Introducing American Funds Strategic Bond FundSM

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  • 08 mins 06 secs
Portfolio Managers David Hoag, Damien McCann and Ritchie Tuazon discuss the interest rate strategy and credit research that characterize the newly introduced American Funds Strategic Bond FundSM.

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2018 Outlook featuring Liz Claman
American Funds video transcript: “Introducing American Funds Strategic Bond FundSM

Dan Indiviglio: I’m Dan Indiviglio, a senior writer at Capital Group, and I’m here today with the portfolio managers for American Funds Strategic Bond Fund: Ritchie Tuazon, David Hoag and Damien McCann.

How would you describe the fund, David?

David Hoag: American Funds Strategic Bond Fund is a flexible core bond fund. We reference the Barclay’s Aggregate as our index, and we strive to beat the index using interest rate strategies such as duration management, curve management to achieve excess returns. Therefore, we believe that this fund can get those excess returns with a low correlation to equity markets.

Dan Indiviglio: Damien, what is credit’s role in the Strategic Bond Fund?

Damien McCann: We like to describe the strategy as “majoring in rates and minoring in credit.” Credit is a very important part of the strategy but it’s not the primary focus. If you think about our excess returns, we would expect 50% to 60% of excess returns to come from rate strategies, maybe about a third to come from credit. And then, within credit, we’re investing both in investment-grade and high-yield securities, relying on the investment recommendations of our team of credit analysts that covers the globe. But we’re more focused on investment grade than we are high yield, and we also have flexibility across developed and emerging markets. We’re more focused on developed markets than we are emerging markets.

Dan Indiviglio: Given that American Funds has such a strong credit research group, why isn’t this fund majoring in credit?

Ritchie Tuazon: I think one thing that is not as well-known to the public is that American Funds also has very good interest rate and inflation research. We have a process set in place that has has been proven to do well across our interest rate-sensitive funds, such as American Funds Mortgage Fund®, American Funds [U.S.] Government [Securities] Fund®. And so that proven research has allowed us to really feel confident that we can take more of our risk in interest rate duration and curve and inflation, which in turn allows us to provide a fund that has a low or negative correlation to equities.

Dan Indiviglio: Why does this fund focus on total return instead of income?

David Hoag: As we’ve described, interest rates are low, and so achieving income is a difficult thing. And what I’ve found [is] that, over time, when income becomes too strong a signal for a portfolio manager, it can dictate, perhaps, what they’ll do in a portfolio. It can sometimes channel someone toward owning high-yield securities even when they may not really love the high-yield market, but they need to do it for its income.

So we can go out and get those income opportunities when we think the valuations are great. And when valuations aren’t attractive, we can go ahead and lower our income by shifting into safer assets. So it really does create a lot more flexibility to not be constrained by income.

Dan Indiviglio: How do the portfolio managers work together in this fund and complement one another?

David Hoag: We all work very closely together. Physically, we’re all within about 15 feet of each other, and we’re communicating all the time: bringing ideas to each other; fielding them from various areas within fixed income; and discussing how they might fit into the portfolio and the sizing, etc.

My background as a generalist portfolio manager in the number of different areas within fixed income leads to my role of bringing the three of us together in talking about broader themes. Damien’s experience relies more on credit, particularly corporate credit, and so he brings that to the table. And then Ritchie has a wealth of experience around rates and inflation, and so he brings that experience to the team also.

Dan Indiviglio: How would you characterize the differences between the Strategic Bond Fund and other flexible multisector funds out there in the market?

Ritchie Tuazon: I think the biggest differentiator between Strategic Bond Fund and a lot of other multi-sector funds is we have an explicit goal to have a low-to-negative correlation to equities. I think when you look at the universe, you’ll see that high-yield correlation is probably upwards of 50%. The correlation to equities is clearly positive, and we’re trying to achieve similar returns without that correlation.

Dan Indiviglio: What market trends make Strategic Bond Fund particularly attractive at this juncture?

Ritchie Tuazon: I think right now, because interest rates are so low, a lot of bond investors are looking at total returns of something like 2% per year. And a lot of people that want to own bond funds but need higher return targets are looking at their alternatives. What this fund is able to do is, in most years throughout a cycle, provide those types of returns without a high correlation to equities. In fact, we strive for a low-to-negative correlation to equities. And we feel like that’s something that’s really going to provide a lot of value for a lot of people that are relying on fixed income.

Dan Indiviglio: How do you think about liquidity for the fund?

David Hoag: Markets have been a little fickle lately with respect to liquidity. Generally speaking, balance sheets are down for Wall Street, so liquidity is generally more difficult. And in fact, we’ve had a fairly stressful period recently with some high-yield funds where liquidity became a real issue.

Ritchie Tuazon: Liquidity is something we’re very comfortable with in American Funds Strategic Bond Fund. About 50% of our holdings are in liquid government securities. So we feel like, should the need ever arise to be more liquid, we’re sort of already there and we wouldn’t really have to change our way of investing, or we wouldn’t be forced to sell anything that we wouldn’t want to.

Damien McCann: Just to underscore Richie’s point about 50% of our assets, roughly, being in government securities, that’s a direct function of our focus on rates as a primary investment strategy. If you look at other funds in our category that have a high reliance on credit — and in particular, high-yield — almost by definition, we have a superior liquidity profile.

Dan Indiviglio: What is the non-U.S. positioning of the fund?

David Hoag: It will vary. We have flexibility to use non-U.S. securities where we see fit. So it tends to be fairly low. But when opportunities do arise for total return or income, we have that ability to own things outside the United States.

We will use some of those areas opportunistically. I wouldn’t say it’s a core strategy of the portfolio, but it’s available to us when opportunities arise.

Ritchie Tuazon: And that really allows us to take advantage of Capital’s global research department, which we have a lot of confidence in. They bring us a lot of great ideas that we’re filtering through every day.