Risk and opportunity in the core-plus bond space
by Brian Jacobsen, Wells Fargo Asset Management
Trouble and risk create potential opportunity for investors. Learn how Ashok Bhatia, CFA, and his team balance those factors in the Wells Fargo Core Plus Bond Fund.
Ashok Bhatia: Trouble and risk create opportunity, and our job on the portfolio management team is to know how to balance those two.
Brian Jacobsen: That’s Ashok Bhatia, manager of the Wells Fargo Core Plus Bond Fund. I’m Brian Jacobsen. And you are On the Trading Desk. Ashok joined us to explain how balancing trouble and risk translates into return potential for investors. To get a sense of where the team seeks opportunity, he defines the core and the plus of the fund he runs.
Ashok: The core part of the strategy is a minimum 65% of the portfolio’s assets and is focused on U.S. Treasuries, mortgage securities, investment-grade corporates, and some municipal bonds. And the objective of that part of the portfolio is to provide that traditional fixed-income return profile. And, for this fund, there are six categories of plus assets. One is U.S. high yield, second is European investment-grade credit, third is European high-yield credit, fourth is emerging markets securities, fifth is currencies, and then sixth is global government bonds. And so we take those six sectors and decide within that 35% what the best sectors are that we should be allocating to, to potentially add higher income and total expect to returns.
Brian: And that brings us back to Ashok’s views on how trouble, risk, and dislocations in the global markets create opportunity.
Ashok: So what really helps us is when there are dislocations, when there’s volatility in all of these global markets—you know, Brexit, some of the fears about emerging markets, some of the fears about China. Those types of events, while they can create risk, also can create some opportunity for us because of our investment mandate—we’re allowed to look at some of those dislocations, these potential opportunities, to add investments to the fund that we think can, over time, generate a higher yield and a higher potential return.
Brian: And looking out in the next six months, he points to three key areas of focus for the team.
Ashok: And if you just take a quick step back, one of the things we really focus on in the product is to understand the macroeconomic environment—where we think we are now, in the United States, key regions of the world, and the overall globe. And one of our key views right now is that we think the second half of this year is going to be a little bit better growth environment for the U.S., but importantly, it’s going to be a better growth environment for emerging markets. We’re seeing stability and even moderate improvement out of China, for example, and out of some of the bigger emerging markets countries like Brazil and Mexico. The second area we’ve been focused on is some municipal types of risk. There have been some special situations that we think are in the process of turning, of getting a little bit better, and there are both attractive yields and attractive total return opportunities there as well. And then the final area we’ve rotated a little bit of capital into is European fixed income—Brexit and events around that have been a big headline, but we do think that has created some attractive opportunities for an investor who has an intermediate-term holding for, again, additional income as well as additional total return.
Brian: Ashok mentioned he and the team look out about six months when they’re finding ideas and making decisions for the portfolio—there’s sound reason for that.
Ashok: Why is that? These post-crises and all the things that have gone on—and so many of them have been very difficult to predict—that’s sort of a core reason that we think we’ve got good visibility over how the economy, our global economy, is going to develop over the next six months, and we want to orient our investment strategy around that.
Brian: As a key takeaway, Ashok wanted to remind investors how he believes he and the team can help investors rise above the headlines.
Ashok: You know, on the question in general about risk, I think one thing that’s important just to keep in mind is since the financial crisis, we have lived through periods and pockets of very high volatility all over and we’ve seen it with the Equity Flash Crash, the U.S. interest-rate crash, multiple fears that the European Union is going to disintegrate, China currency policy, elections, Greece leaving the E.U.—I mean, one could go on for a long period of time. So you know our view is that these pockets of high volatility, these risks, they’re not going away; if anything, they’re likely to increase. They occur because we’re in a slow-growth world, and when we’re in a slow-growth world, shocks have a disproportionate effect on the financial system. But, you know, our process and belief is that we are in a position to manage around those, to know which shocks are real and that we need to react and which are creating those opportunities.
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