While most income funds are tethered largely to the bond market, the Thrivent Multidimensional Income Fund (TMLDX) draws from a wide range of income-oriented investments in search of greater diversity and potentially better returns.
“Roughly 55% of the portfolio is exposed to what we call ‘the alternatives,’ which would include preferred securities, convertible bonds, closed-end funds, and some opportunistic equities that have higher dividend yields or some fixed income-type characteristics,” explains Grant Whitehorn, CFA, Fund Portfolio Manager.
In addition to its alternative investments, the Fund also shoots for higher yields by allocating about 34% of its assets to high yielding corporate bonds.
With a greater weighting of equity-like holdings, capital appreciation plays a greater role in the Fund’s total return than it would with traditional income funds. “For instance, convertible bonds have some bond characteristics, as well as conversion features to participate in the equity upside,” explains Whitehorn. “So that does create the potential for some additional capital gains in the Fund.”
The combination of higher yielding bonds and alternative investments has played well in the market during the recent economic recovery, according to Whitehorn. “The higher yielding sectors of the fixed income market have done very well recently – over the last nine months in particular. The alternative sector has done well in terms of capital appreciation. And hybrid securities have also done well during the equity recovery.”
While the broader range of investment components in the Fund offers greater potential for higher returns, it also introduces some additional areas of volatility and risk. “We’re not as sensitive to interest rate swings as traditional fixed-income funds, but we have more equity-like risk, so we still experience some volatility in terms of both price movement and dividend uncertainty,” explained Whitehorn. “But there is a trade-off because we’re getting compensated with some additional income and yield potential.”
The closed-end fund portion of the portfolio also adds some liquidity risk, said Whitehorn, “but we try to balance that out by also owning some fixed income ETFs, which demonstrated good liquidity during the recent crisis. We also limit our overall exposure to the riskier sectors.”
As the economy returns to normal, can investors expect continued solid performance from the primary asset classes that make up the Fund’s portfolio?
“I think the economy is still in the recovery phase,” said Whitehorn, “but we may be getting to the late recovery phase. The Federal Reserve (Fed) is still being very accommodative with its monetary policy, people are getting back to work, and earnings and growth expectations appear to be very strong for the near term. As long as Fed policy remains accommodative, we should see some continued growth – and if that recovery and expansion continues, the Fund should participate in that growth.”
As the economic recovery evolves, Whitehorn and the Fund’s other two portfolio managers – Kent White, CFA, senior portfolio manager, and Gregory Anderson, CFA, senior portfolio manager – will continue to refine the allocation of the portfolio.
“One of the challenges of managing the Fund is looking at our expectations for economic recovery and growth and then balancing that with where we think we are in terms of asset prices,” explained Whitehorn.
“In allocating assets in the Fund, we try to determine if we’ve already captured most of the upside or potential future growth of any of our holdings and look for other asset classes or other investments that may represent more participation in future upside. Then we increase our allocation to those asset classes or investments that we feel have more potential for growth as the economic recovery continues.”
Now that the economy is ramping up, fears of rising inflation have been growing. Whitehorn believes that the Fed is willing to tolerate a modest rise in inflation before tightening its monetary policy. “The Fed is generally willing to let inflation run a little high, particularly considering how low inflation has been in the past.”
In the meantime, Whitehorn anticipates some temporary price spikes, especially in the commodities area. “We have seen some recent jumps in prices, such as lumber and building materials. Part of that is being driven by a sudden increase in demand as the economy recovers. We’re essentially making up for lost time. But I’m less concerned about those types of price spikes. I think a lot of that will normalize as we get back to normal in our economy. However, if inflation does get too high, I think the Fed will step in to tighten its monetary policy.”
If inflation does pick up, Whitehorn believes that the Fund will feel less of an impact than traditional fixed-income funds. “Inflation could be good for the equity-like assets we own.”
Interest rate swings
As the recovery unfolds, there’s heightened uncertainty over the direction that interest rates may take. While Whitehorn is aware that rates may rise, he believes the diversification of the portfolio may put the Fund in a better position to weather a rise in rates than most other income funds.
“One of the key differences between traditional fixed income funds and the Thrivent Multidimensional Fund is that because of our equity-like holdings, our portfolio is less sensitive to interest rate swings,” said Whitehorn. “Low interest rates are usually good for business growth. Although the Fed may ultimately need to raise rates, the Fund has low or moderate interest rate risk – particularly compared with the traditional fixed income funds. While a large jump in rates could affect the portfolio, I expect that the Fed will continue its accommodative policy of keeping rates under control for the foreseeable future.”
Even if interest rates do rise, Whitehorn believes the market may quickly adjust. “Yields may move higher, but the flow may be going to the high yield sector, which would help compress the spreads.”
The multidimensional make-up of the Fund may help buffer the effects of economic forces such as interest rates, taxes and inflation, while providing more opportunity for total return in a strong equity market than traditional fixed-income funds.
For more on the Fund, see Thrivent Multidimensional Income Fund.