Five of the Hottest-Selling Funds: Buy or Bail?

In the second quarter, the stock market came roaring back, and some fund investors have followed suit though, of course, they'd have been better off if they had stayed in rather than buying after the rally started. On the plus side, most fund money does stay put. There are trillions in mutual funds, and even in the most extreme months, you'll only see $20 billion or $30 billion in net inflows or outflows.

So, now that Karen Dolan has looked at the coldest-selling funds, let's look at the hottest sellers. How did they get here and should you join the masses and rush in? I should note that I pulled a few funds from the hottest-selling list rather than just use the top five because some of the best sellers are there because of fund-of-fund switches or share class issues and don't actually reflect new money from investors.

 
 PIMCO Total Return
Can you imagine what a black eye the fund industry would have gotten if its biggest fund had been a dud in 2008? The average intermediate bond fund lost nearly 5%, but Bill Gross led the fund to a robust 4.8% gain because he was way ahead of the curve on the housing and mortgage disaster. This year the fund is up 6.3%--excellent in absolute terms but middling for its peers.

The great thing about this fund is that PIMCO has shown it can manage massive sums of money by using derivatives. The derivatives allow PIMCO to make shifts in the fund's interest-rate, yield-curve, and sector exposure much more quickly than they could do in trading actual bonds. It's complicated stuff, though, so you've got to have faith that they will continue to manage the giant portfolio effectively. I should note that while the institutional shares (which account for nearly all the flows) have a decent expense ratio, the retail shares are pricey, so  Harbor Bond , which is a near clone and charges just 0.55%, is the way to go.

 TCW Total Return Bond
This fund has doubled in size thanks to massive inflows this year. The draw is that comanagers Jeffrey Gundlach and Philip Barach run a quality-focused mortgage portfolio. The fund's 0.9% return in 2008 wasn't as good as PIMCO's but it was remarkable for a mortgage portfolio. This year they've posted an awesome 11.6% return--one of the best in the intermediate bond category. A key driver has been that Gundlach bought mortgages at very low prices and now some are refinancing, meaning the fund is getting paid back at par. You won't get that kind of pop too often, but this is still an appealing lower-risk take on mortgages.

 Vanguard Total Stock Market  
Here's a surprising but excellent choice on this list. It lost 37% last year, and it's up a pedestrian 8.5% this year. In other words, it's not hot. The best time to get in any fund, index or active, is when it's cold. You get a nice boring low-cost fund here that should do quite well for you over the long haul. (The figures in the table are just for traditional open-end funds. This fund got an additional $570 million in flows to its ETF share class.)

 PIMCO Commodity Real Return Strategy
It got clobbered last year as the recession took a big bite out of commodity prices. That was only fair as commodity prices had taken a big bite out of the economy. In addition, the fund has TIPS overlay, which helped in 2008 but has held it back a bit lately.

In any case the fund is popular not because of what it did but because of what it might do. Inflation is pretty low now given the recession, but with all of the economic stimulus spending around the world, many are worried that inflation will snap back. This fund offers a way to hedge against such a price hike. (I'd note that there's another school of thought that says once the stimulus spending is over, the world economy will grind down and deflation will take hold.)

To me it's particularly appealing for bond heavy portfolios because fixed income takes it the hardest when inflation spikes. As with PIMCO Total Return, this fund's near clone from Harbor ( Harbor Commodity Real Return Strategy  ) is the way to go for retail investors.

 Templeton Global Bond 
This one is en fuego. With a 10% year-to-date gain, this fund is working on its seventh top-quartile year in the past eight. That’s really unusual in the world-bond category because the rise and fall of the dollar puts most funds in the cellar every once in a while. However, manager Michael Hasenstab takes a flexible currency approach and will aggressively adjust currency exposure depending on his outlook. Needless to say, he's been right most of the time. In addition, he usually has a big slug in emerging markets, which have higher yields but higher risk. Given his long track record of success, I'm inclined to give Hasenstab the benefit of the doubt, but be sure to take a close look at the fund's emerging-markets exposure before you dive in.