Exclusivity is the preserve of the elite, at least in the case of the Short/Intermediate Investment Grade Debt sector.
The top two funds in this category – the BlackRock Allocation Target Shares and the Johnson Intermediate Bond – are not available to the entire investment community. The former, managed by the Citywire AAA-rated team of Tom Musmanno and Michael Heilbronn, is only distributed through BlackRock’s separately managed accounts, and the latter – under AAA-rated Brandon Zureick and the AA-rated trio of Michael Leisring, Dale Coates and Jason Jackman – is an institutional-only strategy.
Allocators should not be too dismayed though, as there are several other strong options in this sector. Indeed, there are some that may serve those investors with a higher risk tolerance even better. While the BlackRock and Johnson funds have the best information ratios over the past three years, they have tended not to lead by total returns; their superior ranking is more a product of their lower volatility.
It’ll be Albrycht
One other option is A-rated David Albrycht’s Virtus Newfleet Multi-Sector Short Term Bond fund. Albrycht possesses the sector’s only other manager ratio at or above the 1.00 mark and also leads the BlackRock and Johnson mandates by total return over one, three and five years. Albrycht’s fund, though, has experienced more volatility and a greater drawdown over that period than its BlackRock rival: a standard deviation of 1.9 and a drawdown of 2.1%, compared with equivalent figures of 0.9 and 0.3% for Musmanno and Heilbronn.
Contributing to both the fund’s higher total returns and volatility is Albrycht’s willingness to hold higher-yielding bonds. ‘We expect spread sectors to continue to perform well in the current environment of modest 2% growth and subdued inflation,’ he explained.
‘Spreads are tighter, however, and we are watchful of risks that include the unprecedented retreat from quantitative easing by the major central banks, oil price volatility, geopolitical tensions and continued gridlock in Washington DC.’
Given the combination of these risks and the elevated valuations out there, Albrycht argued that ‘getting the industry calls correct and then picking the right credits is the lever to delivering alpha’.
'Boring' bond managers
The Thompson Bond fund – managed by AA-rated John Thompson and the + rated pair of Jason Stephens and James Evans – has a larger weighting to corporate rather than government debt, comfortably giving it the highest total returns in this peer group over the past one, three and five years.
More recently, the fund has concentrated on shorter-duration bonds, while valuations elsewhere are steep. ‘It’s a boring strategy, to be sure, but a sensible one given the current state of things,’ Thompson said.
‘As a result of these decisions, we believe absolute fund performance over the next year is unlikely to match recent history. However, if our choice to act more conservatively with regard to new purchases is correct, the fund could avoid negative volatility it otherwise would have experienced. In our opinion, funds that are not shortening duration like this are taking too much interest rate risk,’ he added.
The JPMorgan Limited Duration Bond fund, managed by the AA-rated team of Michael Sais and Robert Manning, takes a different approach again, focusing on mortgage-related securities. The main exposure to this type of asset comes from collateralized mortgage obligations, which make up 52.5% of the portfolio, while the more conventional mortgage-backed securities represent less than 7% of the fund.