As Fed policy becomes uncertain, these bond funds could take off | Wilnesh News
With Wall Street uncertain about where the Fed will go on interest rate policy, an actively managed fixed-income approach could attract additional investor interest and inflows. The central bank kept interest rates unchanged after last week’s meeting, citing a “lack of further progress” on inflation. The findings surprised economists, with investment banks Barclays and Bank of America predicting just one rate cut, while Citigroup predicted as many as four cuts. Uncertainty about the impending rate cuts, along with expectations that rates may remain elevated for longer, creates opportunities for active fund managers. “When inflation is higher and the yield curve is flat or even inverted, why should you hold the index?” Rick Rieder, chief investment officer of global fixed income at BlackRock, said in a phone interview with CNBC. “A large portion of the (Bloomberg Aggregate Bond) index is long-term bonds. Why would you want to own it?” Duration is a measure of the sensitivity of bond prices to interest rate fluctuations. Bonds with longer maturities tend to have longer durations. Bond yields and prices have an inverse relationship, so when interest rates are high, long-term bond prices can fluctuate significantly. Active managers in fixed income have the flexibility to adjust their risk exposures. “Today, having more tools at your disposal means you can eliminate parts of the index that aren’t worth owning,” said Rieder, who also invests in the BlackRock Strategic Income Opportunities Fund (BSIIX) and the Flexible Income ETF (BINC) Director). Portfolio Management Resilience With a 30-day SEC yield of 5.25% and a net expense ratio of 0.74%, BSIIX is an unconstrained bond fund, or a member of the non-traditional bond category according to Morningstar. The unconstrained portfolio gives managers the flexibility to invest across a range of income-producing asset classes, including foreign debt, and address interest rate sensitivity to limit volatility. Eric Jacobson says the category remains stable in 2022, the year the Fed begins a round of rate hikes, with non-traditional bond funds down an average of 6.1% that year, while core plus mid-term gains Bond funds fell an average of 13.4%, according to Morningstar, director of manager research for U.S. fixed income strategies. Where unconstrained strategies can run into trouble is in credit crises. “An example was 2008, when we had this instability and everyone was worried about credit risk and the only thing that was doing well was Treasuries,” he said. Another active approach that may receive further attention as the interest rate environment becomes uncertain is the core and core+ categories. While both include corporate, government-issued and securitized debt, the latter gives managers the flexibility to snap up high-yield bonds, bank loans and emerging market debt, according to Morningstar. “We believe that if you are venturing beyond the comfort and limitations of cash, a good place to start is with a core or core+active strategy that will still be influenced by high-quality U.S. investment grades.” Vanguard Group Active Fixed Income Product Management Supervisor John Croke said. “We’re seeing some traction with the ‘let the professionals allocate risk and identify opportunities’ message,” he added. In fact, core bond funds were among the winners from the 2008 crisis. They’ve also held their own during the Covid-19 downturn, benefiting from medium durations (some around six years) and diversification from Treasuries, mortgage-backed securities and corporate bonds. Choosing the Right Product Investors should be prepared to do some homework when digging into these different options. First, they should consider the role they want a particular bond fund to play in their portfolio: Is it to offset equity risk or to enhance returns? “You don’t invest in bond funds to get out of trouble and build wealth,” says Morningstar’s Jacobson. “They’re ballast, balance and insurance — that’s the way I like to think about it.” If your search To bring you to actively managed strategies, read the manager’s approach and learn about their investing approach. A prospectus is a good place to start. “You need to look at the mandate and study the strategy,” says Jaime Quinones, a certified financial planner at Stockard Wealth Management in Marlboro, N.J. “Look at what the guidelines are, and that might be one of the comparisons. A starting point for one flexible approach versus another.” Finally, investors should be aware of fees and taxes. Actively managed funds generally have higher costs than passively managed funds, and those with higher turnover may also be subject to a range of tax implications from capital gains and losses arising within the portfolio. Therefore, these funds are best kept in your tax-deferred account, such as an IRA. “Mutual funds are great for active management, but they are not the most tax-efficient or cheapest,” Quinones said.
