For Bond Funds, Is Core-Plus Really a Minus?
This year's turbulent fixed-income market sheds some light on the limitations of intermediate core-plus bond funds.
If you're looking to fill out your portfolio's fixed-income sleeve, the intermediate core bond and intermediate core-plus bond Morningstar Categories are logical places to start. Both categories are home to funds that invest in a diversified mix of intermediate-maturity investment-grade U.S. bonds, including Treasuries, mortgage-backed securities, and corporate bonds. Thus, they afford investors exposure to a big swath of the U.S. bond market in one fell swoop, with core-plus funds going further afield than core funds into areas like high-yield bonds, bank loans, and foreign currencies. These funds have proved to be popular with investors; the two categories combined were home to nearly $1.7 trillion in assets as of March 31, 2020.
Similar but Different
While the two groups look similar on the surface, the recent market sell-off has brought some important differences into stark relief. In the first quarter of 2020, the average intermediate core bond fund gained 1.49%, whereas the typical intermediate core-plus bond fund lost 1.19%. Why the divergence? Investors fled lower-quality assets for the safety of Treasuries, which were by far the best-performing fixed-income sector for the quarter. Since core-plus bond funds by definition go beyond Treasuries, it means they held more of these lower-quality bonds than core bond funds did. Indeed, investment-grade corporates were down about 3.6% for the quarter, and high-yield corporates were down even more, with losses of 12.7%.
Amy C. Arnott has a position in the following securities mentioned above: VBMFX. Find out about Morningstar’s editorial policies.