I’ve always been a big fan of actively managed bond funds as a way for investors to access risk-managed or alpha-generating strategies. Unlike active stock pickers, the best managers from the likes of PIMCO, DoubleLine, Guggenheim and Loomis Sayles have proven track records of adding value for their investors versus a passive benchmark. Fixed-income is still one of those asset classes where sector positioning, duration targeting and credit selection can make a huge impact on net returns.
Look back through my blog and you will see numerous references to some of my favorite funds like the DoubleLine Total Return Bond Fund (MUTF:DBLTX) or the PIMCO Income Fund (MUTF:PONDX). We have owned both for our clients and in our own accounts for years.
Both funds have proven to be worthy alternatives to well-known indexes such as the iShares Barclays Aggregate Bond Fund (NYSEARCA:AGG) or the Vanguard Total Bond Market ETF (NYSEARCA:BND). Lower volatility, better yields and more attractive net returns are just some of the highlights from these active bond funds since their inception.
That said, I’m constantly on the lookout for top-tier bond managers that make the leap to exchange-traded funds. This move typically brings with it lower management fees for investors along with the capability to access a capable and proven portfolio.
It’s this vigilance that brought the First Trust TCW Opportunistic Fixed Income ETF (NASDAQ:FIXD) onto my radar several months ago. This fund was released on the First Trust platform with TCW Investment Management as the sub-advisor. For those who may not be aware, TCW is a West Coast fixed-income manager that has been in existence since 1971 and has nearly $200 billion under management. Its managers have been around the block and know their stuff.
FIXD is an actively managed ETF that seeks to invest primarily in corporate and government investment-grade debt with the capability to carry some high-yield and floating-rate securities. It can also own derivatives (futures or swaps) to help reduce volatility or control specific risks. The benchmark they are seeking to beat is the Barclays U.S. Aggregate Bond Index and that the expected average duration of the portfolio will likely be within one year of the index.
Interpretation: We want to beat the benchmark, but we aren’t going to take insane bets that deviate too far from the expected return of a broadly diversified bond portfolio.
They envision this fund to be a potential core holding or even a supplementary tactical option in more sophisticated portfolios. The FIXD net expense ratio is listed at 0.55% — basically, right in line with what PIMCO and DoubleLine are charging.
Five months is far too early to pass judgement on the performance of FIXD. However, it has given the manager plenty of time to build out their portfolio, so we can peek at what they are up to. The current holdings number about 225 with an effective duration of 5.63 years and a 30-day SEC yield of 1.6%. Assets in FIXD have just passed $50 million to-date.
Clearly TCW is being a little more on the conservative side with over a third of the portfolio holdings having a duration of less than five years. The biggest allocation breakdowns are investment-grade credit (29.5%), Agency MBS (27%), and U.S. Government/Agency (26.9%) as of June 30.
After digging through some of the individual holdings, the makeup is pretty much what you would expect to find in a diversified bond fund. Plenty of U.S. Treasury, corporate bonds, and mortgage-backed securities. They also have some modest allocation to foreign holdings in Japanese Treasury Bills, as well as a small Treasury futures position.
The net composition is intriguing enough to set the fund apart from the index while still retaining overall correlation with the broad U.S. fixed-income market. It’s the type of fund that can quickly compete against the established players while seeking to carve out its own track record and message over time.
The Bottom Line for FIXD
FIXD is an instantly viable candidate for owners of actively managed bond portfolios to begin monitoring versus their existing holdings. While not necessarily breaking new ground in its approach, the fund is backed by a solid research and investment team just like its competitors. It may also offer a more attractive cost structure for owners of TCW open-ended mutual funds who want to covert some of their portfolio to ETFs.
My plan is to keep this fund as a permanent fixture on my watch list and begin regularly comparing its structure and management style to our existing holdings. If it develops enough notable benefits, it could ultimately end up as part of our portfolio makeup in the future.
David Fabian is Managing Partner and Chief Operations Officer of FMD Capital Management. At the time this article was written, subscribers to the Flexible Growth and Income Report owned shares of BOND. Clients of FMD Capital Management own shares of TOTL, DBLTX, and PONDX.