Last week, we hosted our first live Crane's Bond Fund Symposium in two years, which took place in Newport Beach, Calif. Today, we quote from the session, "Senior Portfolio Manager Perspectives," which featured Northern Trust Asset Management's Morten Olsen, PIMCO's Andrew Wittkop and UBS Asset Management's Dave Rothweiler. Thanks again to those who attended and supported BFS, and attendees and Crane Data subscribers may access the Powerpoints, recordings and conference materials at the bottom of our "Content" page or via our Bond Fund Symposium 2022 Download Center. (Mark your calendars for our next live event, Crane's Money Fund Symposium, which is scheduled for June 20-22, 2022 at The Loews Philadelphia in Minneapolis, Minn., and for next year's Bond Fund Symposium, March 23-24, 2023, in Boston, Mass.)
We first asked, "What are you buying?" Rothweiler responds, "I mean, relative to the space, we've been pretty short on duration. We still like credit. I'd say from a Fed standpoint, you know, the upcoming rate rises, we're steering more and more into the floating rate space. But that being said, in terms of sector, there's still some value in new issue ABS ... and more short-term, maybe around that six-month area, just break-even is still okay for some reason."
On supply, he adds, "Especially given the sell-off over the last few weeks, you know, we haven't had a problem finding bonds. So it seems pretty healthy from our standpoint. It isn't quite the shape it was recently where you had a hard time finding product, for sure."
Wittkop tells us, "I think the overarching thesis ... obviously a lot's going to change over the next three to six months. I think the most important thing that is going to change is regard to the Fed's balance sheet. Obviously, over the last 20 months, the extension of the balance sheet by $5+ trillion has added a lot of cash to the system. As that turns negative, the cash starts to leave the system.... I think it's going to be an overarching negative overall for risk assets in general. So what we're trying not to buy I think is the most important consideration, and what we're trying not to buy is what's done best over the last 20 months."
He says, "What we think has done best and what's been most buoyed by the Fed balance sheet extension is, you know, plain vanilla kind of IG corporates. So, in our space, we're always going to own IG corporates. You can't run an ultra-short, short duration strategy without having some kind of [presence in] that space. What we're trying to do is two-fold.... One is if we say our normal weighting is, call it 40-60%, 60% for most bullish and 40% bearish, we're going to run most of portfolios ... at the lower end of those [ranges]."
Wittkop tells the BFS, "The second thing we're trying to do.... We're trying to keep it relatively short. So ... if we normally see a sweet spot ... at about that 18-month to 2-year point, we don't think there's any reason to move that far out. So we're keeping everything relatively short. Our portfolios don't typically hold a lot of commercial paper. But right now, we've actually been buyers of commercial paper.... You know, there's been some spread widening there. If nothing else, you got kind of immediate liquidity when you want stuff relatively short."
He adds, "So, when it comes to that side, we're trying to buy what we think is most at risk. We do continue to like the securitized side. ABS short WAL, short CMBS, ... the economy is still doing fine. You know, those cash flows in an economy that's still going to be growing above trend should still be relatively consistent, relatively resilient. You can forecast those cash flows. Those spreads to us still look relatively cheap. So, you know where we're underweighting IG, we're kind of overweighting there. So, it's kind of a little bit more barbelled overall. [We're] still running a portfolio I'd say that has much more liquidity than we typically have in in a normal cycle."
When asked what he doesn't buy, Northern's Olsen comments, "We've got a couple of things that we ... have decided not to include in an ultra-short portfolio. So that's high-yield, derivatives and of course, currency or cross-currency bonds. So those three, even though they're obviously very additive to performance at the right times, we just make a business decision that clients in this type of strategy would rather that we keep it somewhat simple [when we] explain all the risk that we're taking inside the portfolio."
He comments, "What we buy, I mean, it's very similar to what you've heard so far ... we have a significant overweight to IG credit at almost all times. We continue to like the additional carry it gives you inside the portfolio. So [we're] being really thoughtful around what type of bonds we're picking. But that's kind of our main story.... Stay away from the riskier asset classes.... A lot of our mutual funds in the short space are just structured long. So we have this one year duration target inside the portfolios, which is longer than most of the market participants and most of our peers."
Finally, Olsen says, "It's been a great run for the last 10 years; it's been an absolutely horrible run for the last four months or so. When I looked at the rankings, it was kind of one of those, you know, show to everybody, happy to share with friends and families and clients. Now I'm trying to put it as far away as possible because it's just not fun to look at. But it's ... an adjustment in the market and we'll see if it's a structural change or if it's another period. We have to get through and we'll get back to something ... like the market we've seen over the last 10 years."
