Last week I got an email from an old school mutual fund company for a webinar they were having this morning that was going to look at fixed income with the title Beyond Duration: Diversify Your Fixed Income Alpha.
With that title, I'm in, they're leading with the right things, let see where it goes. It was a pitch for a fund of theirs which is ok, that's common, maybe I can learn something or maybe it might be one to start the process to study for eventual inclusion in client accounts. BLNDX came from an email solicitation so I'm not dismissive of every email that comes in.
A few minutes in and the manager has been talking different things they've done to differentiate versus "core bond" or as we say here, AGG-like exposure. Ok, lets see what all this talk looks like.
Over the entire 15 years, the fund clearly outperformed AGG but for all the talk about strategy and tactics, there's no differentiation and it rode the market all the way down in 2022. Yahoo shows the fund with a 4.00% trailing 12 month yield compared to 3.97% for AGG. The fund gets three stars, it is outperforming but if you agree that AGG is not answer then I don't see how this other fund could possibly be the answer either.
You've probably seen where interest rates have taken a little bit of leg higher over the last couple of months or so. The ten year treasury now yields 4.65% and the 30 year is up to 5.15%.
The chart is price only. UTHY tracks the 30 year, UTEN the ten year and BOXX uses options to replicate the return of T-bills. Yes, I am banging the same drum. The potential yield from these longer dated proxies does not adequately compensate holders for the risk or the volatility. There has been no shortage of pundits since late 2022 saying that "now is finally the time to add duration" and that has been bad advice.
USVN tracks the seven year treasury note which is pretty close to AGG. If an investor would put 40% into a bond fund with the word core in the name or a 5, 7 or ten year treasury ETF, maybe they would consider splitting that up into several different exposures with better yields and little to no interest rate risk. Doing so would actually be much less risky.
The returns are adjusted for inflation and while that return is attractive, the bigger focus is a much lower volatility, although not visible on this screen there is a much lower standard deviation, the drawdowns have been much shallower except for the Tariff Panic when the drawdown was slightly shallower not much shallower.
In relation to a couple of other posts lately, it's a funny coincidence that Portfolio 3 above has a return of CPI plus 5 even if just by 9 basis points. I would absolutely not rely on a mix of alternative income sectors and strategic alts intended to be income market substitutes to deliver CPI plus 5. Yeah it might happen, but I think counting on it would end badly. If the objective appeals to you, I think you're going to need a decent amount of equity beta and Portfolio 3 has none.
The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.
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