On May 7, we spoke with Don Annino, a
portfolio specialist at Lord Abbett about the Short Duration Income Fund.
The fund attempts to maximize return by
investing across all bond market sectors including investment grade and high
yield corporates, mortgage, government, and asset backed securities while
keeping the fund’s duration (a measure of interest rate sensitivity) within a
1-3 year range.
Prior to 2007, the fund
could only invest in government backed securities. A mandate change in 2007 gave
the portfolio managers the flexibility to invest in these other areas of the
bond market. The two lead portfolio managers on the fund, Robert Lee and Andrew
O’Brien, have been working together for twelve years.
Since 2009, the fund has seen average
returns of around 4.5%, and has consistently outperformed Barclay’s 1-3 year
Government/Credit Bond Index.
The Short Duration Fund has seen a
huge influx of cash recently and now has assets that surpass $30 billion.
Even with assets at these levels, management
insists that they still have a lot of capacity.
The fund has few restrictions on
where in the bond market it can invest, going wherever it finds the best
relative value.
Currently the managers
are more focused on interest rate risk than credit risk.
That has led them to invest 35.5% of the
portfolio in Investment Grade Corporate bonds. High yield bonds are 14.5% of
the portfolio, down from 25% in 2010.
They think corporates could weather a
recession and find that most companies will not face significant refinancing
needs until 2015.
Commercial Mortgage-Backed Securities
make up 28% of the portfolio, down from 50% in 2008, an all-time high for the
fund. These CMBS include loans on retail, office space and hotels. Growth in
these sectors is tied to economy which continues to slowly recover. In
addition, 10.2% is invested in Agency Mortgage-Backs, most of which are 5 year
ARMs. Another 9% is invested in Asset Backed Securities (ABS), almost all with
AAA ratings. Assets backing these bonds include autos, credit cards, and a few
student loans, maturities are typically less than one year and the issues are
very liquid. The Fund has only 1% in cash (it has ranged from -1 to 2%) but
between the liquid ABS and the fund’s line of credit they believe they have
ample liquidity.
Going forward, Lord Abbett sees slow
growth- around 2% GDP. They are encouraged by the housing market and
discouraged by unemployment. They expect the Fed to continue its highly
accommodative monetary policy.
Consistent with the structure of the
portfolio, they believe that there is more risk of a major move in rates rather
than a collapse in credit. Management points out a number of potential risks that
could possibly cause losses similar to those of 2008. The biggest risk is
another scare that the Euro Zone will break apart. In addition, issues could
also arise if China sees another slowdown of their economy (with growth slowing
down to less than 6%).
At some point the
continued increase of the Federal Reserve’s balance sheet could also cause the
markets substantial concern.
We have started using this fund relatively recently in some
client portfolios. After our
conversation, we remain very comfortable with managements approach. The fund has
been very successful and has seen a huge inflow of assets recently. Still, the
management team believes they have tremendous capacity as they operate in a
very large and liquid part of the bond market.
Assistance on this post was provided by Ethan Xu
(Harvest Financial Partners owns this fund in client portfolios. The principals of Harvest Financial Partners own this fund in their personal portfolios. Positions may change at any time)
Posts
