will still make up a big swath of allocation models, the majority in pre-retiree and retiree accounts,” he said. “What can they do? Load up even more on equities?

“Let’s assume a correction, 20 percent down, and then making claim bonds are a bad investment?” Boneparth added. “How will they feel then when there is obviously a flight to safety?

“You can’t bail on an asset class … even if turns out to be a bad cycle for bonds, when the good cycle returns, I’ll still have all my clients.”