Any way you look at it, it's hard to see a bright future for bond mutual funds.
While stock funds and money-market funds have boomed in the late 1990s, bond funds' share of the business has shrunk faster than a tourist-trap sweat shirt.
Sure, 1999 has been a tough year for bonds generally as the Federal Reserve has raised short-term interest rates, putting bond prices on the defensive. But bond funds' problems are more than cyclical.
At their mid-1990s peak, bond funds commanded almost 30 percent of the assets invested in all types of funds, as measured by the Investment Company Institute. At the end of October this year, their share was 13 percent.
Since the end of 1994, bond fund assets as tallied by the ICI have risen 59 percent. Over the same span, the Bloomberg average of bond funds, which tracks the combined return produced by asset appreciation and dividends from bond interest payments, has gained about 39 percent.
In other words, two-thirds of bond funds' modest asset increase has come from price appreciation and only about one-third from new money flowing into the funds.
These days, it takes a dedicated contrarian to see their attractions. "The time when nobody cares about fixed-income is precisely the time when you ought to care about fixed-income," said Joan Batchelder, who's been managing bonds at the $125 billion MFS Investment Management Inc. in Boston for two decades and now heads the firm's fixed-income department.
In recent years, though, many fund investors looking to balance their swelling stock-market holdings have chosen money-market funds rather than bond funds, despite the fact that money-fund yields of around 5 percent have trailed bond-fund returns by 1.5 percentage points or more. Money-fund assets have almost tripled since 1993.
By shunning bond funds in 1994 and again this year, fund investors have provided strong evidence that they won't accept price variability in an investment they own for conservative reasons--as a source of income and stability in their overall holdings.
Prices of individual bonds fluctuate just as bond funds' net asset values do, sometimes with even sharper ups and downs. Still, no matter how violent the swings in interest rates and bond prices, holders of individual bonds can expect to get the face amount back at maturity, barring default.
Bond mutual funds, with their continuously managed portfolios, never mature and cannot offer the promise of a known return at any given date in the future.
Sign of the times: this year's market for tax-free municipal bonds, where brokers report strong growth in direct sales of bonds to individual investors, while assets of municipal bond funds have dropped about 5 percent.
"Brokers are selling individual bonds over funds at this point," said Sheila Amoroso, manager of several tax-exempt bond funds at Franklin Advisers Inc. in San Mateo, Calif., which manages more than $48 billion in munis.
The biggest downer for bond funds, without question, has been the roaring success of their stock-fund competitors. Stock funds now account for more than 55 percent of the fund industry, up from 36 percent six years ago.
The Bloomberg stock-fund average has gained 17 percent a year over the past five years, or more than 2 1/2 times what bond funds have returned. Many analysts, including some bond partisans, say investors have recognized that they needed greater exposure to growth investments to bankroll their retirements, especially with life spans expanding.
"The increase in equities as a portion of portfolios is entirely appropriate," said William Reynolds, head of fixed-income investing at T. Rowe Price Associates in Baltimore, which manages $157 billion, including $103 billion in mutual funds.
If the stock market ever slows down, bond-fund managers say, their wares will look a lot better to investors. Bond funds still can boast quite a few virtues, including diversification and convenience of moving money in and out that aren't easy to find in other bond investments.
"It's not for everyone, but it's for most people," Rafael Costas, director of Franklin's municipal bond research department, says of bond investing.
Even with those positives, though, the days when bond funds shared billing with stock and money funds in the great mutual-fund success story are long gone.