It’s an odd celebration, but let’s do it anyway.
As October opened, we marked the 48th consecutive period in which the simple purchase of a 5 year Treasury provided a better return to investors than a corresponding investment in an index of 20 major government securities mutual funds. It was also the 57th period for doing the exercise. Based on that history, you’ll do better as a direct Treasury investor 84 percent of the time. That makes government mutual funds something of a long shot.
Ironically, these are the kind of mutual funds people buy to have a safe and reliable income without subjecting their savings to great risk. People have entrusted them with more than $125 billion and continue to buy them in spite of their disappointing performance.
Instead of safety and stability what most people actually get is a slow loss of principal from an investment that provides a net return that is less than a riskless money market fund. That makes it a great deal for the mutual fund industry but a lousy deal for the consumer. Basically, the marketers get the mine and consumers get the shaft.
I think it is safe to say, after 48 months, that it is a lead pipe cinch we’ll do better buying a Treasury note directly. If you are retired or drawing income from your investments, this is very important information.
The table below is a rank ordered list of the 20 funds in the index, a mix of front, deferred, and no load funds that have been around long enough to have a ten year track record. In each case I assumed that you invested $10,000, reinvested any capital gain distributions, and took all income to spend. At the end of the five year period, you looked at your remaining principal. If it was less than the original $10,000 you adjusted the income you had received downward. The only income that counted in calculating the return was the amount over and above your original $10,000.
Note that every fund on this list has lost some principal, either to market losses, commissions, or both. Only the Treasury investor came out with his original principal intact. Also note that the Treasury investor placed 4th on the list, providing a higher return than 17 of the 20 funds. This is a typical result— the Treasury placing 2, 3, 4, or 5th— and most funds providing a net return lower than what you could have earned in an average money market fund during the period.
The good news here for people who prefer investing in mutual funds is that the same funds have been at the top of the list in each month for more than a year: Vanguard GNMA, American Century Benham GNMA, and Fidelity Government Securities.
Twenty Major Government Funds Vs. A 5 Year Treasury Note
| Fund Name | End Value | Total Income | Excess over 10k | Average/Year |
| Vanguard F/I GNMA |
$9,868 |
$3,347 |
$3,215 |
6.43% |
| Benham GNMA Income |
$9,793 |
$3,269 |
$3,062 |
6.12% |
| Fidelity Government Secs. |
$9,832 |
$3,215 |
$3,047 |
6.09% |
| 5 Year Treasury: 10/92-5.60% |
$10,000 |
$2,800 |
$2,800 |
5.60% |
| Dreyfus GNMA |
$9,630 |
$3,143 |
$2,773 |
5.55% |
| Dean Witter U.S. Govt Secs |
$9,566 |
$3,116 |
$2,682 |
5.36% |
| Vanguard F/I Short-Trm Fed |
$9,794 |
$2,782 |
$2,576 |
5.15% |
| Colonial Federal SecuritiesA |
$9,327 |
$3,227 |
$2,554 |
5.11% |
| AARP GNMA & U.S. Treasury |
$9,384 |
$3,080 |
$2,464 |
4.93% |
| Franklin U.S. Govt Secs I |
$9,087 |
$3,339 |
$2,426 |
4.85% |
| Portfolio Average |
$9,233 |
$3,148 |
$2,381 |
4.76% |
| Federated Govt Income Secs F |
$9,110 |
$3,258 |
$2,368 |
4.74% |
| IDS Federal Income A |
$9,379 |
$2,869 |
$2,248 |
4.50% |
| Merrill Lynch Federal Secs D |
$9,349 |
$2,863 |
$2,212 |
4.42% |
| Kemper U.S. Govt Secs A |
$8,825 |
$3,291 |
$2,116 |
4.23% |
| Kemper U.S. Mortgage B |
$9,032 |
$3,076 |
$2,108 |
4.22% |
| Putnam U.S. Govt Income A |
$9,106 |
$2,973 |
$2,079 |
4.16% |
| U.S. Government Securities |
$8,776 |
$3,268 |
$2,044 |
4.09% |
| Putnam American Govt Inc A |
$8,882 |
$3,109 |
$1,991 |
3.98% |
| Federated Fund for US Govt A |
$8,740 |
$3,153 |
$1,893 |
3.79% |
| Colonial U.S. Government A |
$8,973 |
$2,909 |
$1,882 |
3.76% |
| Lord Abbett U.S. Govt Secs |
$8,196 |
$3,682 |
$1,878 |
3.76% |
Source: Morningstar Principia/Portfolio Developer
Here are some other messages gleaned from the data:
- We’re Slow, But We Do Learn. The three best performing funds have all gained assets in the last five years. During this period most government bond and GNMA funds were in net redemption, steadily losing assets, as investors checked out.
- Some Mutual Funds Learn, Some Don’t. A $10,000 investment in Lord Abbett U.S. Government A shares has consistently produced a high taxable income…but has also consistently laid waste to the original investment. Although this fund has lost more than $1.2 billion in assets over the last five years there is no evidence they are about to change the policy. Dean Witter U.S. Government Securities, B shares, on the other hand, once made major interest rate bets and disenchanted shareholders with poor performance. Now, they manage differently and have risen on the list.
- The Funds Won’t Improve. During most of the 57 periods examined interest rates were in a downward trend. While the average income advantage for owning a 5 year Treasury was $486, the advantage disappeared when interest rates had fallen significantly. But when interest rates had not fallen at all, the Treasury advantage was around $1,000. In other words, the only time the funds were competitive was when interest rates were falling dramatically.
- Rising Rates Probably Mean A Greater Advantage For Treasuries. If you make a trendline of interest rate change versus Treasury advantage, a period of rising rates means a growing advantage for direct ownership of Treasuries.
This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.
Photo by RODNAE Productions
(c) A.M. Universal, 1997