Debbie Carlson
2 min read
U.S. economic fundamentals are solid, but there is a high degree of uncertainty surrounding macroeconomic policy outcomes, and that could start to weigh on business and consumer confidence, said Chit Purani, fixed-income portfolio manager on the $2.3 billion Capital Group Core Bond (CGCB) exchange-traded fund.
Despite the April equity market selloff, spreads between equities and fixed-income credit have fully recovered their post-tariff rollout weakness, he said, leaving little margin for error for risk assets, as market volatility is likely to persist. With yields above 5%, that makes fixed income attractive, he added.
The mission for the actively managed CGCB is to deliver a consistent pattern of excess returns versus a passive index. The managers can use a diverse set of levers to achieve those returns, but it also has a high-quality mandate to purchase no below-investment-grade bonds. This year, CGCB has seen $659 million in flows and has a yield of 5.68%.
Along with the higher macroeconomic uncertainty, Purani said the team expects greater dispersion across the credit-quality spectrum and in different parts of the yield curve in different regions.
“I wouldn't say it makes me nervous, but it's more about focusing on where we believe we're getting paid for the risks in multiple scenarios, whereas broadly speaking, market beta seems to be priced fairly optimistically,” he said.
CGCB has a 37% weight in investment-grade corporate bonds, which may suggest the fund is taking on more credit risk than peers, but Purani said the details matter.
The fund is positioned with higher-quality bias across sectors, allowing them to reduce the sensitivity of the portfolio to potential credit spread volatility without giving up much spread income.
“We're actually taking a more defensive stance in the corporate bond space by virtue of having shorter maturity and higher quality corporate bonds in the portfolio,” he said.
Examples of how they are structuring the portfolio include emphasizing agency mortgage-backed securities and high-quality securitized products while de-emphasizing longer-maturity corporate sectors and issuers with a higher degree of cyclicality.
“Irrespective of the market value overweight that you may be seeing, the effective risk is more defensive when you look at the corporate carve-out of our portfolio relative to a typical index,” he said.
Among those higher-quality corporate sectors are more defensive industries, such as pharmaceuticals and utilities, all with an eye to bottom-up security selection.
