Funds Funds Research Sectors

TIAA-CREF Core Plus Bond Fund Premier Class Bested Almost 70% Of Its Distinct Peers


Lead manager Joe Higgins continues the thoughtful relative value approach that has been in place both here and on his other charge, TIAA-CREF Core Bond TIBDX. This strategy earns an Above Average Process Pillar rating. Higgins has the ultimate authority in ensuring what holdings go into the portfolio but draws heavily on the strength and expertise offered by the sector managers, analysts, and macroeconomic strategists in identifying relative value opportunities across the fixed-income universe. The strategy can invest in everything from corporate bonds and mortgages to municipal bonds and emerging-markets debt, with the higher-risk sectors like high-yield bonds, bank loans, and emerging-markets debt ranging between 10% and 30% depending on the team’s outlook and risk appetite. The strategy has avoided taking extreme positions in any of those areas and has generated its alpha from a variety of sources instead of relying on any one area. This approach has benefited investors through steady-as-it-goes performance rather than wild swings based on drastic portfolio shifts, and it has worked through a variety of market environments. 


As of December 2021, the portfolio’s largest exposures were to investment-grade corporate bonds (24.2% of assets), agency mortgage-backed securities (18.6%), and emerging-markets debt (10.2%). The emerging markets exposure rarely if ever broke double-digit threshold, but its allocation has been on the upswing since March 2020 given the portfolio managers’ belief in its ability to outperform over the long term. The emerging markets’ relative lack of direct correlation to domestic corporate moves, as well as premium on offer from new issuance, make them attractive. This overweighting also makes sense to the managers in context of a rising rate environment, as they seek refuge in assets that are not hypersensitive to rate increases. That 10.2% stake in emerging-markets debt is almost 4 times the category peer median, though, and about half of it is rated below-investment-grade. Coupled with 5.6% in high-yield corporates, 4.3% in nonagency mortgages, and 2.7% in senior loans, the “plus” sector exposure of this portfolio amounted to 22.7% at the end of December 2021. This edges toward the higher half of the 10%-30% “plus” budget and represents increased credit risk, but the strategy’s yield (a proxy for risk) has hugged quite closely to the peer median in the past couple of years, indicating a reasonable level of risk-taking.


Joe Higgins, who replaced long time lead manager Bill Martin at the end of 2020, is a seasoned and capable manager supported by three experienced comanagers and a robust analyst team. The strategy earns an Above Average People Pillar rating. Higgins had been leading the Core strategy since 2011, has been with the firm since 1995, and was previously sector lead on asset-backed securities and commercial mortgage-backed securities. He is supported by the same trio of comanagers that backed Bill Martin: government specialist John Cerra, high-yield leader Kevin Lorenz, and emerging-markets expert Anupam Damani. They are backed by a robust investment team that continues to expand following the legacy Nuveen and Symphony merger. The organization now boasts considerable firepower, with 43 portfolio managers and 60 analysts spread across the fixed-income platform. Even though Higgins has the ultimate decision-making power for this strategy, he draws on the strength and expertise of the sector managers in allocating capital to portfolios per mandate requirements. As such, the whole team provides input to help with portfolio construction, and often the managers’ portfolios will rhyme with each other. Additionally, the introduction of an investment committee and strategy groups provided more formalized structures for manager discussions and viewpoint sharing.


The strategy under Joe Higgins’ tenure has bested almost 70% of distinct peers in the intermediate core-plus bond category, keeping up with the record his predecessor Bill Martin set during his tenure from September 2011 to December 2020. Over that period, the Institutional share class returned 4.5% annualized and outpaced roughly two thirds of peers. While lagging performance punctuated this record at various points, most notably in March 2020, by and large “measured consistency” was the characteristic on display for this strategy’s performance. Following the rough showing in early 2020 when the strategy lost 8%, almost 200 basis points more than the peer group median, the strategy experienced more bumps all throughout 2021 as rate volatility had a negative impact on mortgage holdings. On the plus side, the strategy had an underweighting in agency mortgages relative to the benchmark (18.6% versus 27.4% at year-end) so the hit was less severe, and an overweighting in high-yield corporates relative to the bogy (5.6% versus 0%) proved rewarding given robust economic conditions.

Graphical user interface, table

Description automatically generated

(Source: Morningstar)


It’s critical to evaluate expenses, as they come directly out of returns. The share class on this report levies a fee that ranks in its Morningstar category’s cheapest quintile. Based on our assessment of the fund’s People, Process and Parent pillars in the context of these fees, we think this share class will be able to deliver positive alpha relative to the category benchmark index, explaining its Morningstar Analyst Rating of Bronze.


Description automatically generated

(Source : Morningstar)

About Funds:

TIAA-CREF Core Plus Bond has an experienced lead manager and the solid process remains intact, while the expansive supporting cast has only broadened. The strategy’s Institutional and Advisor share classes earn a Morningstar Analyst Rating of Silver, while the more-expensive share classes are rated Bronze. The W share class, which does not charge a fee, is unrated. Veteran manager Joe Higgins, who has led the sibling strategy TIAA-CREF Core Bond TIBDX since 2011, took over this strategy at the end of 2020 when long time lead manager Bill Martin retired. Higgins was a natural replacement given that he had been running a similar, more-conservative mandate. He is supported by the same trio of comanagers that backed Martin: government specialist John Cerra, high-yield leader Kevin Lorenz, and emerging-markets expert Anupam Damani. All told, Nuveen’s robust taxable fixed-income group boasts more than 100 portfolio managers, analysts, and traders that help Higgins fulfil his mandate. The strategy’s solid process remains unchanged and peppered with measured risk-taking. Higgins and team execute a relative value process that incorporates a broad opportunity set, with the bulk of assets in investment-grade securities and a smaller subset in higher-risk “plus” sectors like high-yield bonds, bank loans, and emerging-markets debt that will typically amount to 10%-30% of assets depending on Higgins’ outlook and allocation decisions. 

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Funds Funds

Massive Inflow by Mutual Funds into Equities in April

Here’s a monthly report on our best schemes in this category, which you can choose from. Short duration schemes, according to the Sebi mandate, are open-ended short-term debt funds that invest in instruments with Macaulay duration of one to three years. This ensures that investors with a few years to spare should start investing in these schemes.

In the short-term group, 12 schemes have provided returns of more than 10% in a year.

If you just want to invest for a year or two, short term funds might be a good option. To cautious investors, mutual fund managers and advisors propose short-term mutual fund schemes. Here are some short-term debt mutual funds that we suggest to make your decision easier.

Best short duration funds to invest in 2021

HDFC Short Term Debt Fund

ICICI Prudential Short Term Fund

Axis Short Term Fund

According to data from the Securities and Exchange Board of India (Sebi), mutual funds had been withdrawing money from equities since June 2020, prior to the inflows.

Since July 2020, domestic investors have been withdrawing capital from equity mutual fund schemes, with March 2021 being the first month when the trend reversed.

Furthermore, SIP flows increased in March, increasing to Rs 9,182 crore from Rs 7,528 crore the previous month. As a result, he said, the positive flow of mutual funds into equities was seen in March. MFs withdrew Rs 16,306 crore in February, Rs 13,032 crore in January, Rs 26,428 crore in December, Rs 30,760 crore in November, Rs 14,492 crore in October, Rs 4,134 crore in September, Rs 9,213 crore in August, Rs 9,195 crore in July, and Rs 612 crore in June from equities.

These outflows were primarily due to profit-taking by investors following the stock market’s recent rally. MFs, on the other hand, spent over Rs 40,200 crore in the first five months of 2020 (January-May). In March 2020, Rs 30,285 crore was invested out of this total.

Mutual funds, on the other hand, invested nearly Rs 21,600 crore in debt markets during the month under review.

Foreign Portfolio Investors (FPIs) withdrew a net amount of Rs 9,659 crore from Indian stock markets in April, after having invested Rs Rs 10,482 crore in the preceding month.

They had invested Rs 25,787 crore in February and Rs 19,472 crore in January.

Funds Funds Shares

Partners Group Global Value (AUD)

The strategy invests directly in companies and also private equity vehicles, aiming to diversify by region, industry, deal type, and maturity, despite becoming skewed to direct investments in recent years. By design, about one fourth of the portfolio matures each year, enabling the portfolio to tilt toward the firm’s relative-value views, which, along with income payments from the debt sleeve, provides liquidity–although this isn’t paid to investors as income distributions. Critically, this strategy only offers monthly liquidity and contains provisions to restrict this in certain circumstances, likely to coincide with public market volatility (an increased 2% sell-spread was imposed in April 2020). Valuations are mainly conducted using in-house methodology with external verification and so typically lag the quicker price discovery of public markets. However, a 10.7% write-down in assets did occur in March 2020 to better reflect public market volatility. The firm has made a commendable effort to provide private markets access in a liquid form, achieving attractive long-term absolute returns. However, given the discrepancy in inputs to performance between listed and unlisted markets, directly comparing this strategy’s low volatility with that of global listed equities is misleading. The fee is very high in absolute terms, and further indirect costs from the underlying investments can erode the required return premium above listed equities.

A relative value approach across private equity investment types, regions, and industries.

Unlike a typical fixed-term private equity fund, this strategy is a perpetual fund that invests principally in four areas: direct investments, where Partners Group has ownership in the business; primaries, which are investments at the inception of fixed-term closed-end private equity funds with several underlying direct investments; secondaries, which are investments in other private-equity funds but when the fund is several years into its fixed term; and private debt. This approach allows Partners Group to invest across the maturity spectrum of private equity and gain exposure to a huge number of individual companies. It also provides diversification across geographic regions, sectors, transaction types, and financing stages. Through analysis of qualitative market information and quantitative data, the relative value committee determines which industrial sectors to over- and underweight, which regions are the most attractive, and how much to allocate each sector. Currency exposures are 70% hedged. The firm should be commended for attempting to minimise the liquidity mismatch between private equity assets and the provision of a managed-fund offering. However, there are liquidity risks that have the opportunity to lock investors into a product for an indeterminate period that coincides with decreasing valuation multiples.

Concentrated to direct investments, while increasingly cautious and more capitalstructure-aware.

Through its investments in directs, primaries, and secondary’s, Partners Group has exposure to more than 1,000 individual companies across a wide variety of industries. The firm has a heavy tilt to direct investments, which constituted 72% of invested capital at January 2021. The firm has become more cautious over time, increasingly moving up the capital structure with its credit allocation split between senior loans and mezzanine debt. This has a lower 4%-10% return target but offers liquidity and higher payment priority, though it may still be exposed to bouts of illiquidity. Primary investments now sit at 17% of the portfolio and secondaries at 11%, targeting an overall 10%-12% net return. From a strategy perspective, buyout continues to dominate, constituting 79% of the portfolio; debt and special situations have reduced to 17%, with the remainder in venture capital. Regional allocations are evenly split between Europe and North America and combined for a total 84% of the portfolio, with a further 11% in Asia. The industry mix of underlying companies is broad but 71% sits across IT, financials, consumer discretionary, and healthcare. Annual portfolio turnover of around 25% helps Partners Group remain flexible enough to tilt its portfolio annually, and the greater liquidity profile offered by the debt positions ensure some nimbleness both for acquisitions and redemptions.

Source: Morningstar     

Funds Funds Shares

Colchester Global Government Bond A

We’re particularly impressed by the collegiate culture set by these three architects, which promotes probing enquiry and rational decision-making. Colchester values and harnesses talent, nurturing a strong lineup of potential successors, and we like that the process was designed so that no one star portfolio manager dominates.

Colchester applies a value-oriented philosophy to investing in government bonds and currencies. It is a clear, simple and repeatable process centered on assessing value using proven economic frameworks–expected inflation-adjusted real return and purchasing power parity forecasts over the medium term. A welcome characteristic is the combination of systematic modeling and fundamental analysis, which fosters discipline and repeatable outcomes. The latter is underpinned by detailed country financial stability research, which is where the team really excels. We were also impressed with the work conducted on building environmental, social, and governance considerations into the strategy. The financial stability scoring comes into its own in emerging markets, a region requiring greater circumspection. This strategy runs a significant allocation here in both bonds and currencies, where its riskier characteristics come to the fore during periods of capital flight.

The long-term value-driven approach and materially differentiated regional exposures may lead to material spells of relative over- and underperformance, such as in November 2020 when it outperformed by around 130 basis points. Although fees were cut in 2016, they remain higher than average and a minor headwind. Despite this, Colchester is an excellent choice for investors seeking something different.

The Australian vehicle, with its objective of outperforming the FTSE WGBI (AUD Hedged) Index by 2% annually (gross), commenced in late 2016. As at 29 April 2021, it led the index by 2 basis points per year, although much of that came in the first two years, the lag being 38 basis points per year over the past three years. Its value-driven approach, concentrated bets, and active currency exposures (which often exhibit higher volatility than bonds) can lead to spells of elevated relative risk versus the index and peers. Over weightings in Brazil and South Africa (bonds and currencies) in 2015 weighed on returns as political events and unexpected inflation surfaced. However, these were among key drivers of outperformance in 2016.

Overweighting New Zealand, Poland, and Singapore bonds added value in 2017, along with shorts in the US dollar and long currency positions in Brazil, the United Kingdom, and Mexico. Currency calls contributed most in 2018, with long Mexican peso and Malaysian ringgit, and short New Zealand dollar all contributors. In 2019, both bonds and currency contributed to relative returns, with emerging-markets bonds (Mexico, Brazil) adding value. US dollar weakness at the end of the 2020, alongside Nordic and Mexican peso returns, produced around 130 basis points of outperformance, allowing the strategy to catch up most of its second-quarter losses and end the year 27 basis points behind the index.


Funds Funds Shares

AQR Large Cap Defensive Style

The optimizer honors several constraints designed to promote diversification and limit the fund’s exposure to nontargeted factors. It should lean toward less risky segments and away from those that are more volatile, but these tilts shouldn’t overwhelm the portfolio. The optimizer tries to control exposure to other factors, including value, growth, and momentum, among others, so that it maintains a tight focus on its low risk objective

The fund’s low risk mandate will lead it to incur a decent amount of active risk, so it will behave differently from the market. It tends to lag during bull markets and outperform during drawdowns. It has been less volatile than the Russell 1000 Index, while its total return fell short by about 1 percentage point per year from its launch in July 2012 through April 2021. However, it turned in better risk-adjusted performance than the index over the same period and should continue to do so.

A comprehensive approach to reducing risk.

AQR’s portfolio managers pull this fund’s holdings from all large- and mid-cap stocks in the U.S. market. They rank these names on several quality measures, including profitability, profit margins, and earnings stability. They also look at statistical measures of risk like historical standard deviations and sensitivity to market movements.

That information is fed into an optimizer that tries to accomplish two goals. It simultaneously tries to maximize the fund’s exposure to high-quality stocks while minimizing the portfolio’s overall risk. It also considers each stock’s relationship to others in the portfolio. It may hold volatile names if their correlation with others is low enough to reduce the portfolio’s overall volatility.

The optimizer goes a step further and employs constraints to promote diversification and maintain its low-risk mandate. It limits exposure to nontargeted factors like value, growth, and momentum, which should help the fund maintain a consistent focus on high-quality, stable firms. Industry weights must remain within 3% of a riskweighted reference portfolio.

A diverse portfolio of high-quality stocks

Constraining industry weights to a risk-weighted reference portfolio means the fund tends to lean toward stable segments of the market. It has historically placed more emphasis on consumer staples and utilities stocks and less on information technology firms. As of March 2021, it held no energy stocks, but these represent less than 3% of the Russell 1000 Index. Excluding them should not harm its diversification.

The optimizer’s constraints have kept stock-specific risks in check. It caps the weight of any given name at 1.5% during a rebalance. Its top 10 holdings typically represent less than 20% of the portfolio.

This fund’s emphasis on high-quality stocks has been persistent. Large profitable firms like Procter & Gamble PG, Costco Wholesale COST, and Johnson & Johnson JNJ have been among its largest holdings since the fund was launched in July 2012. Volatile names, like mining company Newmont NEM, may make their way into this portfolio if their performance relationship to other stocks is sufficiently low enough to reduce the portfolio’s volatility.

This is a rules-based approach, but the managers have some flexibility. They balance transaction costs against the benefits of trading and attempt to avoid trades where the expected costs outweigh the benefits. Those actions, combined with the fund’s focus on high-quality firms, has kept turnover around 25% on average.

Source: Morning star

Funds Funds Shares

Lazard US Equity Concentrated

The team is strong, but the concentrated approach employed here doesn’t stand out in the competitive large-cap space. Blake looks for firms with stable cash flows and strong balance sheets trading at reasonable valuations for his approximately 20-stock bundle. Blake sorts companies into three groups: compounders (firms with sustainable competitive advantages), mispriced (companies with temporarily depressed profitability and more complex balance sheets), and tactical (shorter-term turnaround stories or restructurings). Blake aims to mitigate risk by investing in names with independent revenue drivers. He also avoids companies with multiple business lines, preferring to own a diverse mix of focused companies.

The strategy’s returns have been lumpy. Since Blake came aboard the mutual fund, the Institutional shares have had either top- or bottom quartile large-blend Morningstar Category returns in all but one calendar year. The strategy had a particularly difficult 2020, trailing the S&P 500 in both the first-quarter market drawdown and the subsequent rally. Technology and healthcare picks such as global fintech firm Fiserv FISV and healthcare equipment company Baxter BAX were hit hard in the year. Though the strategy has lagged of late, Blake’s long-term results over the separate account clone’s history are still competitive gross of fees.

A go-anywhere approach

Blake seeks firms with stable cash flows and strong balance sheets trading at reasonable valuations. The team sorts the companies into three broad buckets: compounders (firms with sustainable competitive advantages), mispriced (companies with temporarily depressed profitability and more complex balance sheets), and tactical (shorter-term turnaround stories or restructurings trading at a discount to asset value). It models bull-, bear-, and base-case scenarios for each holding and uses these valuations to influence trading decisions. Blake attempts to mitigate risk by investing in names with independent revenue drivers. Blake and team have steered clear of American Tower AMT in recent years, for example, because of its overlapping interest in 5G with current holding Crown Castle International CCI.

With a highly concentrated portfolio, trading decisions have a big impact. Turnover has come down of late but has been high at points. In 2012, turnover reached 116% versus the typical large-blend peer’s 57%, though 2020’s 43% turnover was less than half the typical peer’s. Single buys and sells notably alter the approximately 20-stock bundle, and more than three fourths of names in the March 2021 portfolio were purchased in the past three years.

A seasoned lead manager with a stable and experienced supporting cast

Lead manager Christopher Blake boasts a long history on this strategy. Blake took this fund’s helm and implemented his approach in May 2012 but he has overseen its SMA equivalent since August 2003. He has spent his entire 25-year career at Lazard. Blake also has analyst responsibilities. He covers consumer stocks for the central analyst team. Comanager Martin Flood focuses on trading and client communications. Flood began at Lazard in 1996 and joined the strategy in 2007.

Blake draws upon a stable and tenured group of analysts with deep sector expertise. The 25 investment professionals are experienced: They average 20 years in the industry and 14 years at Lazard. Minimal analyst turnover further aids in continuity. The team supports an additional seven U.S. equity strategies, including Lazard U.S. Equity Ultra Concentrated, an approximately 10-stock SMA that this same duo manages. That strategy has top-decile gross returns in its large-blend category since its October 2014 inception.

The managers’ investment in the strategy is decent. Blake invests more than $1 million in the fund, a signal his interests are aligned with fundholders’, while Flood invests between $100,001 and $500,000.

Source: Morningstar

Funds Funds Shares

Legg Mason Royce US Smaller Companies Fund

The strategy’s long-term track record has been mixed. From June 2011 to 31 March 2021, returns for the X Acc share class lagged both the Russell 2000 Index and US small-cap peers by 3.2 and 3.1 percentage points per year, respectively. The sensitivity to valuations and a pro-cyclical positioning has worked against the strategy over the long term.

Given the strategy’s “high quality at a reasonable price” approach, it is expected to perform well during markets where company fundamentals drive performance. On the flip side, it is expected to struggle in low-quality or rapidly rising/momentum-driven market environments. For example, it struggled in 2020 as the market was driven by unprofitable highly-valued names, such as in healthcare and work-from-home areas. Pleasingly, the strategy did well in the first quarter of 2021 when value and quality factors performed better.

The quality-oriented approach has merit, but we would like to see a more consistent implementation.

This strategy employs Royce’s trademark small-cap investment process, namely a focus on bottom-up stock selection based on a disciplined value approach. It centres on buying “quality” stocks under the USD 5 billion market cap level, defined as those with sustainable growth records, a high ROIC, strong free cash flows, earnings stability, strong business models and competitive positions, and clean balance sheets. Such companies are bought when they are out of favour as paying the appropriate price is also an important factor. So in addition to meeting quality standards, the manager seeks to buy a stock when it’s trading at a 30%-50% discount to the team’s assessment of the business’ worth. Ideas are sourced from screens, company meetings and conferences, the firm’s quality list, and previously owned firms. Because of a relatively long investment horizon of two to five years, many of the micro- and small-cap winners in the portfolio have grown into mid-cap territory. The manager doesn’t attempt to align this fund with the Russell 2000 Index or any similar benchmark, so it stands out in various ways at the sector level. Individual positions typically do not exceed 4% of the portfolio.

The portfolio’s quality characteristics are on show.

Consistent with the quality approach, the portfolio’s ROE and ROA have trended above the Russell 2000 Index’s throughout time, while leverage ratios have trended below the index’s. At the same time, the portfolio’s price multiples have typically skewed lower compared with US smallcap peers and the Russell 2000 Index, though the strategy has typically placed in the blend column of the Morningstar Style Box. The strategy is also biased towards the smaller end of the market-cap spectrum relative to category peers.

The absolute value orientation leads to meaningful deviation from the Russell 2000 Index. As of April 2021, the portfolio continued to feature a pro-cyclical positioning, with the largest overweighting in industrials (31.8% versus 16% in the Russell 2000 Index) as Romeo believed the sector offered the most attractive valuations among companies with strong fundamentals. Technology was the second-largest overweighting. On the flip side, the manager had a limited exposure to healthcare (7% versus 19.5% in the index) as many biotech and pharmaceutical firms didn’t clear her quality and valuation hurdles.

Mixed returns over Romeo’s tenure.

In 2017, the strategy was hurt most by its significant underweighting in healthcare. Stock selection in industrials had by far the biggest negative effect on 2018’s results. The fund outperformed in 2019, with solid stock selection in industrials and financials.

In 2020, the fund significantly underperformed both the index and peers, returning 7.4% (in GBP) versus the index’s 15.8% and peer group’s 23.5%. Low-quality, growth and highvaluation small-cap names led the market in 2020 while the manager focused on high-quality, reasonably valued companies. At the sector level, stock selection in industrials, consumer discretionary, and technology detracted the most, while the large healthcare underweighting also hurt.

Source: Morningstar     

Funds Funds Shares

Morgan Stanley Global Fixed Inc Opps A

This multi sector offering’s investment menu ranges wide and includes global corporate bonds, developed- and emerging-markets sovereigns, securitized debt, and a small stake in foreign currency. The strategy can hold up to 50% in below-investment-grade debt, a freedom it has used liberally. That includes its securitized slice, which, as of March 2021, was mostly non agency mortgages (15%) and asset-backed securities (10%). The strategy’s duration can range between zero and seven years and frequent duration adjustments aren’t uncommon here. In the face of rising yields in the first quarter of 2021, the strategy’s duration fell to 2.8 years by quartered, having started the period at 4.4 years.

While the team’s rates calls have generally aided the strategy during rate spikes, its active duration management has had less success in calmer times and overall, results have been mixed since the current management team formed. From October 2014 through April 2021, its institutional share class has delivered an annualized return of 3.9%, which modestly trails its typical multisector bond Morningstar Category peer.

This strategy has seen mixed results since its current management team formed. From October 2014 through April 2021, its institutional share class has delivered an annualized return of 3.9%, which modestly trailed its typical multisector bond category peer. Over that period, the strategy’s active duration management has typically proved helpful during rate spikes. During 2016’s interest rate shock from August through December, the strategy’s 1.3% gain bested over two thirds of category peers.

When yields spiked in 2018, the strategy’s 64-basis-point gain in the first 10 months of that year was well ahead of the typical 88-basis-point loss for the category. However, when yields leapt from February 2021 through March 2021, the strategy’s 0.9% drop was double that of its typical rival. During times of credit stress, results have varied. During the commodity sell-off in the fourth quarter of 2014 and again between June 2015 and February 2016, the portfolio landed in the bottom half of the category each time.

However, a reduction in junk-rated debt helped during the high-yield sell-off in 2018’s fourth quarter, when the strategy’s 1.1% decline edged out the 1.8% decline for its typical category peer. In the sell-off from Feb. 20, 2020, through March 23, 2020, its 10.5% decline held up better than over two thirds of its peers thanks in part to the team treading lightly in high-yield debt


Funds Funds Shares

Virtus New fleet Senior Floating Rate R6

The managers argue that bank loans exhibit an asymmetric return pattern–limited upside with the potential for significant downside owing to credit missteps–and thus focus on avoiding losses. Over the past year, the team pivoted to a more offensive stance in order to take advantage of opportunities unearthed by the coronavirus pandemic, increasing exposure to B rated debt by 12 percentage points over the period to 65% of assets in March 2021. That said, the strategy still maintains an up-in-quality tilt relative to peers; its 33% combined stake in BBB and BB rated fare is 8 percentage points more than that of its typical bank-loan Morningstar Category peer.

The team avoids holding cash, preferring to tap a line of credit to manage liquidity. This has resulted in consistent modest leverage, which contributed to the strategy landing in the category’s worst decile during both 2018’s rocky fourth quarter and the coronavirus-driven sell-off from Feb. 20 through March 23, 2020. Performance has been underwhelming over longer periods. Over Ossino’s tenure from August 2012 through April 2021, the Institutional share class’ 3.7% annualized return trails almost two thirds of distinct category peers.

Performance has been underwhelming over the current management team’s tenure. From August 2012 through April 2021, its Institutional share class’ annualized return of 3.7% trailed the Credit Suisse Leveraged Loan Index by 90 basis points and ranked in the bank loan category’s bottom half.

Despite its mostly defensive tilt, the strategy has underperformed during recent credit stress periods. During the junk-rated debt sell-off in the fourth quarter of 2018, the strategy’s 4.2% decline landed in the bottom decile of its category. When coronavirus market turmoil struck from Feb. 20 through March 23, 2020, its 22.4% plunge was again worse than over 90% of peers. Heavy outflows, the strategy adding leverage through its line of credit, and investors selling their most liquid loans all detracted from performance during these periods.

During more favorable times for bank loans, performance has mostly been middling. For example, when returns reached high single digits for bank loans in 2012, 2017, and 2019, the team’s decision to remain up the credit quality spectrum resulted in its returns placing in the middle quintile of its category in each of those years. That said, during the credit rebound from April 2020 through March 2021, the strategy’s 20.7% return ranked in the category’s best quintile thanks to the team’s credit selection choices and modest leverage.


Funds Funds Shares

Colchester Global Bond Fund USD Unhedged Accumulation

Refrains from using leverage and derivatives, sticking to cash bonds (and currency forwards). However, it does take active currency exposures although a 60% minimum will be held in USD. The long-term valuation-driven approach can lead to large, contrarian positions, like its long-held overweighting in Mexican government bonds, which was maintained at 9% versus the index’s 0.7%. It also held a stake in the Mexican peso. Other large bond positions included overweightings in Singapore (9.6%), against underweightings in the eurozone (some 20% underweight), the United States, and the United Kingdom. In currencies, the larger active bets included long positions in the Malaysian ringgit (6.5%) and Norwegian and Swedish kronas against underweightings in the US dollar (23%) and the euro (23%).


managed similar portfolios since 2000, but the UCITS vehicle, with its objective of outperforming the FTSE WGBI Index by 2% annually (gross), was established in December 2012. Since then, as at 31 March 2021, the clean I USD Unhedged share class has slightly lagged the index, although most of the underperformance came in earlier years. However, this vehicle has been 54 basis points per year ahead of the category average over the same period.

The value-driven approach, concentrated bets, and active currency exposures lead to wide swings in relative performance versus the index and peers, such as in 2015. Overweightings in Brazil and South Africa (bonds and currencies) weighed on returns as political events and unexpected inflation surfaced. Currency calls contributed most in 2018 with long Mexican peso, long Malaysian ringgit, and short New Zealand dollar all contributors. In 2019 both bonds and currency contributed to relative returns, with emerging-markets Bonds (Mexico, Brazil) adding value.

The valuation-driven approach led to underweightings in seemingly expensive safe-haven assets such as the US dollar in preference for emerging markets coming into 2020, which hurt in the first-quarter sell-off but boosted returns in the subsequent rebound to leave the strategy ahead for the year. Overweightings in Mexican bonds and its currency were core contributors to outperformance.

It’s critical to evaluate expenses, as they come directly out of returns. Based on our assessment of the fund’s People, Process and Parent pillars in the context of these fees, we think this share class will be able to deliver positive alpha relative to the category benchmark index.

Source: Morning Star