This month, Bond Fund Intelligence interviews Brad Camden, Director of Fixed Income Strategy at Northern Trust Asset Management. He tells us about the history of NTAM in the fixed-income space, talks about the current market environment, and discusses a number of other bond fund issues. Our discussion follows. (Note: The following is reprinted from the August issue of our Bond Fund Intelligence, which was published on Aug. 14. Contact us at info@cranedata.com to request the full issue or to subscribe. Note too that we published our latest Bond Fund Portfolio Holdings last Friday, Aug. 21. Let us know if you'd like to see our most recent "cut". Finally, mark your calendars for Crane's Bond Fund Webinar: Ultra-Shorts & Alt-Cash, which will be Sept. 24, 2020 from 1-2pm ET.) (See too the press release and filing on Vanguard exiting the Prime MMF space. Watch for more on this tomorrow.)
BFI: Give us a little background. Camden: In the fixed income space, Northern Trust Asset Management has been managing a mix of sector specific and multi-asset class portfolios for over 40 years. In the mid-'90s, Northern launched the Northern Funds mutual fund family.... The mutual fund complex has been around for over 25 years and has performed well through various economic, business, and monetary cycles.
In 2011, NTAM launched FlexShares, an ETF suite of products [which] initially [focused on] the TIPs market but over time evolved into the ultra-short space, the mortgage market and ultimately into the credit markets.... Beyond mutual funds and ETFs, we offer strategies across the yield curve and up and down the quality spectrum in other formats such as SMAs and collective funds.
I joined Northern Trust Asset Management in 2002, [and] in 2004 I found my home in fixed income. Initially I started working on the high yield desk ... until a spot opened up on the securitized team. I spent time there honing my skills, [and] after a few years, I moved over to the credit team. I [then] moved into more direct portfolio management oversight roles in our Core and Core Plus products and some of our credit products, ultimately managing the investment management team.
Since 2018, I've been responsible for the long-duration fixed income team. Specifically, this includes anything outside of cash such as ultra-short, active, passive, and multifactor strategies. It's been a great experience and a wonderful journey here. I'm very grateful to be a part of an outstanding team and thankful for the opportunities that I've had to manage a diverse mix of portfolios while working with a wide range of clientele.
BFI: What are your major priorities? Camden: My major priorities to start 2020 were to build upon the strong investment performance of 2019, further expand and develop our team, continue to develop multifactor and ESG solutions, and serve our clients. However, after the Covid-19 shock, most of my time has been spent working with my team on understanding how the pandemic will alter economic growth, inflation, and monetary policy. We’re also analyzing how the credit markets will be impacted.... I believe we've done an outstanding job at evolving our views and communicating with our clients to offer them guidance. This is a testament to our strong forward-looking investment process.
Right now, my major priority is making sure that our clients' objectives are met, without taking undue risk to achieve them. One of the things that we always talk about here at Northern is making sure that we're paid for the risk taken. So [I'm working on] managing the team, staying abreast of the macro economic environment, changes in credit fundamentals, and staying in tune with clients.
It's been a challenge the past few months due to the uncertainty in the marketplace, particularly because there's been a disconnect between fundamental data and the technical. The engagement from central banks has been unprecedented and has had a significant impact on fixed income returns. [The Fed's] foray into the corporate bond market has been interesting. The challenge is staying ahead of the news flow -- the health crisis, economic outlooks and politics, and incorporating this information correctly into our investment process.
BFI: What funds are you focusing on? Camden: The two that are of most interest to our clientele are Ultra-Short and High Yield Fixed Income. With cash yielding basically zero, an investor can extend duration to roughly 0.5 year to 1.0 year and pick up between 50-60 basis points to earn a premium over cash without taking significant duration or credit risk. As a result of this incremental yield, clients who don't have immediate cash needs have moved into the strategy resulting in an uptick in flows.
For example, our taxable Ultra-Short mutual fund, NUSFX, just went over $3 billion for the first time, and we're very proud of this accomplishment. We've also seen significant interest in our ETF Ultra-Short product, RAVI.... We expect these products to continue to gain traction because we anticipate that the Fed will remain at zero-bound for the next five-years. Therefore, investors will be forced to move out of cash to get some incremental return.
High yield has also generated a lot of interest this year. It is our biggest overweight in our multi-asset class portfolios; we have an 11% allocation to it in our model portfolio. Over the next year, we anticipate high yield generating a return of roughly 5.0%, which, in our view, will outpace both the investment grade and government bond markets, and most of the equity markets. Historically, the high yield market has offered attractive risk adjusted returns and we expect this to be the case going forward.
We have multiple High Yield fund offerings. Our largest is the actively managed mutual fund, NHFIX. It currently yields close to, on a gross basis, 7.0%. So we're out-yielding the high yield market by north of 100 basis points without taking significant credit risk relative to the market. In this fund, we focus on taking compensated risks. We don't take significant issuer specific bets and we don't take significant subsector bets. In fact, we try to maintain sector neutrality and find value moving up and down the quality spectrum and within issuers by finding opportunities in different parts of the capital structure. By using this approach across 300-400 issuers, we have been able to generate stable, consistent returns.
BFI: Are there concerns over credit? Camden: Absolutely, we've been paying close attention to credit fundamentals and the sectors most directly impacted by the virus. We've been working diligently to avoid downgrades and defaults while at the same time trying to find value.... We understand that fundamental deterioration won't be uniform and that much of the negative performance impact is being offset by strong technicals -- strong inflows from investors and from the Fed. It has been a unique environment -- credit markets are challenging, liquidity has been uneven, the new issue market has been historically busy, and it's becoming more difficult to find value.
We're always cognizant of where we are investing. Initially, as the Fed entered the market, we were buying higher quality sectors and issuers -- agency mortgages, high quality defensive credit issuers such as issuers in the utility space, technology.... Now that those spreads have tightened significantly ... we've been rotating into other sectors, some of which were directly impacted by the pandemic. These include transportation, consumer cyclicals; even energy.
Overall, we are not taking significant issuer specific bets given the uncertainty on both the path of the virus and business models going forward. However, we are moving up and down the quality spectrum.... It's very difficult to find yield right now, but through our investment process, [we] are able to identify issuers where we feel that we’re paid for the risk of investing in them.
BFI: How about mutual funds vs. ETFs? Camden: We're seeing interest in both types of wrappers. ETFs, over the last couple of years, have grown much more quickly.... The benefits of ETFs are many, such as transparency, liquidity, and tax efficiency, but ... the product is still new. If ETFs continue to perform well, especially in volatile market environments like we've had, I expect them to continue to gain investor acceptance and to continue to grow. There is also value in mutual funds, including NAV stability. Different investors have different needs and there are benefits to both types of products.
BFI: Talk about your investors. Camden: We have a broad investor base. We work with public and corporate pension funds, foundations, endowments, and other institutional clients like insurance companies. We've also seen some significant growth in the intermediary space recently [and] continue to work with Northern's wealth management business.... The investor base runs the gamut and as you can imagine, with such a diverse investor base, we are always busy.
