This month, BFI profiles Yoana Koleva, Managing Director at Lord Abbett and Portfolio Manager of Lord Abbett Ultra Short Fund. The Jersey City-based manager runs the largest Ultra-Short Bond Fund and second largest Short-Term Bond Fund and ranks 12th overall in our bond fund family rankings. Koleva discusses the firm's history, the fund's strategies and a number of other topics in the ultra-short space. Our Q&A follows. (Note: The following is reprinted from the October issue of our Bond Fund Intelligence, which was published on Oct. 15. Contact us at info@cranedata.com to request the full issue or to subscribe. Also, please join us for Crane's Money Fund Symposium Online, which will be held Tuesday, October 27 from 1-4pm ET.)
BFI: Give us a little history. Koleva: Lord Abbett was actually founded back in 1929, so we've been around for a very long time. Within the short duration space, we also have a very long history and a pretty significant presence. Our Short Duration Income Fund was launched in early 2008. We invest in short-term, credit-oriented securities and the goal is to generate strong, consistent returns with low volatility. We have a multi-sector approach where we invest in investment grade, high yield corporate securities, CMBS and ABS, and the way we add value is through sector rotation and security selection. Currently, the short duration strategy has over $60 billion in assets.
Given our experience and our success in short duration, in 2016 we decided to launch our Ultra Short Bond product. If you recall, 2016 was the year when we had a major change in the regulatory landscape driven by the Money Market Reform. We believe that created an opportunity for a new product. You saw significant outflows from the Prime money market space as gates and floating NAVs were introduced. Prime money markets dropped by nearly $1 trillion driven by investor outflows and fund conversions into government money market funds. For the investor that focuses on principal preservation and return above Treasuries there were really very limited opportunities. We saw that market dynamic and identified it as an opportunity for the ultra short space. We currently manage over $20 billion in assets in the space, so it's been a huge success.
In terms of my background, I have been with Lord Abbett since 2011. I initially started as a credit research analyst focusing on financials. I was an analyst for about four years, and in 2015, I moved over to the portfolio management team as our AUM was growing and our portfolio management team was expanding. I was part of the Ultra Short strategy launch in 2016, and in 2018 I assumed the role of lead portfolio manager. Prior to joining Lord Abbett, I was actually on the sell side. I was at Morgan Stanley and was a bank analyst there.
If you look at the performance, especially of Short Duration, it has been very strong over the past 10 years. We haven't had a negative return year in the last decade and have consistently delivered positive returns. We believe that there is an anomaly in short duration credit – short duration securities are overlooked by investors and over time they generate better risk-adjusted returns. The average duration of the short duration portfolio is two years and as such you have a lot of visibility in what the credit profile for a company might look like over the next two years. And given also the short duration of these assets, you have limited volatility. A two-year bond isn't going to exhibit the same type of volatility that you might see with a 10-year or a 30-year bond. So, our view is that the front end of the curve has been in a way neglected by investors, and on a risk-adjusted basis that's actually where you get superior returns.
BFI: Tell us about the team. Koleva: We have 65 investment professionals within taxable fixed income and we all work together and collaborate to identify investment opportunities. We have a team-based approach, there is no star portfolio manager that makes one or two key decisions. It's all about each team identifying market inefficiencies and opportunities within their space. There are three parts to the team: you have the portfolio management team, the credit research analyst team, and the trading team. Within portfolio management, we are all divided based on our areas of expertise. I am part of the corporate portfolio management team. We have an ABS team, a CMBS team, a rates team, and a leveraged credit team, and we are tasked with identifying opportunities within our area of expertise.
The second leg to the stool, so to speak, is the credit research analyst team. We have over 20 analysts covering all the major sectors. We have a centralized approach to credit research. Each analyst is a sector expert and covers all the credits that would be in their sector across the credit spectrum. For example, an energy analyst would cover all companies, ranging from single-A, at the higher end of the quality spectrum, all the way to triple-Cs. That gives them a very holistic view of their space, which is very helpful, especially with crossover credits, such as rising stars or fallen angels.
The third leg of the stool is the trading team. The traders work very closely with the portfolio managers and credit analysts. They know what the portfolio management team and the credit analysts views are, and they help us identify opportunities that we can invest in.
BFI: What are your major priorities? Koleva: With Ultra Short, the goal of the strategy is to generate excess return over Treasuries while maintaining at the same time limited downside volatility. The ultra short strategy is managed by the same team that manages the rest of the credit focused funds. Thus, we can leverage the expertise that we have across the team. Currently, we believe corporate credit provides an attractive opportunity and we have a rigorous process to identify the securities that can generate superior risk adjusted returns.
BFI: How is the fund positioned? Koleva: For Ultra Short specifically, the asset classes that we invest in are: commercial paper, asset-backed securities and fixed and floating rate corporate notes. To take a step back, when you think about what the key risks for strategies like ultra short are, I would bucket them into three categories: liquidity risk, credit risk and interest rate risk. The different sectors that we invest in are designed to address those risks.
If you think about liquidity risk, the way we address this is by investing in commercial paper. The commercial paper provides a natural liquidity for the fund, as it is staggered and is very short term. The commercial paper part of the portfolio ranges at about 20 to 30% of the fund. There’s a natural liquidity that comes from that commercial paper maturing.
The second risk we talk about is credit risk. The way we mitigate that is by investing in very high-quality assets. Think about our ABS book, it's triple-A. The corporate bonds are investment grade with a big focus on single-A rated securities. The overall average rating of the fund is A-plus. We're talking about very high-quality assets.
The third component to risk is interest rate risk. The way we protect against interest rate risk is by investing in floating rate products. So, depending on our view of whether we are in a rising or lower rate environment, we can dial up and down our exposure to floating rate notes. Those are the main asset classes that we invest in.
Where our expertise and value comes in is identifying relative value across the different asset classes to determine where the best opportunities are, and doing the sector rotation that I talked about. We could be overweight any of the four asset classes we invest in, depending on what our view of relative value is within that sector. Our ability to identify inefficiencies and relative value across the different sectors is one of the main ways we add value.
BFI: Talk about your investors. Koleva: It's blend of both retail and institutional. We have had a very strong history and a very strong presence within the retail space. So, I would say we are more retail-oriented. But we have seen strong growth within the institutional space as well, especially over the past couple of years, within the short duration and ultra short strategies.
BFI: What's your outlook? Koleva: We are constructive on the short credit space. We expect rates to stay at near zero for an extended period. In that type of environment, if you are interested in earning excess yield over Treasuries and you are concerned about principal protection at the same time, you don't have many choices. Money markets are yielding near zero. At the same time, the absolute level of yield is very low. If inflation picks up, taking duration risk puts you in a vulnerable position. So I think the ultra short and short duration funds are very well positioned. Also, I think the ultra short space is a good alternative if you want to preserve optionality in case we have another bout of volatility similar to what we had in March. If you have a more defensive view, and you’re waiting for a better opportunity to enter the market, having exposure to ultra short near term is a good alternative.
