Given the uncertainty prevalent in today’s markets, the appeal of globally diversified products such as Flexible Income bond funds is hard to ignore.
While the category itself is considerably smaller than its Multi-Sector Income counterpart, with 17 funds versus the latter’s 84, it has produced some noteworthy performances over the past three years.
In fact, of those 17 funds, 14 have outperformed the Bloomberg Barclays US Aggregate Bond index’s 3.15% rise over the past three years. The category also boasts being the top performing US Dollar Bond sector over the past decade, with total returns of 130.4%.
‘High yield corporates were the top performing sector over the [third] quarter, benefiting from strong earnings and low supply,’ the pair wrote in the third quarter commentary for the DoubleLine Flexible Income fund. ‘Collateralized loan obligations and bank loans also outperformed, as floating rate assets benefited from the increase in short-term rates.’
Largest by AUM:
Citywire A-rated portfolio managers Dan Fuss, Matthew Eagan and Elaine Stokes, along with AA-rated Brian Kennedy, have taken a defensive stance, with their cash allocation standing at just under 21% at the end of the third quarter.
However, the fund’s allocation to high yield corporate credit and its short duration stance has helped to power performance. Energy issuers were among the high yield winners, while investment grade credit proved a drag on overall performance.
In their latest market commentary, the managers said they expected steady growth and inflation in the upcoming quarter. With Treasury yields expected to keep rising, they are opting to maintain low exposure to interest rates.
Top by risk-adjusted:
The trio have a manager ratio of 1.31, and their fund has been powered by commercial mortgage-backed securities. Its focus on high quality bonds and an underweight allocation to Treasurys have also contributed.
In their latest commentary, the managers said they have generally favored energy-related securities and shorter duration bonds, despite the risk of inflation. They added that they are maintaining their defensive approach and shorter duration, due in part to high global debt levels.
One to watch:
Launched in July 2016, this fund is the category’s rising star, having jumped up the rankings from 14th to first for its performance over the past 12 months. Over the most recent 12-month period, it has returned 4.3% compared with the category average of -1.2%.
Manager Scott Carmack has opted for a low average duration of 1.7 years, with a yield to maturity of 5.6%. The fund primarily invests in investment grade corporate bonds (78%), and unlike some of its peers, it has no allocation to cash.
‘We will continue to monitor the macro situation as it develops, but we do not see anything in the near term that merits an adjustment to our current allocation,’ Carmack said.
iShares Core US Aggregate Bond
The top ETF in the Flexible Income category tracks the Bloomberg Barclays US Aggregate Bond index and offers diversified access to more than 6,800 US investment grade bonds.
It has an expense ratio of just 0.05% but has slightly underperformed the benchmark over three years, with total returns of 3% compared with the index’s 3.15%.
Its top sector allocations are 38.5% in US Treasurys, 27.6% in mortgage-backed security pass-throughs and 15.1% in industrials. It holds 28.2% of its portfolio in bonds with maturities of between seven and 10 years, followed by three- to five-year bonds at 19.3%.