This month, Bond Fund Intelligence interviews Ruta Ziverte, the Head of U.S. Fixed Income for William Blair Investment Management. Ziverte discusses the Chicago-based manager's history, her team's emphasis on preserving capital and focus on agency mortgage-backed securities, and alternatives to cash management. Our discussion follows. (Note: The following is reprinted from the September issue of our Bond Fund Intelligence, which was published on Sept. 15. Contact us at info@cranedata.com to request the full issue or to subscribe. Also, the replay is now available for Crane's Bond Fund Webinar: Ultra-Shorts & Alt-Cash, which we hosted last Thursday.)
BFI: Give us some history. Ziverte: William Blair's fixed-income team has focused on active management in developed fixed-income markets since 1990, when the team launched their first mutual fund, the William Blair Income Fund. This fund is benchmarked to the intermediate government credit index.
As markets evolved and client needs shifted, we expanded our lineup. In 1998 we added a core bond strategy, and 10 years later we launched the corresponding mutual fund -- the William Blair Bond Fund. Our low duration strategy was launched in 1999 and the corresponding mutual fund in 2009. More recently, our platform has grown into sustainable fixed income due to the integration of ESG analysis into our investment process, and we run a sustainable fixed income strategy for separately managed accounts.
Our team members have an average of 20 years of experience, with the majority having worked together at William Blair for more than 10 years. I would like to point out that our team is diverse, with about 40% women and 40% minorities. In addition, all have experience across funding markets, securitized and corporate credit, and emerging markets. I believe this is what differentiates us from our peers, and it adds value to our overall process because it provides diversity of thought.
I joined William Blair in October 2019 as Head of U.S. Fixed Income. In this role, I'm responsible for the team's leadership. I'm also involved in portfolio management and developing and executing our fixed income growth strategy, in conjunction with other team members. Before joining William Blair, I was a vice president and senior PM at Oppenheimer Funds.
BFI: Talk about the fund lineup. Ziverte: We manage three mutual funds. The William Blair Income Fund, which falls in the short-term bond fund category, is our oldest fund. It seeks to provide relatively stable capital and income. The William Blair Bond Fund is a high-quality, core fixed-income strategy with an objective of income and capital appreciation. Lastly, the William Blair Low Duration Fund, which falls in the ultra-short category, seeks capital preservation and income. This strategy aims to outperform the risk-free rate through differentiated exposures within fixed-income sectors while maintaining a liquid portfolio of fixed income-securities rated A- or higher.
BFI: Talk more about Low Duration. Ziverte: While we launched the William Blair Low Duration Fund in 2009 as an alternative to prime money market funds that paid a basis point, we've been managing a low duration strategy for institutional clients for more than 20 years.
Our low duration strategy was created for investors that seek capital preservation, liquidity, and some income. These investors, corporations or nonprofit organizations, have common goals -- optimizing how they manage their capital, earning a competitive return over the risk-free rate while not taking on oversized risk, and staying liquid.
I think our low duration strategy is unique in its high-quality orientation. Investments have to be rated at least single-A-. The strategy and corresponding mutual fund are also diversified, comprised of four types of securities: agency mortgage-backed securities (MBS), asset-backed securities (ABS), corporate credit, and Treasuries. The duration profile of the fund is around one year.
I think it's important to point out that our pursuit of income occurs after our objectives of high-quality, liquidity, and preservation of capital are satisfied. The most important element of our approach is that we employ continuous active management to ensure we have the appropriate high-quality and diversified exposures, including a timely and appropriate allocation between fixed and floating-rate instruments. Plus, security selection is key. We are committed to a disciplined security selection process that looks at fundamentals versus relative value. That, combined with a distinctive approach that favors investing in above-market-coupon agency MBS give us the potential to achieve higher yields than cash instruments while providing the benefit of capital preservation.
Our ability to identify differentiated, higher-quality exposures has helped deliver the fund's objective of capital preservation and above-market income during even periods of extreme market volatility, such as Q1 2020. Overall, then, I would say that our approach to managing this fund is time-tested and our strategy has held up through market cycles.
BFI: Where can you find any yield? Ziverte: It's a great question these days. Rates are zero-bound, and everyone is looking for yield. We're obviously looking for yield too, but the priority for us in any market is to really understand and solve for the clients' needs. The focus today tends to be on finding high-quality sources of income while maintaining that capital preservation. As prime money market funds are closing and government money funds produce limited yield, investors are forced to seek alternatives to cash management. At such times, investors might be inclined to take on more credit risk or duration risk to generate that extra income. However, we don't believe it has to be that way.
We believe we are able to achieve this capital preservation and higher income by investing in agency mortgage-backed securities. We favor seasoned, high coupon U.S. agency MBS with low loan balances. Borrowers within these pools typically have little economic incentive to refinance their smaller mortgage balances. Therefore, investors experience lower pre-payments than the market, thus receiving above market coupons for longer periods of time. We believe disciplined risk management is really critical and remains a priority for our strategies, including our low duration strategy.
BFI: Talk about what you can't do. Ziverte: We try to make sure the William Blair Low Duration Fund is diversified, generally consisting of 80 to 130 issuers. In terms of duration, it's inside one year. For bullet securities, we focus on three years as a maximum maturity. When we look at the issuer size guidance for credit instruments, we generally don't go over 2.0%. And anything to be included in the fund has to be high-quality, so A-rated or higher. Those are some of the guidelines.
In terms of asset classes, we don't invest in commercial mortgage-backed securities (CMBS).... But as I mentioned, we do invest in MBS. When evaluating MBS, we solely focus on agency versus non-agency. The benefit of agency MBS is the timely payment and principal and interest which is guaranteed by Government Sponsored Enterprises such as Fannie Mae and Freddie Mac. It's generally less risky, but has also provided nice income for our investors. And the fund definitely does not utilize leverage.
BFI: What is your biggest challenge? Ziverte: Things are better now than they were in March. But we're still living in uncertain times, and capital preservation is even more critical. As such, we continue to challenge our base-case expectations to ensure that we understand the true downside risks of all our positions.... Especially in a low-yield environment, it can be challenging to identify securities that could add incremental yield without adding a lot more risk. We seek to do that by staying very disciplined, and sticking to our process.
We really showcased that in the first quarter of this year. There were not many funds that provided the positive returns like we did. So we provided capital preservation and income. And our unique way of investing in MBS is a big part of why we were able to achieve that.
BFI: Tell us about your overall outlook. Ziverte: We're very constructive on the future of ultra-short bond funds, especially the ones with a high-quality tilt, the ones focused on capital preservation. We've seen that in times of stress, central banks become very accommodative to help boost the economy. This leads to front-end rates moving toward zero and drives investors to start looking for alternatives to managing their cash.
We believe the short end of the strategy curve will remain anchored near zero, and we do not believe that under the current regime the Fed is at all interested in entertaining the idea of negative rates. Therefore, these types of funds should be more in demand.
