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THE WALL STREET JOURNAL - Nov. 4, 2009 - by Sam Mamudi
Treasury bonds are typically seen as a safe and unspectacular part of the market, a safety-first asset class with negligible returns.
So the 5.2% annualized gain enjoyed by the average Treasury-bond mutual fund over the past decade may surprise many investors.
In fact, the average Treasury fund has outperformed both U.S. and international stock funds over the past decade, while also carrying low risk.
U.S. stock funds saw annualized returns of 2.1% in the same period, while the average international stock fund's gain was 4.7%. High-quality corporate-bond funds posted average annualized returns of 5.6%, though their risk is greater than Treasury bonds
Treasury funds enjoyed even better performance in the 1990s. From Dec. 31, 1989, to Dec. 31, 1999, they saw average annualized returns of 6.7%. While those numbers are still impressive, especially given the low-risk nature of Treasurys, they were well below the average U.S.-stock fund's 1990s annualized gain of 15.7%, and the 10.4% for international-stock funds.
The past 10 years "was a decade that saw two bear markets and fairly tame inflation," said Russel Kinnel, director of fund research at investment researcher Morningstar Inc. "In the 1990s, Treasurys would have been the worse place to have been. It speaks to how things go in cycles."
In the 1990s, as with the past decade, Treasurys benefited from low inflation and low interest rates. Mr. Kinnel said the cycle is poised to turn again, and he doesn't expect Treasurys to replicate their past gains in coming years.
With the 10-year Treasury yield at about 3.4%, Mr. Kinnel doesn't see much potential for good returns. He said Treasurys also face so-called duration risk -- the chance that inflation or interest rates will rise in the coming years, which will diminish gains.
"Treasurys might not be a good place to be going forward," he said.
Still, the steady returns from Treasurys over the past 20 years highlight their value in a portfolio. Mr. Kinnel said investors "should have just a little [set amount of] money in Treasurys" at all times, though he recommended adding and trimming amounts depending on conditions.
Mr. Kinnel said many investors can simply buy Treasurys at auctions held by the Federal Reserve. But for those who want to own them through a mutual fund, he recommended Vanguard Group's line of offerings, mostly because they are low cost.
Given the economic environment and his wariness of long-term Treasurys, Mr. Kinnel recommends Vanguard Intermediate-Term Treasury Fund. The fund, which has expenses of 0.25%, has 10-year annualized returns of 6.7%, according to Morningstar. Last year, as every other asset class fell, it was up 13.3%. The fund is down about 1% so far this year.
Barclays: Crisis Over
Global markets are functioning normally, and stocks, particularly those in developed markets, likely offer more upside, according to Barclays Wealth.
The global wealth-management business of London-based Barclays PLC is encouraging clients to move past the crisis; seek exposure to economic growth in Asia; and prepare for short-term interest rates in core countries to remain low for "a very, very long time," said Aaron Gurwitz, managing director and head of global investment strategy at Barclays Wealth, at a year-in-review briefing on Tuesday.
"The crisis is over," said Mr. Gurwitz, yet many investors have been "doubly traumatized" and have yet to move past the crisis psychology.
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