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Aug 27, 2019
Wealth: Three U.S. bond kings wield same strategy, get same result: lag...
NEW
YORK (Reuters) - Three names dominate the U.S. world of bond investing -
Jeffrey Gundlach, Dan Ivascyn and Scott Minerd. But funds run by these
star investors are lagging their respective benchmarks this year.
FILE
PHOTO: Jeffrey Gundlach, CEO of DoubleLine Capital LP, presents during
the 2019 Sohn Investment Conference in New York City, U.S., May 6, 2019.
REUTERS/Brendan McDermid/File Photo
The
proximate cause for the underperformance of these high-profile bond
investors: the monstrous rally in U.S. corporate bonds and Treasuries.
Investors
had been feasting on U.S. corporate credit bonds for years, though
recession fears and mounting defaults late last year put an abrupt end
to that. This year, the appetite for U.S. corporate bonds picked up
dramatically when investors’ views on the economy began to improve and
central banks became more accommodative.
U.S. corporate bonds
have posted a total return of 13.4% this year, measured by the Bank of
America Merrill Lynch US Corporate Bond Index, while year-to-date
Treasury returns are up 8.1%, according to an index compiled by
Bloomberg and Barclays .
What’s more, a lack of alternatives
against the backdrop of ultra-low, even negative-yielding, debt has made
U.S. corporate bonds the natural destination for many investors. Some
95% of all investment-grade corporate debt in the world that has a
positive yield is in the United States, according to Bank of America
Merrill Lynch.
All three investors – Gundlach, the chief
executive of DoubleLine Capital; Ivascyn, group chief investment officer
of Pacific Investment Management Co, known as Pimco; and Minerd, global
chief investment officer of Guggenheim Partners – have been underweight
corporate credit relative to their benchmarks.
But all three
told Reuters they can live with the underperformance because of the
greater damage that they see coming for corporate bonds.
“We
have never owned a single corporate bond in the Total Return Strategy
dating back to 1993. Look it up,” Gundlach said. “When corporate bonds
become very overvalued, especially when rates fall due to recession
prospects increasing — well?” he added of why he has avoided the asset
class.
The DoubleLine Total Return Fund (DBLTX.O),
with $54.5 billion in assets under management, is up 6.17% this year,
as of Aug. 23, according to Morningstar data. It is lagging its
Intermediate Core-Plus Bond category by 2.50 percentage points, and
lagging 90 percent of its peers this year, according to Morningstar.
That Intermediate Core-Plus category invests primarily in
investment-grade U.S. fixed-income issues including government,
corporate and securitized debt, and has total assets of $724 billion.
Gundlach
said there will be times when his fund will be out of favor and there
will be times when it will be extremely popular. “Everybody knows what
this fund is,” he said. “You know what you are getting. There are no
surprises.”
Ivascyn, who oversees $1.84 trillion in assets under
management at Pimco as of June 30, shares Gundlach’s sentiments. “We
believe that corporate credit is fundamentally weak and could overshoot
to the downside if the economy deteriorates,” he said.
The Pimco Income Fund (PIMIX.O),
the largest actively managed bond fund, with assets of more than $130
billion, is lagging 93 percent of its Multisector Bond category so far
this year, according to Morningstar data as of Aug. 23. The Multisector
category typically invests in U.S. government obligations, U.S.
corporate bonds, foreign bonds and high-yield U.S. debt securities and
has assets of $259 billion.
Minerd’s Guggenheim Total Return Bond Fund (GIBIX.O) is lagging 95% of its Intermediate Core-Plus Bond category so far this year, for the same period.
“As
the Fed begins its easing campaign to try to extend an already
long-in-the-tooth expansion, credit spreads are already tight across the
fixed-income spectrum,” Minerd said. “Credit spreads could get tighter
in this liquidity-driven rally, but history has shown that the potential
for widening from here is much greater.”
Gundlach, Ivascyn and
Minerd have also played defense with their interest-rate postures,
keeping their respective portfolios at shorter durations.
Duration
is a measure of a bond’s sensitivity to interest rate fluctuations.
Going shorter or negative duration is an investment strategy pursued
when rates are expected to rise.
FILE
PHOTO: Scott Minerd, Chairman of Guggenheim Investments and Global
Chief Investment Officer, speaks during the Reuters Global Investment
2019 Outlook Summit, in New York, U.S., November 12, 2018.
REUTERS/Brendan McDermid/File Photo
“I’ve said this a thousand times...we always run shorter duration,” Gundlach said.
Ultimately, the three bond kings expect to win in the long run, as the economy weakens.
“We
think developed government bond yields are too low and could easily
reverse so we are comfortable with low rate exposure,” Ivascyn said.
Reporting by Jennifer Ablan; editing by Megan Davies and Leslie Adler
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