Largest by AUM
The Pimco Income fund became the market’s largest active fixed income product last year, overtaking TCW’s Metropolitan West Total Return Bond fund, having already surpassed the Newport Beach, California-based firm’s own flagship Total Return fund. Managed by the Citywire AA-rated duo of Daniel Ivascyn and Alfred Murata, the Pimco Income fund’s portfolio is split between two sub-strategies: one focused on higher-yielding securities that should benefit when economic growth is strong, and one with higher-quality assets for times when it is not.
Ivascyn and Murata are currently looking to duration exposure in developed countries, primarily the US and Australia – in the latter case because the country has scope to cut rates if its economy weakens. For yield, they have turned to investment grade corporate bonds and sectors such as agency mortgage-backed securities.
Top by Risk-Adjusted
Guggenheim Total Return Bond
Befitting her total-return mandate, Citywire AA-rated Anne Walsh has generated this category’s best risk-adjusted returns over the past three years, with an exceptional manager ratio of 1.8. Her Guggenheim Total Return Bond fund is maintaining a defensive posture as the credit curve continues to flatten, with the portfolio positioned for rate hikes through a barbell approach to duration management.
Guggenheim expects four rate hikes from the Federal Reserve in 2018, and accordingly around 75% of the fund’s portfolio is in adjustable-rate securities. At the other end of the barbell, the fund holds longer-term debt with correspondingly higher yields and longer durations. Walsh reckoned that the yield curve would undergo a bear flattening over time, with longer-duration assets more likely to be insulated from losses than the intermediate part of the curve.
One to Watch
BMO Strategic Income
The BMO Strategic Income fund – under the aegis of the AA-rated duo of Scott Kimball and Daniela Mardarovici alongside Janelle Woodward and Frank Reda – has surged up the performance table to eighth out of the 91 funds in this sector over the past year, up from 85th out of 88 over the previous 12 months. In 2017 the fund’s managers accurately predicted that rates would remain range-bound, with the 10-year Treasury ending the year within three basis points of where it started.
With Federal Reserve hikes and the flattening of the yield curve also in mind, their portfolio entered 2018 with no exposure to Treasurys. The BMO team has instead been overweight corporate bonds, which represent 69% of the portfolio compared with just 31% of its benchmark, the Bloomberg Barclays US Aggregate Bond index.
iShares Core US Aggregate Bond ETF
While there is no real passive proxy for this category, at a cost of just five basis points the iShares Core US Aggregate Bond ETF is as cheap as the Vanguard Total Bond Market ETF but – being $55 billion in size versus the latter’s $37 billion – is more liquid. On that front, the iShares product also scores more highly than the two ETFs that are less expensive in this sector: the $5 billion Schwab US Aggregate Bond ETF and the $2 billion SPDR Portfolio Aggregate Bond ETF, both of which are available for four basis points.
The iShares ETF’s portfolio currently has a weighted average coupon of 3.28%, a weighted average maturity of 8.38 years, an effective duration of 5.92 years and an option-adjusted spread over Treasurys of 42.62 basis points. Its largest allocations are to Treasurys and pass-through mortgage-backed securities.