I had already begun thinking that dividend stocks have become a crowded trade for some time. And then I read this article in the Wall Street Journal about how bond funds are investing in dividend paying stocks. At this point, it is an easy jump of bias confirmation to call a market top. A commenter questioned the data and I thought it would be worthwhile to investigate more. That was yesterday morning and I’m still trying to get my head around it. It is, after all, an important question. We know that yield is too expensive, that it is artificially manipulated (for our own good by all knowing central bankers) and that the (intentional) effect is to cause allocations in other areas of the economy to adjust. But how expensive? Is it an allocation or a mis-allocation? Has the search for yield become too crowded? And, most importantly, is there a trade in it?
Sorry to disappoint, but this post is only going to be a starter kit. This is a big question. It is, arguably, THE big question for investors right now.
I’ve reached out to the author of the article via email. He responded very quickly and indicated that Morningstar tracks just under 2,000 bond funds. Most funds’ allocations to stocks are small, but there are several dozen with allocations >5% and a couple dozen with allocations > 10%.
I was able to run a fund search to try to replicate the findings from the article. I also looked at the MorningStar site but didn’t find the article. I’m not a subscriber, so if you read this and are, please let me know if you find anything. Instead, I used what I have available, which is a Bloomberg terminal. I brought up the fund screening tool. The criteria that I used was: US domiciled, focus on debt asset class, USD denominated and equity fund allocation > 1%. I also only looked at primary share classes to avoid repetition of funds & assets.
According to Bloomberg’s database, there are 14,672 primary share class funds of all types active and domiciled in the US. Of those, there are 2,540 focusing on debt. Finally, of those 2540, 162 have an allocation to equities greater than 1%. 60 have an allocation greater than 5%. Like all screens, these are not perfect. Many of these look like funds that were oriented to have mixtures of fixed income and equity. Others consider preferred stocks as fixed income. Out of the top 10 for those holding more than 1% equities, 3 are Loomis Sayles. There is not an easy way to track these allocations over time, at least not in aggregate. There is nothing, therefore, to add about evolution of these equity allocations.
Overall, I don’t see a clear conclusion. I suspect that there is a reach for yield and allocations are indeed higher. The incentives in place for portfolio managers encourage a reach for yield. It seems unfortunate that there is not a smoking gun here, but sometimes finding out something is not evidently true can be as valuable as finding out that it is. At any rate, there is more to be said about the reach for yield but not tonight and not in this post.