Intermediate Core-Plus Bond Funds Get Adventurous
These three funds are being bold with their securitized exposure.
These three funds are being bold with their securitized exposure.
Times are relatively tough for fixed-income managers. Geopolitical uncertainty, ultralow or negative yields around the world, and the decade-long recovery have resulted in rich valuations in several areas, including corporate credit. As a result, some managers in the intermediate core bond and intermediate core-plus bond Morningstar Categories have relied more heavily on securitized debt over investment-grade and/or high-yield corporates because they believe its various components offer some combination of favorable risk-adjusted returns, good diversification, and ample liquidity. But, like corporate credit, securitized assets are highly correlated to the underlying economy. A change in economic fundamentals can put the sector under pressure, especially for those funds that invest in lower-rated deals. Areas such as credit risk transfers, subprime auto loans, and high-yield collateralized loan obligations are among the most sensitive to changes in the broader economy, all of which are present, in some capacity, within the intermediate core-plus bond category.
The plain-vanilla side of securitized holdings is nothing new. Core bond funds have long invested in agency mortgage-backed securities. The Bloomberg Barclays U.S. Aggregate Bond Index's stake in agency mortgages is just below 28%. Some managers prefer low-risk mortgages for the liquidity benefit and slight yield advantage over U.S. Treasuries. Others, typically in the intermediate core-plus bond group, can be a bit bolder in their securitized exposure.
Alfonzo Bruno does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.