In this era of historically low interest rates, most money market funds have been offering little-to-no yield to investors. Yet money market funds have traditionally been a popular place for investors to park their assets before moving them into stock or bond investments.
For your clients who may be rolling over their retirement fund assets during this uncertain economic environment, Thrivent Limited Maturity Bond Fund – Class S (THLIX) might offer better return potential as a placeholder for those dollars – particularly if you plan to move those assets gradually into bond or equity funds through dollar cost averaging.
Although the Thrivent Limited Maturity Bond Fund does entail credit, duration, and interest rate risk, those risks tend to be less than other bond funds but more than a money market fund. Unlike a money market fund, this fund has a variable Net Asset Value (NAV) so the share price may go up or down especially in periods of market volatility. The Fund holdings are very short duration instruments that carry low interest-rate risk. The Fund recently offered a 12-month distribution yield of 1.59% and a 30-day SEC yield of 3.33%1 (Rates are as of June 30, 2022). (See current rate)
The Fund invests primarily in investment-grade corporate bonds, government bonds, asset-backed securities, mortgage-backed securities and collateralized debt obligations. It may also invest a portion of assets in foreign securities. The portfolio enhances yield with a diversified portfolio including securitized debt, such as government-guaranteed residential mortgage-backed securities and high-quality structured securities with underlying assets such as corporate and student loans.
While the principal of the Fund may experience some volatility due to fluctuations in the interest rate environment, its shorter duration makes the Fund less sensitive to interest rate changes than some longer-duration funds. As a result, the Fund may be appropriate for an investor who is seeking the opportunity to generate a modest level of income (with some investment risk), but with less interest rate risk and a lower return potential than most longer-term bond funds.
Comparing performance during a similar environment
In a period of rising rates, investors are often advised to lower the duration of their fixed income portfolio. This is because duration measures the extent to which bond prices increase or decrease with movements in interest rates, which is an inverse relationship. In other words, the value of a 10-year bond might be affected more by rising market interest rates than that of a 1-year or 2-year bond.
However, it is also important to keep in mind that portfolios with higher durations tend to offer higher yields. Therefore, one cannot assume that having a lower duration in a period of rising rates will lead to outperformance. A portfolio with a lower yield, such as a money market fund, may still underperform a longer duration fund if the longer duration fund is generating a higher yield and does not put capital at jeopardy through higher default risk.
While interest rates are rising more quickly today than we have seen in recent years, we can look to the period between December 2015 – December 2018 to see how both funds performed in a recent period of rising interest rates driven by Federal Reserve rate increases. The performance figures exclude dividends and reflect net asset value performance only: