A tactical approach to fixed income investing

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Coming up, the portfolio manager of Thrivent Income Fund gives his insights into how a nimble approach to fixed-income investing sets the Fund apart from its peers.

From Thrivent Asset Management, welcome to Advisor’s Market360™. A podcast for you, the driven financial advisor.

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It wasn’t too long ago that many fixed-income investments were not very attractive in terms of yield and upside potential. In the wake of the pandemic, income investors had to search far and wide for yield, often taking on additional risk. Then, around a year ago, the Federal Reserve, or Fed, began its long series of rate hikes. The fixed-income market has changed, and attention has swung back towards funds such as Thrivent Income Fund. So, to take an in-depth look at the Fund, we invited Thrivent Asset Management’s very own Kent White, CFA, vice president of fixed-income mutual funds, to offer some insights. 

Listen on as we discuss the market conditions that impact the Fund, followed by a glimpse into how the Fund is constructed and finally White’s perspective on how Thrivent’s investment team stands apart from the rest.

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We first wanted to get a clear understanding of Thrivent Income Fund’s objective.

“[Thrivent Income Fund’s] primary objective is to seek high current income with a focus on preserving capital. And secondarily, we want to obtain long-term growth of capital, which is helpful to maintain our investors’ purchasing power in an inflation environment like the one we're currently in.”

After seeing an increased demand for intermediate and longer maturity bond funds, we wanted to get White’s opinion on what’s driving this demand.

“The primary driver of the increased demand in intermediate and longer-term maturity bond funds has really been the increase in yields that we've seen since the Fed began raising rates. The yield on the benchmark, Bloomberg Corporate Bond Index, is currently about 5.5%. That's the highest we've seen since 2009.”

The index White referred to, the Bloomberg U.S. Corporate Bond Index, measures the investment-grade, fixed-rate, U.S. taxable corporate bond market.

Higher yields have been a boon to Thrivent Income Fund. White elaborates:

“So, it's really drawn a lot of capital into the fixed-income world. And really, in the broader market, too, we're also seeing a lot of inflows that have been really supportive of corporate bonds, from pension funds, insurance companies, and these flows have been really supportive for the asset class as well.”

Does White expect that this demand for intermediate and long maturity bonds will continue?

“We do believe that the demand for quality fixed-income assets is sustainable primarily for the attractive yields that are still on offer and that we believe are likely to persist, at least for the intermediate term, barring a deeper downturn than we are currently expecting. We might be nearing the end of the Fed hiking cycle, but we believe that rates will probably remain elevated for a little while unless we find ourselves in a really weak economic environment.”

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The resurgence of bonds and bond funds may also be helping the 60/40 portfolio make a comeback. As covered in a previous episode, the classic 60 percent equity, 40 percent fixed income approach to portfolio allocation was troubled in recent times. But now, White offers his take on whether or not this portfolio structure is, indeed, back. 

“I definitely believe that the 60/40 portfolios have come back in favor. It was really out of favor for quite a long time, and that's because we were in such a very low rate environment that you didn't have the upside. Like when, say, for example, when equities sell off, what was attractive to the 60/40 portfolio was the ability of fixed income to rally and prices to increases as interest rates decreased. When we're in a near-zero interest rate environment, that part of the 60/40 asset allocation was not working. It didn't have the upside. So, [there was] very low yield and very little upside to the price component of high-quality fixed income.”

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Next, we wanted to understand how White evaluates potential fixed-income securities in Thrivent Income Fund. Specifically, we wanted his take on investment-grade and high-yield exposure and how he manages those through rate cycles.

“Investment-grade corporate bonds is the primary asset class that the Income Fund invests in. They’re the highest-quality tier of corporate bonds. With the economy potentially heading into a weak spot or soft stretch as the Fed continues to tighten, you generally want to be positioned in higher-quality assets, and investment-grade corporates are that asset within fixed income.

“We've actually been bringing down our high-yield exposure throughout the year, particularly into the summer rally that we've seen, and our high-yield exposure is as low as it's been since the pandemic. We're no longer finding valuations there as compelling as they were, and we’d rather wait for a better entry point in the credit cycle before we begin increasing our exposure to high yield again.”

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There are a lot of income funds out there and, as White sees it, there’s a lack of diversification in many of Thrivent Income Fund’s peers. The Fund has had consistent performance, and its diversification plays a role in that – but what else makes the Fund unique? We asked White about the secret sauce.

“Within our peer group, I think we've got a little bit more of a flexible or tactical approach than some of our peers do. We have the ability – and it's one of our core competencies – I think what's really attractive about the Income Fund is that we can move in and out of different asset classes, whether it's investment-grade corporates, U.S. Treasuries, high-yield debt, preferreds, and securitized, like mortgage-backed securities. I think that might differentiate us a little bit from some of the peer group.

“The peer group is very different. We've got a lot of different funds in there – none of them really look the same. But I think that what sets us apart is that we can move in and out of all these different asset classes. And we have great teams here at Thrivent that are experts in all of these areas, including emerging market debt, when we find those asset classes attractive.

“We've got a really collaborative culture, and the PMs and directors in those areas will let us know that they're finding growth or value in those asset classes more attractive than they had been, and we can shift things around depending on what our outlook is on the economy and where we're at with our outlook for risk.”

After White described the Fund’s nimble and flexible investment approach, we wanted to know how these elements helped to drive performance or if other factors come into play.

“Well, we talked a little bit about the research process, but that is really the foundation of the Income Fund’s success and long-term track record, which it does have a very long history of success – very few years over the last 15 years where we've been below median. And the primary source of that alpha has been security selection.

“We have a great analyst team. They know their industries; they know their credits. And this bottom-up research process is where we get all our ideas. And that has really, really driven the performance over time.

“The other aspect, too, that has been very beneficial for performance is this ability to move in and out of asset classes – this flexible investment approach that we've talked about, where we can move into and out of high yield, for example, when we find valuations attractive, or if it fits within our macro-economic outlook.”

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Another way in which the Fund can be tactical is in its duration positioning. We asked White how the Fund manages duration risk to boost performance and manage risk, especially in the later stages of a Fed rate-hiking cycle.

“Duration positioning is not the primary driver of alpha for the Income Fund, but we do actively position the Fund for where we believe rates are heading in the future.

“At this point, we believe the Fed is nearing the end of its rate hiking cycle – might still have a little bit more to do to get inflation and the labor markets in better balance. So, we've been positioned for higher rates throughout the year, but we're really looking for things like the consumer to weaken, labor markets to begin to soften up, and some further signs that inflation is starting to cool. And at that point, we'll begin to really explore the idea of lengthening our duration position.”

Looking at the history of Thrivent Income Fund, it has been less volatile than its index. We asked White about the ways the Fund dampens volatility.

“Volatility is definitely something we pay a lot of attention to. We're really focused on risk-adjusted returns and trying to keep our volatility down. And we've got a long history of having below or average risk and above average return, risk adjusted.

“So, the way that we have been able to do that is this flexible approach that we were just talking about. It's been very conducive to lowering volatility as we kind of find that we can move tactically between asset classes and invest in higher volatility assets when we find them attractive and lower volatility assets when we don't.

“We've always had a very solid understanding of where risk is in our portfolios and whether that risk is being priced correctly. If we get that right and adjust our portfolios accordingly, that is a big lever that we can pull to dampen volatility.”

An easy trap to fall into is thinking that volatility is only about downward movement. But really, it’s about huge peaks and valleys in performance. We asked White how the Fund remains so consistently, well, consistent when compared to its peer group.

“Yeah, avoiding that type of volatility really does contribute to your long-term performance. Investors don't like to see us up top at the 10th percentile and then down at the 90th percentile, because frequently that's what happens.

“So, when we find ourselves at that level, like right now – the Income Fund is actually doing quite well within its Morningstar peer group – then you have to really ask a lot of questions. How are we positioned versus our peer group? What's been driving that performance? Are we comfortable with how we're positioned? And if not, those are the types of things we talked about. How do we adjust for that? And maybe we own a little bit more high yield, for example, than we thought we did, and that's been working, and do we expect it to continue to work?

“So, having a good handle on our peer group does help, especially using the Morningstar data, [to see] where we're positioned within that peer group. You can just look at the peer group and see these funds that do have quite a lot of volatility. And that's not something that – especially in fixed income – that most investors want to see. They like steady performance, and we can deliver that by knowing how we're positioned and where our bets are, and make sure that we're comfortable with them.”

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We wanted to get a better understanding of how Thrivent, and specifically, its culture is beneficial to White and his team.

“I think the thing that makes Thrivent a unique place to work and a really rewarding place to work is that it has a very mission-driven environment and corporate culture. And because of that, I really do feel like the work that we do on a day-to-day basis actually means something more than it might otherwise if I had worked at a big public company doing the same thing. So, at the end of the day, I really do feel like we're closer to our investors and making a difference in their lives.”

Digging deeper, we asked about his team’s autonomy in contrast to subscribing to a view coming from the top down.

“No, we don't have a prescribed top-down mandate from anyone. We all collaborate and share views, but each portfolio manager has their own views and managing their portfolio accordingly. There's a lot of autonomy that we have here, and there's a lot of autonomy at the research analyst level, too. They are doing their work and it's all part of the team.

“That's what I love about this – it’s all team based. We've got research analysts that know their industries, know their credits. They're actively feeding ideas and their recommendations into our portfolios, and we act on those. They're an integral part of our research process. We also have a lot of conversations about where we think rates are going or the economy is going.

“So, it's a very collaborative process between research analysts, our PM team, and our trading desk, for example. So, it's very, very interesting to be able to work like that. We don't have PMs that are off doing their own thing without a team that is supporting them.”

Whenever we get the opportunity, we like to learn a little about the people behind the funds. We asked White about his hobbies and how they might contribute to his skills as a money manager.

“When I do have time, I really enjoy reading. I think that one of the things that makes a good investor is curiosity, and I like to see people that read in our group. It broadens your horizon and the way you think about the world. And things are changing so rapidly all the time, and we’re trying to keep on top of that change.

“So, reading would be probably the best use of my free time outside of spending time with my family. I have kids – my last one is going off to college here soon. So, I have to find a few more hobbies, I think, to keep us busy.”

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We hope you found this deep dive on Thrivent Income Fund insightful. A special thanks to Kent White for the guided tour. More episodes of Advisor’s Market360™ are available wherever you listen to podcasts. Email us at podcast@thriventfunds.com with your feedback, questions and topic suggestions for future episodes. And as always, you can learn more about us at thriventfunds.com and find other insights of interest to you, the driven financial advisor. Bye for now.

(Disclosures)

All information and representations herein are as of July 26, 2023, unless otherwise noted.

Past performance is not necessarily indicative of future results.

Investing involves risks, including the possible loss of principal. The prospectus and summary prospectus contain more complete information on the investment objectives, risks, charges and expenses of the fund, and other information, which investors should read and consider carefully before investing. Prospectuses and summary prospectuses are available at thriventfunds.com or by calling 800-521-5308.

There are some risks involved when investing in the fund. Debt securities are subject to risks such as declining prices during periods of rising interest rates and credit risk, or the risk that an issuer may not pay its debt. The Adviser's assessment of investments may prove incorrect, resulting in losses or poor performance. These and other risks are described in the prospectus.

Any indexes discussed are unmanaged and do not reflect the typical costs of investing. Investors cannot invest directly in an index.

©2023 Morningstar, Inc. All rights reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3), is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.

Actual investment decisions made by Thrivent Asset Management, LLC will not necessarily reflect the views expressed. This information should not be considered investment advice or a recommendation of any particular security, strategy or product. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.

Thrivent Asset Management, a division of Thrivent, offers financial professionals a variety of investment products to help meet their clients’ needs. Thrivent Distributors, LLC is a member of FINRA and SIPC and a subsidiary of Thrivent, the marketing name for Thrivent Financial for Lutherans.