The December issue of our Bond Fund Intelligence newsletter was sent to subscribers yesterday. The latest issue features the lead story, "BlackRock Blog Blasts Bloomberg Barclays Aggregate Index," which reviews a piece by iShares' Martin Small on how benchmarks can be deceiving, and the fund "profile" piece, "Neuberger Berman's Lind & McGinnis: Customization Key," which discusses NB's focus on customized separate accounts on both the taxable and tax-exempt side. BFI also recaps the latest Bond Fund News, including the briefs: Yields Up, Returns Down in Nov., IBD Says 'Bond Funds Declined', and Vanguard Expands Active F-I Lineup. BFI also includes our Crane BFI Indexes, averages and summaries of major bond fund categories. We excerpt from the December issue below, and we also quote from a WSJ article on legislation to overturn the floating NAV. (Contact us if you'd like to see a copy of our latest Bond Fund Intelligence, which is $500 a year, and BFI XLS data spreadsheet, which is $1,000. Watch for our next Bond Fund Portfolio Holdings data too late next week.)
Our lead "BlackRock Blog Blasts" story says, "Martin Small, Head of U.S. iShares at BlackRock, recently wrote a blog entry entitled, 'Why your bond fund and its index may not be a good fit.' In it, he discusses why many bond fund managers are benchmarking to an inappropriate index and beating it handily by taking more risk. The piece's introduction tells us, "Most actively managed core bond funds are measured against the Aggregate Index, even though their holdings often sit outside the benchmark. Martin explains why this may be confusing for investors."
Small writes, "In political parlance, 'gerrymandering' is when the boundaries of an electoral constituency are manipulated to favor a particular result. The practice has long been controversial, prompting intervention from the U.S. Supreme Court. But the High Court has never weighed in on 'gerrymandering' in the largest active bond fund segment: the over $1 trillion of assets captured by the Morningstar US Intermediate-Term bond (ITB) category." (Note: Crane Data's Intm-Term category totals $911 billion, by far our largest segment.)
The BlackRock blog continues, "The Bloomberg Barclays U.S. Aggregate Bond Index -- commonly referred to as the Aggregate Index -- is the benchmark against which over 90% of active ITB mutual fund performance is evaluated. Investors have typically used these funds at the core of their portfolios to pursue broad, diversified exposure to the U.S. market. Over time, however, the Aggregate Index has gradually become a less apt mirror of the investment universe of the total investable U.S. bond market."
Our "profile" interview says, "This month, BFI interviews Neuberger Berman Senior Portfolio Manager & MD Kristian Lind and PM & VP Matt McGinnis, who manage tax-exempt and taxable short-term strategies, respectively. Lind oversees the firm's Municipal Short Duration portfolios, while McGinnis is part of a team that runs taxable Enhanced Cash and Short Duration separate accounts, as well as the Neuberger Berman taxable Short Duration Bond Fund. Our discussion follows."
BFI asks, "Can you give us a little background?" Lind answers, "Our fixed income team has a long history managing cash management and short duration mandates in a variety of vehicles. Many team members have over 20 years of experience partnering with clients on customized short duration and cash management solutions. Some of our largest mandates date back to the mid 1980's.... I've been with Neuberger Berman since 2005 and Matt has been with us since 2008."
On their strategies, McGinnis comments, "The short duration space is a significant focus for us at Neuberger Berman. As a firm, we currently manage $29.6 billion in various short duration fixed income strategies across Floating Rate Loans, High Yield, Emerging Markets, Municipals and Investment Grade debt. We manage $1.7 billion in Municipal Short Duration assets and $4.7 billion in taxable Investment Grade Short Duration assets. While we do offer a taxable short duration bond mutual fund, a large focus of ours is partnering with our clients to create customized separately managed accounts tailored to our client's individual needs." (Watch for the full profile later this month.)
Our Bond Fund News includes a brief entitled, "Yields Up, Returns Down in Nov," which says, "Yields jumped and returns were lower across our Crane BFI Indexes last month. The BFI Total Index averaged a 1-month return of -0.12% and a gain of 4.11% over 12 months. The BFI 100 returned -0.08% in Nov. and 4.29% over 1 year. The BFI Conservative Ultra-Short Index returned 0.08% over 1 month and 1.29% over 1-year; the BFI Ultra-Short Index averaged 0.03% in November and 1.63% over 12 mos. Our BFI Short-Term Index returned -0.14% and 1.97%, and our BFI Intm-Term Index returned -0.17% and 3.57% for the month and year. The BFI High Yield Index fell 0.15% in Nov. but rose 7.26% for 1 year. (See p. 6 or BFI XLS for more.)"
The new issue also includes a News brief entitled, "IBD Says 'Bond Funds Declined In November: Turning Of The Tide?'" The article comments, "With a Federal Reserve interest rate hike all but priced in by fixed-income markets this week and short-term rates on a steady rise, November may well be the month bond investors saw the tide turning on forever-low rates.... With few exceptions, most bond mutual funds fell. Short-intermediate investment grade debt funds posted the biggest decline, shedding 0.26% and trimming their yearly gains to 1.72%. Core bond funds also underperformed, off 0.15% for the month, for a year-to-date gain of 3.15%. Riskier assets were not rewarded either.... Municipal bond funds lost 0.37% on average, with a [YTD] gain of 3.43%."
Finally, the December issue of BFI includes the sidebar, "Bond Fund Inflows Slow." It tells us, "ICI's latest 'Combined Estimated Long-Term Fund Flows and ETF Net Issuance,' with data as of Nov. 29 tells us, 'Bond funds had estimated inflows of $6.16 billion for the week, compared to estimated inflows of $6.54 billion during the previous week. Taxable bond funds saw estimated inflows of $6.47 billion, and municipal bond funds had estimated outflows of $312 million.' Over the past 5 weeks through 11/29, bond funds and ETFs have seen almost $26.5 billion in inflows vs. $49.3 billion in inflows over the prior 5-weeks."
In other news, The Wall Street Journal writes, "Bringing Back the Money-Fund Buck?" It says, "A fight is brewing over whether to reverse rules meant to prevent another crisis-triggered exodus from a corner of the mutual-fund industry, the latest front in a broad push to undo post crisis regulations. A pending House bill would overturn a 2014 Securities and Exchange Commission requirement that a subsection of money-market mutual funds -- those whose shares are held by institutions and that purchase corporate debt or municipal bonds -- float in value like other mutual funds. That would allow the funds to return to offering investments with stable, $1 share prices."
The article explains, "Legislation backed by Federated Investors Inc., a midsize, Pittsburgh-based company with nearly 70% of its assets in money funds, has racked up an unusual amount of bipartisan support, fueled by lobbying from municipal officers and treasurers who say the rule has increased short-term borrowing costs and crimped investment options. Federated says the bill, by Rep. Keith Rothfus (R., Pa.), will 'enhance the utility and availability of money market funds.'"
It adds, "Big asset-management firms such as Vanguard Group and BlackRock Inc., which argue the industry has already spent millions of dollars to comply with the SEC's requirements, have lined up against the legislation. Opponents also say they are loath to relive a bruising fight over the structure of the funds that lasted several years, according to people familiar with their thinking. Representatives for Vanguard and BlackRock declined to comment. The House Financial Services Committee could act on the legislation in early 2018." (See also our Dec. 12 Link of the Day, "BofA's Cabana on Bill H.R.2319" and our Nov. 17 News, "AFP Comments on Stable NAV Bill.")
