Yield of Dreams

Morningstar: Be Prepared to Lose a Lot in Bonds


Stocks and bonds had a pretty good 2012, but it’s time to sober up, according to Morningstar analysts. Long-run expected returns for asset classes around the world are low, said Sam Lee, ETF analyst at Morningstar.

But even short-term outlooks aren’t good. Russel Kinnel, director of fund research, said not to expect big returns for the next year or two.

Bonds, especially, will disappoint. Lee went as far as to say prepare yourself to lose a lot of money in bonds. If you look at bond yields and substract inflation expectations, the expected real return of the average bond market is -1 percent. Negative!

(That said, Lee still believes everyone should own some bonds; they’re still a valuable insurance hedge.)

But income-oriented investors can’t just depend on bonds and Treasuries. Instead, one of Kinnel’s picks is the Vanguard Dividend Growth Fund (ticker: VDIGX), an $11 to $12 billion fund that invests in wide-moat, high-quality companies. He likes the fund because these companies have the potential to grow their dividends, and it’s low-cost. Unlike Treasuries, this has appreciation potential, he said.

Kinnel also suggests to buy the unloved: European equities and U.S. equities. They’re coming off a low point, and valuations are attractive.

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Casting a gimlet-eye on asset management issues.

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