Bond Update – June 2021

Three months ago, we wrote to you about updates to your bond portfolio that increased diversification and flexibility to better navigate the changing dynamics of the bond market, such as rate movements, changes in spreads, and inflation. Those changes were implemented and, thus far, have been additive as your bond portfolio has outpaced the market.

Even as we adjusted your bond portfolio in March, the BDF Investment Committee continued to research other opportunities in the fixed income space, especially as we expected the bond market to remain dynamic for the foreseeable future. The Federal Reserve has steadfastly kept short-term rates near 0% and continues to provide ongoing liquidity to the market through quantitative easing. At the same time, concerns about inflation have pushed longer-term interest rates up. The need for a flexible approach to fixed income is still of utmost importance.

With that in mind, we will replace JPMorgan Strategic Income (JSOSX) with Performance Trust Strategic Bond (PTIAX).

• We have had our eye on Performance Trust for quite some time and have been impressed by their team and unique investment approach. Since JPMorgan Strategic Income has been part of BDF’s bond strategy for a long time, we do not take its replacement lightly. It has been a good performer and has played an important role in the multi-sector portion of your bond portfolio. However, we believe that Performance Trust’s investment philosophy, diversification, and low correlation to stocks make it a better fit for our bond strategy going forward.

• JPMorgan Strategic Income has historically taken on a large allocation to cash, anchored by very strong macro-level convictions about the direction of interest rates and the bond market in general. Performance Trust, by contrast, takes a much more bottoms-up approach to investing. They are generally agnostic towards interest rates and instead use shape management to determine how to allocate across the bond market. Shape management is a way to model how each area of the bond market, or each specific bond, will respond to interest rate movements (up or down) each day. Performance Trust can then put together a group of bonds that complement each other in a portfolio, with some playing offense (generating higher yields) and others playing defense (reducing portfolio risk). By using shape management, Performance Trust can capture opportunities (underpriced and mispriced securities) in the market and achieve a higher yield than JPMorgan’s approach while maintaining good credit quality overall.

• Performance Trust Strategic Income is also an excellent complement to PIMCO Income and BlackRock Strategic Income, which are the other multi-sector bond funds in our strategy. PIMCO and BlackRock take a top-down approach to investing. Performance Trust also has a much lower correlation to stocks than PIMCO and BlackRock, and therefore is an effective diversifier against the risk and volatility of equities.

We will implement this update in the next week. As we do, we will take into consideration any of your unique circumstances. Since we utilize asset placement to enhance your after-tax return, the updates may impact tax-deferred accounts, taxable accounts, or both depending on what makes the most sense for you.

For additional insights, please click on the video below discussing this portfolio update.