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These Bond Funds Should Benefit From a Flight to Quality

Emory Zink

Emory Zink: The intermediate-government bond category may appear straightforward, but its constituents offer subtly differentiated portfolios. For example, both Silver-rated JPMorgan Government Bond and Bronze-rated American Funds US Government Securities are funds with Positive Process Pillar ratings. While the investment menu for either is similar, and includes U.S. Treasuries, agency mortgages, and more modest allocations to out-of-benchmark fare, such as TIPS and CMBS, the funds' profiles can differ considerably.

For example, JPMorgan Government Bond selects collateralized mortgage obligations, or CMOs, which the team prefers for their stable and predictable cash flow characteristics. As of September 2018, the allocation to agency CMOs was 35% for JPMorgan Government Securities but only 3% for American Funds US Government Securities, which prefers more traditional agency mortgage pass-throughs. 

While American Funds US Government Securities keeps its duration within a year of its Bloomberg Barclays U.S. Government/Mortgage Index benchmark, JPMorgan Government Bond explicitly maintains a duration within a corridor of five and five and a half years. 

Another difference is that JPMorgan Government Bond will use more exotic mortgage derivatives, such as IO and inverse IO, modestly at times. American Funds US Government Securities doesn't employ those in its buttoned-up portfolio.

In flights to quality, both of these funds should benefit relative to more tempestuous peers, but as their portfolios indicate, they are not identical intermediate-government bond options.