NEW YORK (Reuters) – Three names dominate the US world of bond investments – Jeffrey Gundlach, Dan Ivascyn and Scott Minerd. But funds run by these star investors are lagging behind their respective benchmarks this year.
FILE PHOTO: Jeffrey Gundlach, CEO of DoubleLine Capital LP, Presents at the 2019 Sohn Investment Conference in New York City, USA, May 6, 2019. REUTERS / Brendan McDermid / File Photo
The Causes of Underperformance these high-profile bond investors: the monstrous rise in US corporate bonds and government bonds.
Investors had been clinging on to US credit bonds in the United States for many years, although the recession and rising defaults late last year put a sudden end to it. This year, appetite for US corporate bonds increased dramatically as investors' views on the economy began to improve and central banks became more accommodating.
U.S. corporate bonds have had a combined return of 13.4% this year, measured by Bank of America Merrill Lynch's US corporate bond index, while the annual Treasury yield is up 8.1%, according to an index compiled by Bloomberg and Barclays.
In addition, the lack of alternatives against ultra lows, even negative returns, have made US corporate bonds the natural destination for many investors. About 95% of all investment-grade debt in the world with a positive return is in the US, according to Bank of America Merrill Lynch.
All three investors – Gundlach, CEO of DoubleLine Capital; Ivascyn, CEO of Pacific Investment Management Co., known as Pimco; and Minerd, global head of Guggenheim Partners – have been underweight in corporate credit relative to the benchmark portfolio.
But all three told Reuters that they could live with the underperformance because of the greater damage they see to the company's bonds.
"We never owned a single corporate bond in the Total Return Strategy from 1993. Look it up," Gundlach said. "When corporate bonds become very overvalued, especially when interest rates fall due to the downturn, well?" He added why he has avoided the asset class.
The DoubleLine Total Return Fund ( DBLTX.O ), with $ 54.5 billion in total assets, is up 6.17% this year, as of August 23, according to Morningstar data. It is lagging behind the Core-Plus Bond middle class by 2.50 percentage points, and is lagging 90 percent of its peers this year, according to Morningstar. The intermediate Core-Plus category invests mainly in U.S. interest rate problems including government, corporate and securities debt, and has total assets of $ 724 billion.
Gundlach said there will be times when his fund will be in favor and there will be times when it will be extremely popular. "Everyone knows what this fund is," he said. “You know what you're getting. There are no surprises. "
Ivascyn, which oversees $ 1.84 trillion in assets under management in Pimco as of June 30, shares Gundlach's sentiments. "We believe corporate credit is fundamentally weak and can outweigh the disadvantage if the economy deteriorates," he said.
The Pimco Income Fund ( PIMIX.O ), the largest actively managed bond fund, with a wealth of more than $ 130 billion, hangs after 93 percent of the Multisector Bond category so far this year, according to Morningstar data from August 23rd. The multisector category typically invests in US government bonds, US corporate bonds, foreign bonds and high yield US debt securities and has a wealth of $ 259 billion.
Minerds Guggenheim Total Return Bond Fund ( GIBIX.O ) holds 95% of the Intermediate Core-Plus Bond category so far this year, over the same period.
"As the Fed begins its easing campaign to try to extend an already long-term expansion, credit surcharges are already tight across the interest rate spectrum," Minerd said. "Credit spreads may be tighter in this liquidity-driven rally, but history has shown that the potential for expansion from this is much greater."
Gundlach, Ivascyn and Minerd have also played defense with their interest rates and kept their respective portfolios for a shorter duration.
Duration is a measure of a bond's sensitivity to interest rate fluctuations. Going shorter or negative duration is an investment strategy that is followed when interest rates are expected to rise.
"I have said this a thousand times … we always have shorter duration, "Gundlach said.
Finally, the three bond kings expect to win in the long run, as the economy weakens.
"We find that the yields on government bonds are too low and can easily reverse, so we are comfortable with low interest rate exposure," Ivascyn said.
Reporting by Jennifer Ablan; editing by Megan Davies and Leslie Adler