This month, BFI interviews Vishal Khanduja, Vice President at Calvert Research and Management (now part of Eaton Vance). Calvert, one of the original "ESG" or responsible investment managers, is based in Washington, D.C., with assets under management of over $14 billion (as of 12/31/18). We discuss their Short Duration Income Fund, and a number of other bond market topics, below. Note: This profile is reprinted from the March issue of our Bond Fund Intelligence publication. Contact us if you'd like to see the full issue, or if you'd like to see our BFI XLS performance spreadsheet, our BFI Indexes and averages, or our most recent Bond Fund Portfolio Holdings data set, which was published Friday. (Note too: To those of you attending our 3rd annual Bond Fund Symposium, welcome to Philadelphia! Feel free to drop by the Philadelphia Loews if you're in town, or see the conference materials in our Bond Fund Symposium 2019 Download Center.)

BFI: Give us a little bit of background. Khanduja: Calvert traces its roots back to 1976. We began in the money market business, launching the first variable-rate government money market fund in the United States. In 1982, we launched one of the first responsible-investment funds, the Calvert Balanced Fund. The short-duration franchise originated in 2002, with the Calvert Short Duration Income Fund. We expanded and added the Calvert Ultra-Short Duration Income Fund in 2006.

As for me, I joined Calvert in 2012. My primary goal at the time was to strengthen our approach to portfolio construction and risk management so that our process would also appeal to larger institutional investors. We had strong success in managing a range of strategies across the yield curve and credit spectrum. This broader view expands our opportunity set in each of the strategies we manage, and our multi-sector focus ensures we capture them well. Our goal is to manage strategy-specific portfolios that address specific risk and return objectives.

An ultra-short strategy, for example, addresses a specific client need and, as such, the portfolio's risk exposure and performance should be commensurate with these expectations. We respect bespoke client requests, and that's why we provide fiercely competitive returns across a range of strategies.

BFI: Do all Calvert funds do ESG? Khanduja: Yes, all of them. Each security that goes into any of the Calvert funds, irrespective of the asset class, is evaluated fundamentally and from an ESG perspective. This integrated approach is how Calvert has always approached responsible investing. An ESG analyst rates and ranks companies based on ESG metrics that are financially material to companies within each particular subindustry. The benefit to me, as a Calvert portfolio manager and as part of the broader Eaton Vance team, is that I have access to 11 ESG research analysts and five ESG quantitative analysts, as well as the broader fixed-income team at Eaton Vance that includes more than 60 fundamental analysts across our high yield, diversified fixed income, bank loan and muni teams.

BFI: Talk about Short Duration Income. Khanduja: Though I am the one talking to you, I think it is important to remember that we employ a collaborative, team-based approach when managing the Calvert Short Duration Income Fund. I serve as lead portfolio manager and Brian Ellis co-manages the fund with me. Indeed, every analyst on our team has a handprint on the resulting portfolio. It is critical that each decision we make involves a fundamental analyst, an ESG analyst, a trader, and the portfolio manager for the specific strategy. We believe this team-based approach allows us to be as successful as possible, and the consistency we've provided shareholders over time speaks to both the team and this approach.

BFI: What is your biggest challenge? Khanduja: Many people believe when you integrate environmental, social, and governance, or ESG, factors, you sacrifice performance. That is incorrect. Our funds are competitive with the broader benchmarks and peer groups in addition to being competitive with ESG-benchmarks and peer groups. The additional ESG lens through which we evaluate investment opportunities helps us avoid risks and actually dovetails quite nicely with our philosophy of focusing on risk-adjusted performance.

The broader short duration space has become a lot more interesting in recent years. The challenge in 2014 was how to address front-end rates that were at zero or ten basis points. The strategies were delivering what they could to the investors, but we weren't providing a lot of return in that environment. Return potential has markedly improved in the zero to 5-year space; curves are flat, the Fed has increased rates nine times already, making this an interesting place to be. The front end of the curve is no longer zero, but 2.5%. Cash or money market or ultra-short strategies have become a desirable asset class rather than a placeholder in an asset allocator's tool kit.

When cash starts returning 2.5-3.0%, which is the current 10-year rate, it truly becomes a competing asset class. Investors have the opportunity to dampen interest rate volatility, dampen spread volatility, and still earn 2.5-3.0% comfortably. The market is clamoring to that space and we've seen a lot of interest from clients. We have seen record inflows in 2018 and that has continued into this year as well. Given the popularity of the space, there are many investment managers operating in this asset class, which can make it difficult for the end investor to pick the right one. We tell investors and financial advisors that long-term track record is what you want to see here because we believe that indicates the success of our process over time.

There are two variables that fixed income investors focus on the most, yield and duration. Another aspect that we believe many overlook is spread duration. In our Ultra-Short and Short Duration strategies, we focus on spread duration and interest rate duration. Spread duration is the risk that highlights the amount of credit risk taken. The Calvert Ultra-Short strategy spread duration is currently less than a year and a half.

The Calvert Short Duration strategy has a one- to five-year benchmark, which allows more risk with respect to spread duration. Spread duration is currently slightly over a year longer than our Ultra Short spread duration. It is important to adhere to the strategy prospectus, which delivers our clients the experience they prefer.

BFI: Talk more about the portfolio. Khanduja: We like to break the investable universe into three big balance sheets. There's a sovereign balance sheet, a corporate balance sheet, and the consumer balance sheet. This is the starting point of our portfolio construction process. From there, we assess the health of each balance sheet and delve further into sector concerns. The three sectors we focus on are investment grade corporates, high yield, and securitized assets, which includes asset backed securities as well as mortgage-backed securities. Our strategies are liquid, long only. The portfolios right now are tilted towards consumer balance sheets and away from corporate balance sheets due to more sound fundamentals and valuations. We focus on high quality and low spread duration.

BFI: Tell us about the investor base. Khanduja: We serve a broad range of investors. We offer '40 Act mutual funds with several share classes to meet investor and advisor needs. We also offer separate accounts that offer increased customization. We have seen increased interest from new investors in recent quarters as higher interest rates have driven a renewed focus.

BFI: What does the future look like? Khanduja: Short duration bond strategies look very attractive for the next 12-24 months. Higher starting yields and stability at the front-end of the curve bodes well for short duration strategies. It remains critical to be cognizant of spread duration risk and interest rate risk. The Fed plays a key role in an environment like this. After the Financial Crisis in 2008, the Fed advocated for investors to go out of the curve in duration. We are in a very different environment now and the Fed is focused on incentivizing investors to reduce duration risk and spread duration risk. That's exactly what is happening in the market, and investors like us are listening to that and acting accordingly.

Email This Article




Use a comma or a semicolon to separate

captcha image