Barron\'s Magazine. April 06, 2020

L10 BARRON’S•Funds Quarterly April 6, 2020

says Collins, “we believe most credit

spreads are extremely attractive and

issuers may be undervalued.” He and

his team are “not inclined” to go bar-

gain hunting among high-yield cred-

its from the hardest-hit sectors of

energy, commodities, travel, leisure,

and entertainment, he says—but

financials, utilities, certain health-

care, telecom, and technology compa-

nies are on their radar.

The $30 billionWestern Asset

Core Plus Bond(WAPAX) is another

notable fund that got hammered in the

selloff, but it is still one of the best in the

category over the long term. The retail

fund was launched in 2012, but the

institutional shares have returned 5.3%

a year on average over the past 15 years.

TheTCW Total Return(TGLMX)

rates within the top 7% for every single

trailing time period through 10 years—

but that is no surprise, given its 61%

allocation to mortgage-backed securi-

ties as of late last year.

You Want to Consider

All Your Options

The global fixed-income market is larger

than the global stock market, and infi-

nitely more nuanced and complex.

While issuers vary by industry, geogra-

phy, and credit profile, that’s only

scratching the surface. Managers also

need to navigate where a bond falls on

the hierarchy of payments, and consider

interest-rate and currency risks. Mean-

while, there is a whole world of assets

that looks nothing like traditional bonds.

Yet, these complexities can pave the

way for opportunities—especially for

managers who have leeway to move to

any sector of the bond market and, in

some cases, beyond. Multisector bond

funds typically hold up to two-thirds of

their portfolios in below-investment-

grade or unrated bonds.

Total return is the name of the game

for these strategies, but there is a

trade-off: “They generally offer less

diversification benefits relative to equi-

ties,” says Sjoblom, who adds that in-

vestors focused on long-term returns

might want to supplement their core

holdings with a smaller allocation to a

multisector bond fund.

As a group, these funds have suf-

fered. From Feb. 20 to March 20, multi-

sector funds fell 13%. It’s no surprise,

given that high-yield bonds—which are

nearly 40% of the category average—

suffered a double whammy of Covid-

and an oil price war, which spilled over

from energy names to the whole sector.

At one point, high-yield spreads were

more than 10%, says DeMaso, which

meant the market was betting that half

of the companies issuing these bonds

would default within five years.

Yes, those spreads could widen

further—meaning prices fall—“but if

you can look out 12 months, and are

willing to weather a bumpy and uncer-

tain road, there is opportunity there,”

he says.

Manager skill, experience, and

research depth are tantamount in this

group. Up an average of nearly 7%

over the past 10 years, the $137 billion

Pimco Income(PONAX) has pro-

vided investors with steady returns

without the kind of gut-wrenching

volatility typical of many go-anywhere

strategies.B

Multisector

Bond Funds

Own corporate

and sovereign

debt, among

other bonds

39%

of assets are in

below investment-

grade bonds

TheMixed-UpMathofNegativeRates—andWhatItMeansforYou

N

egative interest rates have been the norm in many developed

nations for more than a decade, but the notion that U.S. inter-

est rates could drop below zero had seemed unfathomable—

until recently.

Actually, one-month and three-month Treasury bills briefly dipped

into the red zone in late March. If the bellwether 10-year Treasury’s

yield, which was recently 0.7%, moved into negative territory, it

would be symbolic, yes, but it wouldn’t have as dramatic an impact

as some investors fear.

What causes rates to go negative? One driver is central bank policy.

Following the financial crisis, European central banks rolled out neg-

ative rates to boost business and consumer lending in hopes of spur-

ring economic growth. Over the past decade, many countries have

instituted negative rates.

Whether the U.S. Federal Reserve will go to such lengths is up for

debate. But with rates currently near zero, it isn’t out of the question.

Meanwhile, there is another force that can drive rates below zero—

the market. Bond yields are a function of supply and demand. When

investors rush to buy government bonds, it drives up the price of a bond

and sinks the yield. The amount of money in negative-yielding sover-

eign debt peaked at $17 trillion in August, 30% of the global bond mar-

ket. It has since fallen to $10.6 trillion, 18% of the global market.

Does that mean bond investors lose money? Not necessarily. If you

buy a bond on the secondary market at a negative yield and hold it to

maturity, you will effectively lose money: The price you paid for the

bond is more than the principal you’ll receive when it matures.

However, if you trade the bond, you can still make money—as long

as the price of that bond goes higher, in turn driving yields lower. The

Bloomberg Barclays Germany Treasury Bond Index had a -0.1% yield

at the start of 2019 and has since returned more than 5%. “It has

been proved in other parts of the world that if rates go from 50 basis

points to minus 50 basis points, it’s still a gain,” says Jim Paulsen,

chief investment strategist at the Leuthold Group.

That might sound like tulip mania, but behind all of this are insti-

tutional buyers, such as insurance companies and pensions, that

need a safe place to park assets. Besides, interest rates can’t be

viewed in a vacuum. “It’s all about inflation expectations,” says David

Rosenberg, chief economist and strategist of Rosenberg Research. “If

your expectation is that the [consumer-price index] might go to mi-

nus 2%, which it could in the context of a recession, then all of a sud-

den even a no-yield bond would be giving you a 2% real return.”

What about bank deposits and loans? Negative rates are sometimes

talked about as a “storage fee,” but banks probably wouldn’t be so

bold as to charge for deposits; they can make more money on fees,

other services, and loans.

So do negative rates mean that consumers could get paid to borrow

money? Um, no. There is a floor on how low rates for mortgages and

other loans will go, and that is nowhere near zero.B