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With the economic landscape changing dramatically and a “new normal” taking shape in the fixed-interest marketplace, bonds are testing a long-held–but poorly vetted–theory about safety. Ask anyone with a minor interest/proficiency in personal finance about safe assets, and you’ll likely hear something about bonds. They are the asset the investment industry offers up as a safety bunker in times of tumult. But are they? For some large and sophisticated institutional investors most likely. But for the individual investor, the answers are much more mixed.
I recently reviewed bond fund inflow data in an attempt to understand the following:

Where do Americans turn (regarding bonds) in an effort to de-risk their portfolios
Who are the winners in this pursuit?
What evidence exists to support those winners as the top choice (i.e. is there any identifiable logic behind the buying behavior)

It turns out inflow data isn’t quite as neatly organized as I had hoped, but I was able to find data on the top bond fund inflows for the 12 months of September 2021 through August of 2022. The specific article identified 10 bond funds that took in a combined $83.4 billion dollars during this timeframe.
Fidelity Smashes the Competition
Interestingly, Fidelity was the big winner in this bond fund buying frenzy taking 9 of the 10 spots with its various bond fund offerings. Vanguard was the only other fund company to make the list with its Total International Bond Index coming in at number 7 slot.
Now, I have a sneaking suspicion that this reality tells us less about Fidelities superiority as a fund company, and a lot more about its success as the number one 401(k)–measured by account numbers–in the nation. In other words, Fidelity has a lot of 401(k) accounts, and those account participants moved money to bond funds. Since Fidelity is the plan sponsor of so many of those 401(k) plans, its bond funds were the top choice–probably the only choice in a lot of cases.
So digging deeper, I wanted to look at how these top-inflow-performing bond funds performed in terms of investment performance over the past 1, 5, and 10 years. This was an exercise to determine first what bond fund investors might anticipate and also if there was any evidence that suggested these funds were in fact superior.
The Results are Horrific
The top two funds have only existed for about a year. The FIWGX and FSMUX took first and second place respectively. And in 2022, they both achieved a double-digit loss for investors.
Number three on the list, the FTLTX has history allowing for a one and five-year investment result. It also has the worst 1-year performance of the top five funds at -29.41% in 2022.
Number four on the list FSTDX is another fund with barely a year under its belt and a -19.04% loss in 2022
Finally, a spot number five we find a fund with some history. The FPCIX happened to be one of the best performers in 2022 at -14.11%–how exciting. It’s five-year performance comes in at 0.31%. And its 10-year performance sits at 1.42%
I didn’t bother looking at funds after the fifth position. Most of them haven’t been around long enough to calculate anything beyond a one-year return. But I did look at the AGG since it’s generally regarded as the benchmark for the bond fund market.
Performance for the AGG is -13.03% in 2022, -0.02% for the past five years, and 1.01% for the past 10 years.
Striking Observations about Investor “Usability”
I learned a long time ago that the best-designed product will fail miserably if users can’t understand it/figure out how to use it correctly. Lots of finance commentators like to chastise the common folk for not “investing right.” It’s a narrative they’ve used for decades, and lots of people have indulged them in this patronization parade. But I think it’s time to admit that if people can’t figure it out naturally more or less on their own, we have a problem. Sure some will employ professionals to help them wade through the unknown of personal investing/retirement preparation. But many won’t, and they will be worse off for the most part.
The fact that Fidelity wins the inflow war most likely because it’s the largest fish in the 401(k) pond and its funds with the highest inflow–more or less–happen to be short-lived offerings with awful one-year results to me tells a narrative of unwitting investors being led to slaughter. Perhaps I’m missing something, but this sure seems like history repeating itself. And with every financial calamity, we have a large dose of déjà vu mixed in with nuance that tends to be the thing that got us. In other words, the downfall is never the same, but it shares some similarities with the last one. But, the terrible observation that comes around every financial disaster that generally lacks the same nuance is how investors behave in light of the meltdown. They always seem to do the same dumb things and then complain about the negative consequences.
I don’t believe there is any consensus presently on the end of Monetary Tightening. This means there is plenty of room for bonds to fall additionally. So why are people piling into bonds? Because the average American investor who has amassed a reasonable 401(k) balance did so through blind auto payroll deductions and has benefited from standing in the right place at the right time for the past decade-and-a-half, but still lacks any investor sophistication to understand what the relationship between bonds and interest rate policy is.
And all the While you Could have Bought and Annuity
I want to return to the 10 year results from FPCIX and AGG. It’s one to one-and-a-half percent annual growth for 10 years. That’s pretty awful. And it takes place during a time when interest rates were mostly on the way down–i.e. that should have lifted results. All the while this is timeframe where a lot of people said some very negative things about annuities. The negativety cam largely because low interest rates meant low-ish annuity features. They at least appeared low when compared to their pre-financial crisis comparisons. But mant annuities provided benefits will in excess of 1.5% annually during this time. And many annuities today offer benefits that much more attactive than bonds funds and without the risk of further losses as the Fed continues interest rate hikes.