The August issue of our Bond Fund Intelligence, which was sent to subscribers Monday morning, features the stories, "WSJ Says Active Bond Funds Struggle vs. Indexes Since '22," which reviews how bond funds have fared over the past year and a half, and "GMO High Yield's Joe Auth: Niche, Alpha-Driven, 'Pointy'," our most recent "profile" interview. BFI also recaps the latest Bond Fund News and includes our Crane BFI Indexes, which show that bond fund returns rose in July while yields were mixed. We excerpt from the new issue below. (Contact us if you'd like to see our latest Bond Fund Intelligence and BFI XLS spreadsheet, or our Bond Fund Portfolio Holdings data.)
Our lead article "Active Bond Funds" piece states, "The Wall Street Journal writes on 'How Bond Funds Have Fared During the Fed's Rate Hikes.' They tell us, "When it came to helping investors navigate recent debt-market turmoil induced by Federal Reserve rate increases, bond-picking fund managers largely came up short. Of almost 2,000 actively managed bond funds covering a range of investing strategies, 58% failed to beat comparable bond indexes after accounting for the fees that investors pay over the last 18 months -- roughly the stretch of the Fed's campaign -- according to data from Morningstar Direct. With bond prices suffering across the board, only about one in 10 of the funds posted positive returns. Most bond-index funds also lost money over that stretch. But many eked out a slightly better performance than active managers, in part because they cost less."
It tells us, "Passive index funds have posed stiff competition for active investing strategies for decades. Firms like Vanguard and BlackRock's iShares unit have popularized the idea that owning a broad basket of securities is cheaper and no less lucrative than carefully curating a portfolio. But even some investors who have been sold on passive stock strategies still stand by active bond management, arguing that the quirks and complexities of debt investing mean their market is different."
Our "GMO's Joe Auth" interview states: "This month, BFI interviews Joe Auth, Head of Developed Fixed Income at Boston-based, Jeremy Grantham-founded GMO. Auth is portfolio manager of both GMO High Yield Fund and GMO Opportunistic Income Fund. He started in September 2014, coming over from the Harvard Endowment (HMC) to run the structured products business at GMO. He tells us 'The most extensive part of my background in fixed income is in structured products, so mortgages, CLOs, ABS, those types of investments.' We discuss the overall bond market, the High Yield fund and the risks of not owning credit and bonds."
BFI: Give us some history. Auth: I was one of the three people that started the GMO High Yield Fund. The strategy got going in 2017 and then became a mutual fund in the spring of 2018. Of the two main products that I manage at GMO (High Yield and Opportunistic Income), they're very different.... One (Opportunistic Income – the structured products fund) uses a fundamental approach more, and then the other one (High Yield) uses more of a systematic, factor-based approach.... Fixed income isn't something GMO is known for ... but we've been investing in bonds for quite a long time."
Our first News brief, "Returns and Yields Higher in July," states, "Bond fund returns jumped and yields were mostly higher last month. Our BFI Total Index increased 0.47% over 1-month and is up 0.46% over 12 months. The BFI 100 rose 0.41% in July but fell 0.66% over 1-year. Our BFI Conservative Ultra-Short Index was up 0.53% over 1-month and is up 4.01% for 1-year; Ultra-Shorts rose 0.57% and are up 3.66% over 12 mos. Short-Term rose 0.59% and 0.98%, and Intm-Term increased 0.17% but fell 2.51% over 1-year. BFI's Long-Term Index rose 0.03% but fell 2.95%. High Yield rose 1.25% in July but rose 4.53% over 1-year.
A second News brief, "Morningstar on 'The Best Bond Funds,' comments, "Bonds are on the mend in 2023 after a tough 2022: The Morningstar US Core Bond Index is up about 2% so far this year after falling nearly 13% last year. What's next for bonds? Morningstar expects interest rates to begin falling over the next six to 18 months. But regardless of where interest rates are headed, there's a case to be made for holding bond funds in your portfolio. One of the biggest reasons to do so: Bonds are still less risky over the long term than stocks."
Our next News brief, "'BankRate on the 'Best Short-Term Bond Funds in August 2023,' which tells us, "Bond prices fell throughout 2022 as the Federal Reserve hiked interest rates to combat high inflation, but with an end to rate increases potentially in sight, investors may be able to take advantage of attractive yields in short-term bonds. Here's what you should know about short-term bond funds and some of the best ones to consider for your portfolio."
Another brief, "U.S. News on the '7 Best Vanguard Bond Funds to Buy' comments, "Aside from a dismal year in 2022 as interest rates rose sharply, bonds have historically played an important role in portfolio management. Due to their lower correlation with stocks and steady cash flows, bonds can provide ballast for investors, helping to reduce volatility and minimize drawdowns."
A BFI sidebar, "Barron's on Active Bond ETFs," says, "Barron's writes, 'Active Bond ETFs Are Sprouting Up All Over. Should You Bite?' The piece states, 'Bond managers are betting big on active exchange-traded funds. In recent months, two bond kings -- BlackRock's Rick Rieder and Pimco's Dan Ivascyn -- have gotten in on the act. It's another sign of the growing popularity of ETFs as an alternatives to mutual funds, where active managers have long held sway.'"
Finally, another sidebar, "EFAMA 2023 Fact Book," comments, "EFAMA, the European Fund and Asset Management Association, recently published its annual 'Fact Book,' which includes a wealth of statistics on European funds and a section on European bond funds. (See the press release here.) It tells us, 'The year 2022 was an exceptionally difficult year for bond funds. Central banks were forced to tighten monetary policy aggressively as inflation — already on the rise at end 2021 — again increased significantly during 2022. This abrupt end to the era of low-interest rates led to a decrease in bond markets over much of 2022, as outstanding bonds with lower interest rates declined in price.'"
