24 BARRON’S August 5, 2019
the past 12 months, while Voya Strate-
gic has returned 6.1%.
Good bond sector choices and secu-
rity selection have also helped Toms.
The fund’s largest weighting, at 20% of
the portfolio, is in nonagency real es-
tate mortgage-backed securities. These
are bundles of mortgage loans not
backed by federally sponsored agencies
such as Fannie Mae. The subprime
ones were at the heart of the 2008
financial crisis, but the whole sector has
been on a tear since then.
From a macro perspective, Toms
favors mortgage debt over corporate
debt because he thinks that the U.S.
consumer is actually in better financial
shape than many companies. “Mortgage
debt as a percentage of [gross domestic
product] in the U.S. consumer base
actually continues to decline, while
corporate debt to GDP in the U.S. has
continued to increase,” he notes.
Toms also has about 14% of the fund
in bank loans, down from a peak of 40%
over the past five years. He has become
increasingly cautious about the sector
suffering from excess leverage and poor
underwriting. One of the fund’s largest
bank-loan positions is in Asurion, a pri-
vate cellphone and appliance insurer.
Toms’ loan analysts like the company’s
first-lien debt, which is the highest in
the company’s capital structure and
thus has the greatest claim to assets in
a bankruptcy. The company has solid
revenue growth from new policies, no
near-term debt maturities, and strong
free-cash flows, Toms says.
Toms is even more wary of high-
yield bonds and maintains only a 7%
weighting in them. “Over the past five
years, that high-yield weight has
ranged from about 4% to 34%,” he says.
He doesn’t think that yields are high
enough in the sector to compensate
investors for the credit risks today.
Lately, he is finding value in select
BBB-rated investment-grade bonds.
“We took advantage of attractive valua-
tions to select issuers we felt were com-
mitted to delevering their balance
sheets and improving fundamentals,” he
says, citing AT&T (T), which now has
an executive-compensation plan “specif-
ically tied to lower leverage targets,”
and beer company Anheuser-Busch
InBev (BUD), which is redeeming its
shorter-maturity bonds to better man-
age its debt.
It’s this sort of granular analysis of
individual securities, combined with
Toms’ high-level macro thinking, that
give this fund its edge.
says. In practice, this means that bonds
rated below BBB are generally kept to
less than 50% of the portfolio, as they
increase volatility.
Simultaneously, Toms tries to reduce
interest-rate risk by hedging. “It’s a
real differentiator for us to have the
same volatility as other bond strategies,
but not be as heavily driven by high
interest rates,” he says. (Bond prices
and rates generally move inversely.)
While Toms does hedge against ris-
ing rates, he usually isn’t fully hedged,
nor does he bet that rates will rise, as
his competitors often do. He targets a
two-year duration for his portfolio. That
means if interest rates rise by one per-
centage point, the fund’s value will fall
by two percentage points.
By contrast, some nontraditional
bond funds will buy individual corpo-
rate bonds and then short, or bet
against, Treasuries to the point where
these funds have a negative duration—
meaning that if rates go up, the fund’s
value should rise, too. But that can be
dangerous when markets become vola-
tile and risk-averse, because jittery
investors will snap up safe-harbor Trea-
suries and flee riskier corporate bonds,
causing a double whammy of losses.
That’s largely what happened in
2018’s fourth quarter, and partly ex-
plains why one peer with negative-
duration bets, the AB Unconstrained
Bond fund (AGSAX), has fallen 3.7% in
VoyaStrategicIncome
Opportunities
Note: Sector allocation as of 6/30; all returns through 7/29; three-
and five-year returns are annualized.
Sources: Morningstar; Voya Investment Management
Total Return
1-Yr 3-Yr 5-Yr
ISIAX 6.1% 5.0% 4.1%
Nontraditional Bond
Category
3.7 3.6 2.4
Sector Allocation Weighting
Non-Agency RMBS 20.0%
Agency Mortgages 19.9
Commercial Mortgage-
Backed Securities
19.5
Bank Loans 13.7
Asset-Backed Securities 11.0
High-Yield Corporates 6.6
Emerging Markets 3.8
Investment Grade
Corporates
3.8
U.S. Treasury & Cash 1.7
Total 100
For 25 years, the market’s biggest gains came when
most investors were sleeping. But what had been a great
ETF trade has been broken by Trump’s tweets.
Timing ETF Trades
By Lewis Braham
NO ONE EVER SAID DAY TRADING WAS EASY.
But maybe night trading is.
According to a July report from Be-
spoke Investment Group, essentially all
marketgainssince1993—asrepresented
bythe SPDRS&P500Trust exchange-
traded fund (ticker: SPY)—have come
outsideofhourswhenthemarketisactu-
allyopenfortrading.“Hadyouboughtat
the close every day and sold at the next
trading day’s open, you’d be up 672%
rightnow(notevenincludingdividends),”
writesJustinWalters,thereport’sauthor
andBespoke’sco-founder.“Hadyoudone
the opposite and bought at the open ev-
erytradingdayandsoldattheclosethat
same day, you’d be down 11.5%.”
A lot of important company news,
such as earnings reports, is often re-
leased after hours. The market prices
thatnewsintoindividualstocksbeforeit
opens. Since the news, earnings-wise,
hasbeenlargelypositivesince1993,that
has led to boffo after-hours returns,
which can quickly have a halo effect on
the rest of the market.
Could you make money then as a
night trader? Many brokers now offer
limited after-hours trading for their re-
tail clients. At Charles Schwab, for in-
stance, you can place orders for after-
market trading and execution between
4:05 and 8 p.m. Commissions are the
same$4.95atradeasfortheregularses-
sion.TDAmeritradeisevenmoreflexi-
ble, allowing 24-hour trading with its
$6.95 commission.
But is it worth doing? Probably not.
“The problem with this strategy is that
yourtransactioncostswouldlikelybetoo
hightoexecuteitconsistentlyovertime,”
says George Pearkes, Bespoke’s macro
strategist. You could also face liquidity
problemsastradingvolumesdeclineafter
hours, he says: “Unless you’re a really
experienced trader and able to manage
your risk very carefully, it’s very chal-
lenging to be effective trading in after-
hours markets.”
Interestingly, the after-hours trade
hasn’tworkedsofarin2019.Accordingto
the Bespoke report, had you bought the
S&PETFatthemarket’sopenandsold
atthecloseeverydaythisyear,you’dbe
up 15.1%. Conversely, with after-hours
trades,you’dbeuponly4.3%.That’sbe-
causeoftheuniquepoliticalclimatewe’re
in, Pearkes says, regarding the U.S.-
China trade war.
Pearkes is referring to President
Donald Trump’s tweets and China’s re-
sponsetothem,bothofwhichtendtooc-
cur outside of U.S. market hours. “You
would never have a previous president
just tweeting stuff out,” he says. “The
patternhastendedtobethat[thepresi-
dent] will tweet things that are antago-
nistic or in some way market negative
with respect to U.S. trade early in the
morning or late at night. That’s when
someonelike[economicspolicyadvisor]
LarryKudlowisn’taroundtotalktore-
porters and say, ‘Oh no, you know we
were feeling optimistic about a deal.’ ”
Thetradingpatternhasinverted.The
negative news comes out at night, and
during the day, the president’s advisors
pushthemarkethigherwithwhatPear-
kes calls “fluff.”
Bespoke’s recommended solution to
this conundrum: Buy and hold.
Day Versus Night Trading
Note: 1/29/1993=0 Source: Bespoke Investment Group
Buy the close, sell the next open
(+672%)
Buy the open, sell the close (-11.5%)
2000 ’10
-250
0
250
500
750
The biggest gains for the S&P have come
during after-hours trading.