The financial repression exemplified by the Federal Reserve’s zero interest rate policy (ZIRP), that was begun on Dec 16, 2008, has many side effects. One of these side effects is to drive down the interest income that savers and investors receive from their bond and fixed income investments. For example, many bank deposits are paying only 0.01% today. Similarly, locking up funds in a 5 year CD yields a paltry 1% to 1.5% today, which results in a negative return after inflation. In this yield starved environment, that recently entered its 5th year, having some skillful active bond managers in your portfolio can be very helpful in seeking to generate returns above the fund’s relatively low yields. The fund managers do this by trading bonds in addition to holding them. For example, a domestic corporate and government bond manager that we like is running a multi-billion dollar fund that is currently yielding just 2.54%. Last year, the fund generated a total return of 9.3%. The additional return beyond the yield came from a combination of realized gains on bonds sold throughout the year, plus unrealized capital appreciation of the bonds the fund holds. Similarly, an international bond fund that we like is currently yielding 5.6%, while holding approximately 50% of their $68Bn in cash and the other 50% in foreign government bonds. In 2012, the fund generated a 15.8% total return for investors, including both the interest income from holding bonds plus the returns from trading them.
(as of Feb 22nd, 2013)