Where do bond funds go from here?

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Bond funds will take time to reset during this volatile time

What can investors expect going forward now that Bill Gross has joined Janus Capital (JNS)? First, in the short term there will be a net outflow from various PIMCO bond funds to bond funds of other strong players like BlackRock (BLK), iShares Core U.S. Aggregate Bond ETF (AGG), and Vanguard Total Bond Market ETF (BND). Plus, there will be a benefit to Janus too, as Mr. Gross will bring in his expertise.

Janus Unconstrained

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Second, the bonds funds will go for a reset. It will take some time before a new equilibrium emerges. The most likely beneficiaries would be large ETFs and niche players like DoubleLine Capital of Jefferey Gundlach. In the interim, there will be higher volatility in bond fund prices and shares of Janus Capital due to higher uncertainty in the coming days.

Third, the long-term outlook for funds will depend on the performance of the funds after the short-term noise dies down. Funds that perform well will get higher inflows.

Mr. Gross is likely to come back rejuvenated

Mr. Gross welcomes the new challenge in this phase of his career.  He said in his first interview after his exit from PIMCO that he likes the thrill of money management more than getting caught up in the operational parts of running an organization.

The fund that Gross will manage, the Janus Global Unconstrained Bond Fund (JUCDX), will challenge him. Because of its unconstrained nature, it will typically have less duration, maturity, and interest-rate risk than a traditional fixed-income portfolio.

Most intermediate-term bond funds are benchmarked to a bond index with an average maturity of five to seven years. Unconstrained funds have no such benchmark. With more freedom to manage funds, it’s possible he will return to his earlier market-beating ways.

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