Fund gets love from advisers, if not investors

The American Century Target Maturities Trust 2025 Portfolio (BTTRX) has had a strange couple of years, but a loyal group of advisers swears by the long-term-bond fund.

The fund posted a return of 21.45% last year and ranked No. 38 out of 3,853 bond funds, according to Morningstar Inc. of Chicago.

But the fund also placed among the industry leaders in asset outflows percentagewise, shrinking to $187 million in assets as of Dec. 31 from $244.8 million at the end of 2001. That follows a drop from $594.1 million as of Dec. 31, 2000.

In 2001, as the fund was losing more than half its assets, it still managed to return 32.63%, making it Morningstar’s No. 1 bond fund across all categories.

The 2025 target maturity fund is part of a series sold by American Century that also includes the years 2005, 2010, 2015, 2020 and 2030, with combined assets of about $1.3 billion as of Dec. 31.

The fact that these conservative funds are quietly managed for American Century Investments of Kansas City, Mo., from the heart of the Silicon Valley technology bubble in Mountain View, Calif., adds to the novelty.

The 2025 target maturity portfolio isn’t your average mutual fund, and that makes it hard to bring in long-term assets.

“I think it flies beneath people’s radar because it’s something else to learn,” says Jeremy Fletcher, lead portfolio manager of the American Century Target funds.

But some financial advisers don’t find the fund and its American Century siblings a hard sell. In fact, they are building their businesses around the funds and reaping gains for their clients at a time when stocks are backsliding.

Between 1997 and 2000, Robert J. Bova, president of MoneyWatch Advisors Inc., a Lexington, Ky., firm with $144 million under management, shifted the allocation of his portfolio to 90% bonds from 75% equities.

Mr. Bova, who works from Naples, Fla., holds half that bond portfolio in the 2025 Target Maturity Fund because he knows what he is getting.

“You don’t have a lot of extraneous gains because they don’t do much timing,” he says.

A key attraction of these bond funds is that they provide a simple way to buy zero-coupon bonds in a way that closely mimics buying the bonds themselves

“You can predict what your return is going to be,” Mr. Fletcher says.

One major rap on bond funds in general is that they take a disproportionate chunk of the yield away in fees. Or worse, they take huge risks to justify their fees.

American Century’s Target funds charge 0.59%, and the company says the funds do certain things to make this up to the investor.

For starters, the bid and ask on a zero-coupon bond is high, but American Century’s portfolio managers can get close to the bid price and they pay no commission, which can be as high as 5% of the purchase price. Also, because the fund managers hold the bonds to maturity, they can buy more illiquid but higher-yielding bonds to pump up returns.

The one extra risk Mr. Fletcher takes to generate higher yields is buying government-agency bonds. But even those he buys are rated AAA.

Donald S. Peters, principal with Central Plains Advisors in Witchita, Kan., who manages about $30 million, has his own thinking about the fees. “Fifty-nine basis points is fine,” says Mr. Peters. “I made 19% [on the 2025 Target Maturity Fund] last year after the fee,” he says. “It’s cheaper than buying odd lots, and sometimes you can’t even get a bid.”

Long-term zero coupon bonds are also the best way to bet on deflation, advisers say. Besides being non-callable, they cut out reinvestment risk. With traditional bonds, there is no guarantee that you will be able to reinvest interest payments at the rate originally locked in.

Once the fund hits its target date, American Century dissolves it and sends proceeds to the shareholders.

Because these funds hold the highest credit-quality bonds and they hold them to maturity – barring fund redemptions – they offer as close to a guaranteed return as exists in the securities marketplace.

Recently, redemption pressure has become an issue with the 2025 Target Maturity Fund.

The problem lies with who owns the funds. Although 60% of the funds’ investors buy the funds for retirement or to fund a college education in the future, another 40% use the funds to try to time markets for interest rates.

The latter group followed the herd into shorter-maturity bonds in 2002 to avoid the risk of a rebound in interest rates that never happened.

Deborah Larson, a spokeswoman for American Century, says her firm is working on an initiative to market all its funds more through intermediaries. She thinks this may reduce redemptions because it will introduce a higher level of education to the product’s sales.