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By Michael Herbst | 06-10-2015 03:00 PM

2 Bond Funds for the Patient Investor

While both Scout funds have had success scouring battered parts of the fixed-income market, Unconstrained Bond will go negative or short duration while Core Plus Bond will not.

Michael Herbst: Silver-rated Scout Core Plus Bond (SCPZX) and Bronze-rated Scout Unconstrained Bond (SUBFX) are both run by the long-tenured team at Reams Asset Management under CIO Mark Egan. Both are also very attractively priced relative to similar funds. At both funds, management takes a very absolute approach to risk, meaning they view risk as the loss of capital rather than volatility or tracking error. What this means is when real yields are low, they will typically take on less interest-rate risk; when real yields are higher, they will take on more interest-rate risk. But importantly, in market dislocations, they are not afraid to jump in with both feet into battered parts of the market, especially in corporate credit or nonagency mortgages.

The differences in the funds: Core Plus is looking to outperform the Barclays U.S. Aggregate Bond Index by 100 to 125 basis points over a market cycle. Unconstrained Bond is looking to outpace three-month Libor by 300 to 500 basis points over a market cycle. Typically speaking, Unconstrained will have a more concentrated portfolio and more exposure to corporate credit and nonagency mortgages when management finds those areas attractive. Another important characteristic is that Unconstrained can actually go negative or go short duration. So, for most of the beginning of 2015, the portfolio's duration for Unconstrained was in the neighborhood of negative four years. Core Plus will not go negative in terms of duration.

These are not for investors who are looking for safe-haven bond funds. They do court plenty of volatility in the short term; but over the very long haul, results of both funds have been excellent on absolute and risk-adjusted bases.

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