Morningstar Prospects is a list of promising or unsuspected investment strategies that Morningstar Manager Research may one day cover in full. We recently added a trio of new bond funds to the list.
Strategic obligations of US funds (ANBAX) takes an approach that focuses on rates and minors on credit, which sets it apart from richer credit peers in the Morningstar Mid-Base-Plus category. The fund aims to derive 60% of excess returns from duration and positioning on the yield curve, with the remainder coming from sector and stock selection. As such, the duration of the strategy, a measure of sensitivity to interest rates, can oscillate and has been up to four years longer or shorter than its benchmark in the past two years. The managers aim to limit the correlation of strategy to equities and generally orient the portfolio towards the more liquid sectors of the bond markets, such as government debt and investment grade corporate credit. The execution of this rate-driven approach has been strong. The strategy has often outperformed both during times of stress on credit and rates, including during the coronavirus sell-off in the first quarter of 2020.
BlackRock Income (BMSIX) is a notable proposition within the Morningstar Multi-Sector Bond category. The flexible approach of this offering leverages the same resources and philosophy that underpin the Gold-rated BlackRock High Yield Bond. (BRHYX). Management aims to achieve consistent and attractive risk-adjusted results throughout the credit cycle by aggressively investing in global credit markets. The investment universe is relatively broad, ranging from bonds to secured loans and other securitized assets, to investment grade and high yield companies, emerging markets and bank loans. The fund generated strong returns, ranking ahead of 85% of its peers, with volatility below 60% of them.
FlexShares High Yield Value Scored Bond (HYGV) The index fund is a solid choice for exposure to the high yield bond market. It tracks the Northern Trust High Yield Value-Scored US Corporate Bond Index, which seeks to maximize exposure to bonds offering higher yields while controlling downside risk. The fund’s benchmark index selects bonds from the Northern Trust High Yield US Corporate Bond Index, a broadly diversified, market-weighted index that is representative of the available market. It uses an optimizer to maximize exposure to bonds with high value scores, a proprietary metric that assesses the relative value of each qualifying bond. The optimizer uses various constraints to control the risk of the fund. This fund benefits from a systematic approach which guarantees a broadly diversified portfolio with minimal concentration risk. For example, in June 2021, the top 10 holdings in the fund’s portfolio represented 5% of assets, while the Morningstar category average for high yield bonds was 15%.
Analysts Nicholas Goralka, Sam Kulahan, Benjamin Joseph, and Neal Kosciulek provided the research behind this segment.