Barron's - USA (2021-02-15)

28 BARRON’S February 15, 2021

bonds, for example. It has leeway to put up

to 35% of its assets to work in so-called

plus sectors, ranging from U.S. high-yield

bonds and European corporates, to emerg-

ing markets and foreign-currency expo-

sures. In theory, an investor could get

broad fixed-income exposure with this sin-

gle portfolio. “The idea is this takes some of

the decision-making off the table so inves-

tors don’t have to worry about how their

fixed income is allocated,” says Rilling, who

has led the team since 2015.

In typical times, Rilling and her four

co-managers sit nearly elbow-to-elbow on

an open trading floor in Menomonee Falls,

Wis., a town just outside of Milwaukee

where, coincidentally, Rilling grew up. Like

most in their industry, they have had to

replicate that camaraderie virtually.“We’ve

done a really good job re-creating that, but

nothing beats being in person,” she says.

Rilling takes the lead on investment-grade

corporate credits, while four other sector

specialists cover their respective areas; the

group is supported by nearly 70 people on

the fixed-income research team.

Heading into 2020, Rilling and her team

were worried about the rich valuations

across the fixed-income universe—and at a

time when the economic cycle was long in

the tooth. “They were at levels we hadn’t

seen since before the financial crisis,” she

says. “But of course things changed very

quickly.”

By the end of January 2020, the team

had brought the plus allocation of the port-

folio down to 11%, with U.S. high-yield

bonds representing less than 3% of assets

at that point. The team wasn’t anticipating

the Covid-19 selloff, but they were well-po-

sitioned to take advantage of it.

By the end of April, they had increased

plus holdings to 21% of assets and brought

their U.S. high-yield allocation up to nearly

15%. They used a combination of individual

securities and exchange-traded funds that

serve as placeholders when they want to

quickly gain exposure to an area while ana-

lysts are still vetting securities. “Over time

we rotate into individual names,” she says.

The team added to its plus exposure in

other areas, including European and

emerging market debt, bringing the cate-

gory to nearly 26% of the portfolio by the

end of August.

Meanwhile, the team positioned its core

holdings to take advantage of fire sales

among investment-grade securities. “The

highest-quality companies started tapping

the investment-grade market to gain back

balance sheet liquidity,” says Rilling. She

added such names as3M(MMM),Deere

(DE), andWalt Disney(DIS), which issued

bonds at yields close to 4%. In other words,

A-rated bonds were trading at spreads

(yields above Treasury bonds with the

same maturity) similar to where BB bonds

had traded just a few months earlier.

But yields didn’t stay there for long. Just

as equity investors flooded back to the mar-

ket in the spring, so, too, did yield-hungry

bond investors. Valuations for most pockets

of fixed income are back where they were a

year ago.

“It’s pretty remarkable that you could go

through an entire credit cycle, coming in at

the best place, going to the worst place, and

then recovering back almost to the best

place, in just a year,” Rilling says. The port-

folio’s breakdown was recently 78% core

and 22% plus.

The current market environment offers

an important distinction from this time last

year. “Today we’re in the early stages of a

new economic cycle, and with fiscal stimu-

lus providing additional support,” she says.

While equity investors have dipped their

toes in hard-hit sectors, Rilling’s team has

been selectively buying bonds in Covid-sen-

sitive areas.

The fund bought investment-grade air-

line bonds secured by cash flow from mile-

age-incentive programs, including 2027

United Airlines Holdings (UAL) bonds is-

sued in June at 6.5%. Her team has since

added unsecured airline bonds, small posi-

tions in cruise operators, and higher-qual-

ity energy names. “U.S. high yield is our

favored spot in credit, particularly BB

bonds that have more room to recover than

BBB,” she says.

The fund also owns bonds that were

investment-grade before the Covid-19 crisis

led to downgrades. With a new economic

cycle unfolding, these so-called fallen an-

gels—including bonds fromOccidental

Petroleum(OXY) and EQT (EQT)—could

reclaim their wings.B

Wells Fargo Core Plus Bond

Total Return

1-Yr 5-Yr 10-Yr

STYAX 8.9% 5.9% 4.9%

Bloomberg Barclays

4.5 3.8 3.8

U.S. Aggregate

Bond Index

Sector Allocations % Assets

U.S. Securitized 32%

U.S. Investment Grade 27

Treasuries/Government Related 18

U.S. High Yield 12

Emerging Markets 3

European Investment Grade 2

European High Yield 2

Foreign Currency 2

Note: Allocations as of Dec. 31. Returns through Feb. 8; five- and

10-year returns are annualized.

Sources: Morngingstar; Wells Fargo Asset Management; Bloomberg

Scoreboard: Preholiday Cheer

(U.S.stockscontinuedtorallyonreliefhopesandsolideconomicdata,withtheS&P500up1.15%.China

RegionFundssoared5.31%astheLunarNewYearholidayneared,withexpectedheavyonlinebuying.

OneWeek Year-to-Date

U.S.STOCKFUNDS 2.49% 8.03%

TOPSECTOR/ChinaRegionFunds 5.31 18.11

BOTTOMSECTOR/GeneralU.S.TreasuryFunds – 0.13 – 3.29

S&P500 1.15 4.27

U.S.BONDFUNDS 0.18 0.23

BloombergBarclaysAGGBond 0 – 0.91

THEWEEK'STOP25

Fund InvestmentObjective OneWeek Year-to-Date

AmericanGroCannabisE/AMREX Specialty&Misc 21.15% 71.4%

UprightGrowth&Income/UPDDX EquityIncome 15.82 36.9

UprightGrowthFund/UPUPX GlobalMulti-CapValue 15.72 62.6

WCMChinaQualGroInst/WCMCX ChinaRegion 14.31 25.5

UprightAssetsAlloc+/UPAAX MixTgtAllGro 14.15 33.3

KineticsInternetNL/WWWFX Science&Tech 13.21 26.9

KineticsGlobalNL/WWWEX GLSm/Mid-Cap 10.74 19.3

KineticsMktOppsNL/KMKNX FlexiblePortfolio 10.29 23.9

JacobInternetFundInv/JAMFX Science&Tech 10.19 39.8

KineticsSCOpptyNL/KSCOX GLSm/Mid-Cap 9.67 28.2

KineticsParadigmNL/WWNPX Small-CapGrowth 9.00 25.9

PerkinsDiscovery/PDFDX Small-CapCore 9.00 36.2

BailGiffChinaAInst/BCANX ChinaRegion 8.36 18.1

MorgStanIAsiaOppI/MSAQX PacificExJapan 8.10 21.2

MorgStanIIntlOppI/MIOIX IntlMulti-CapGrowth 7.90 16.3

BlackRockIntlA/MDILX IntlMulti-CapGrowth 7.85 12.9

KineticsSO&CRInst/LSHUX GLSm/Mid-Cap 7.79 28.0

MorgStanIIncI/MSSGX Small-CapGrowth 7.75 53.4

FriessSmallCapGrInst/SCGFX Small-CapGrowth 7.73 33.8

ThornburgBetWldIntlI/TBWIX IntlMulti-CapGrowth 7.72 10.7

ERSharesGlobalInstl/ENTIX GlobalMulti-CapGrowth 7.56 27.9

LordAbbettMcCpGroI/LMIYX Small-CapGrowth 7.52 27.7

EmeraldBank&FinanceIns/HSSIX FinancialServices 7.51 27.2

TCWDevMktsEquityI/TGDMX EmergingMarkets 7.50 18.9

OberweisGlobalOppInv/OBEGX GLSm/Mid-Cap 7.48 19.7

THEWEEK'SBOTTOM10

Fund InvestmentObjective OneWeek Year-to-Date

SEIInstUSMgdVltltyY/SUSYX Multi-CapValue – 6.70% – 5.3%

CounterpointTactEqI/CPIEX AltLong/ShortEq – 2.49 – 8.6

NvgtrSentryMgdVolI/NVXIX EquityMktNeutral – 2.38 – 18.0

SlkINHFrontierInst/FSNHX GLSm/Mid-Cap – 2.24 4.2

GothamShortStratInst/GSSFX AltLong/ShortEq – 1.92 – 5.4

AXSMktNeutralInst/COGIX EquityMktNeutral – 1.72 – 2.4

NuveenEqtyMktNtrlI/NIMEX EquityMktNeutral – 1.49 – 1.4

NewAlternativesA/NALFX Specialty&Misc – 0.94 1.9

JHancockIIARCurrI/JCUIX AbsReturn – 0.88 – 1.3

PGIMJennUtilityA/PRUAX Utility – 0.86 0.5

THELARGEST25

Assets 3-Year* 1-Week YTD

Fund (billions) InvestmentObjective Return Return Return

AmericanFundsGroA/AGTHX $125.2 Large-CapGrowth 22.3% 1.28% 6.3%

FidelityContrafund/FCNTX 110.3 Large-CapGrowth 21.2 2.20 5.4

VanguardWellingtonAdm/VWENX 94.6 MixTgtAllGro 11.5 0.82 2.3

AmericanFundsEuPcR6/RERGX 89.6 IntlLarge-CapGrowth 13.7 3.05 6.2

AmericanFundsBalA/ABALX 87.7 MixTgtAllGro 10.6 1.04 2.6

AmericanFundsIncA/AMECX 74.9 MixTgtAllMod 8.0 0.87 3.1

PIMCOIncomeInst/PIMIX 73.1 Multi-SectorInc 5.4 0.41 1.0

Dodge&CoxStock/DODGX 70.2 Multi-CapValue 11.2 2.21 7.3

Dodge&CoxIncome/DODIX 69.4 CoreBond 6.4 0.14 – 0.3

AmericanFundsICAA/AIVSX 67.2 Large-CapCore 12.3 1.05 4.1

BlackRockCashInstSLA/ 64.4 InstlMoneyMkt NA NA NA

VanguardPRIMECAPAdm/VPMAX 63.7 Large-CapCore 18.0 2.29 9.1

AmericanFundsWashA/AWSHX 63.0 Large-CapCore 12.0 1.11 3.8

AmericanFundsCIBA/CAIBX 61.9 GlobalEquityIncome 6.1 0.94 2.4

VanguardIntlGroAdm/VWILX 60.5 IntlLarge-CapGrowth 27.5 3.42 12.0

AmericanFundsFInvA/ANCFX 59.5 Large-CapCore 13.9 1.70 4.9

AmericanFundsNPerA/ANWPX 58.9 GlobalLarge-CapGrowth 20.5 1.55 6.0

AmericanFundsCWGIA/CWGIX 56.9 GlobalLarge-CapCore 11.5 1.53 5.0

TRowePriceBCGro/TRBCX 56.0 Large-CapGrowth 23.3 1.89 6.1

PIMCOTotRtnInst/PTTRX 53.7 CorePlusBond 5.9 0.14 – 0.5

MetWestTotalRtnI/MWTIX 53.5 CorePlusBond 6.5 0.11 – 0.6

FidelityStrAdvLgCp/FALCX 51.5 Large-CapCore 0 1.63 5.4

VanguardSh-TmInvAdm/VFSUX 51.3 ShortInvGrade 4.2 0.04 0.1

VanguardWellesleyAdm/VWIAX 50.1 MixTgtAllocCon 8.5 0.48 0.3

VanguardTgtRet2025Inv/VTTVX 49.9 Mixed-AssetTarget2025 10.8 1.23 3.2

*Annualized02/08/2018to02/11/2021.ThroughThursday. Source:Lipper