Barron\'s - April 6 2020

(Joyce) #1

April 6, 2020 BARRON’S•Funds Quarterly L9


Inflation is another big factor that


moves bond prices—and government


bonds in particular. While interest-rate


risk reflects the fear of missing out (on


better yields elsewhere), inflation risk


reflects the fear of losing purchasing


power. Enter Treasury inflation-


protected securities, or TIPS, which


are indexed to inflation.


Inflation isn’t a risk during this re-


cession, but “once a recovery takes


hold, inflation could surprise on the


upside because the massive policy stim-


ulus introduced in this crisis may be


hard to offset quickly enough in the


next expansion,” says Jim Paulsen,


chief investment strategist of the


Leuthold Group. He notes that the em-


bedded inflation rate for TIPS recently


fell below 1%. Inflation expectations are


going to go back up to some degree, he


says, which would be a reason to con-


sider TIPS.


You Want Safety,

But Need Some Income

Many investors don’t want to draw a


definitive line between safety and in-


come, which is why the staple of many


bond portfolios is the intermediate core


fund. There’s more than $1 trillion in


these funds, making it by far the largest


category of bond funds. They own an


array of bonds, including Treasuries,


mortgage-backed securities, municipal


bonds, and corporate credits. Most


stick close to the benchmark


Bloomberg Barclays US Aggregate


Bond Index, known as the Agg, which


was recently 41% Treasuries and about


27% government-backed mortgage-


backed securities.


The funds held up relatively well as


a group during the initial Covid-19


selloff—and for the year through


March 31 are up 1.5%—but there are


wide variations depending on how


much of their exposure was in govern-


ment bonds versus everything else,


especially corporate bonds.


The $53 billion American Funds


Bond Fund of America (RBFGX), for


instance, recently had a 44% allocation


to government bonds. It’s up 3.9% so


far this year, better than 94% of its


peers. The fund’s focus on capital pres-


ervation makes it a solid choice for


investors who prioritize safety, but still


need some upside. Over the past de-


cade, the fund has returned an average


of about 4% a year.


Still, investors shouldn’t be quick to


judge funds that didn’t hold up as well


during the past several weeks. “Many


active managers have historically out-


performed by taking on credit risk,”


Rosenbluth says. “And those areas have


dragged down performance records.”


But that leaves room for greater re-


turn going forward.


“There’s some serious carnage in the


credit markets now, and that is creating


opportunity for opportunistic inves-


tors, for sure,” says Steve Raneri, chief


investment officer of GM Advisory


Group in New York. “In a situation


where you have a fast-moving market


with a lot of dislocation, there’s going to


be winners and losers. You want some-


body to pick through and separate the


baby from the bath water.”


The recent indiscriminate selling


makes it possible for bond fund man-


agers like Mary Ellen Stanek to put


their credit research teams to work.


“We don’t want to be Pollyanna-ish


about the challenging times in front of


us, but we are nibbling,” says the chief


investment officer at fixed-income spe-


cialist Baird Advisors, which manages


the $24 billion Baird Aggregate Bond


(BAGSX).


The fund has lagged behind others


recently because 38% of its assets were


in corporate bonds, versus 26% for the


category average. But the team has a


record of striking a balance between


risk and reward. Over the past decade,


the fund’s 4.3% average annual return


put it in the top 10% of its peer group,


with a good deal of that outperformance


coming from moments like these.


Total Return Is Your Goal—

Within Reason

The second-largest category of bond


funds is intermediate core-plus. Morn-


ingstar began making the distinction in


2019 to indicate funds that, like core


funds, focus primarily on investment-


grade U.S. bonds, but can also hold up


to 35% of assets in below-investment-


grade bonds across all sectors.


“These are managers that have a lot


more flexibility,” Sjoblom says. “When


high-yield spreads become attractive,


they can move in and take advantage of


that market.”


This ability to stray from the bench-


mark has served investors well—until


recently. Between Feb. 20 and March


20, these funds fell an average of 6.5%,


which is a lot to swallow, even for in-


trepid bond investors. In general, the


higher a fund’s exposure to high-yield


debt, the harder it fell.


“The recent selloff and extreme li-


quidity demands have hit every credit


sector,” says Mike Collins, senior port-


folio manager overseeing the nearly $54


billion PGIM Total Return Bond


fund (PDBAX). Prior to Covid-19 panic-


selling, the fund ranked in the top 10%


of intermediate core-plus funds for


every major trailing time period. It’s


down nearly 3% so far this year, and is


now near the bottom of its peer group.


But, again, this is largely due to its rela-


tively light book of government bonds,


recently just 16% of assets.


When the market stops panic-


selling, many of those holdings


should recover, and in the meantime,


Know What You Own


If investors have learned anything in the past month, it’s that bonds are not homogenous and bond funds can lose a lot of money,


even when stocks are also falling. Choose your funds to meet your needs—and expectations.


Bond YTD YTD 5-Year 10-Year
Bond Fund / Ticker Category Return Rank Return Rank Return Rank

Vanguard Short-Term Federal/ VSGBX Short Government 2.5% 38 2.0% 11 1.8% 23

Vanguard Intermediate-Term Treasury/ VFITX Intermediate Gov’t 6.7 23 3.3 11 3.7 5

American Funds Bond Fund of America/ RBFGX Intermediate Core 3.9 6 3.5 3 4.2 12

Baird Aggregate Bond/ BAGSX Intermediate Core 1.5 57 3.1 26 4.3 10

PGIM Total Return Bond/ PDBAX Intermediate Core-Plus -2.9 78 2.9 33 4.5 15

Western Asset Core Plus Bond/ WAPAX Intermediate Core-Plus -2.3 70 3.4 5 5.0* 5

Pimco Income/ PONAX Mulitsector -7.8 41 3.2 9 6.9 2

Note: Data as of March 31. Five- and 10-year returns are annualized. *Institutional share class Source: Morningstar

FlighttoSafety,FleefromCredit


In the first quarter of the year, all but four of Morningstar’s 19 taxable bond fund categories lost money.


Source: Morningstar Direct

1-Month Return through March 20 YTD return through March 31

Long Government

Intermediate Government

Short Government

Intermediate Core Bond

Inflation-Protected Bond

Long-Term Bond

Intermediate Core-Plus Bond

Ultrashort Bond

World Bond-USD Hedged

Muni National Long

Short-Term Bond

Corp Bond

World Bond

Nontraditional Bond

Multisector Bond

Bank Loan

High Yield Bond

Emerging-Mkts Local-Currency Bond

Emerging Mkts Bond

-20% -15 -10 -5 0 5 10 15 20

Treasury


Yields


Investors have


been fleeing to


the safety of


government


bonds, pushing


yields close to


zero. Are nega-


tive yields next?


0.02%


yield on the


1-month Treasury


0.04%


yield on the


3-month Treasury


0.15%


yield on the


1-year Treasury

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