Nontraditional bond funds had a rough month in September, with the average fund in the category losing 1.04%, according to Morningstar. Funds in the category lost an average of 1.15% in the first nine months of 2015, and generated three-year annualized returns of only 0.84% through September 30, 2015. The long-anticipated reversal of the 35-year bull market for bonds has yet to come to pass (and may not for quite some time), and as U.S. Treasurys have rallied and credit spreads have widened, nontraditional bond funds – which often trade rate risk for credit risk – have suffered.
Top Performing Funds in September
Not all nontraditional bond funds lost ground last month, though. Standout performers included:
The Cedar Ridge Unconstrained Credit and Forward Credit Analysis Long/Short funds shared the top honors with one-month returns of +1.07%. The Robinson Tax Advantaged Income Fund gained 1.04%.
Over longer spans, the Forward fund, which is sub-advised by PIMCO, but was previously sub-advised by Cedar Ridge, has been a superior performer, gaining 3.54% for the year ending September 30, and posting positive returns over the past three and nine months, as well. The Cedar Ridge and Robinson funds, by contrast, had negative returns in the first nine months of the year, although the Robinson fund’s three-month and one-year returns were in the black, at +1.36% and +0.53%, respectively.
As of October 19, CRUMX, FLSIX, and ROBNX had respective assets under management (“AUM”) of $50.9 million, $102.1 million, and $54.8 million.
Worst Performing Funds in September
While the best-performing nontraditional bond funds managed to eke out modest gains in September, the worst performers suffered more substantial losses. The Highland Opportunistic Credit Fund’s (HNRAX) A-class shares fell 7.2% for the month, bringing its year-to-date and one-year losses to 14.16% and 20.03%, respectively, through September 30. As of October 19, the fund had $72.6 million in AUM.
The Fortress Long/Short Credit Fund (LPLIX) and PIMCO Floating Income Fund (PFIIX) fell 3.17% and 2.80%, respectively, in September. Both funds were down for the three-, nine-, and twelve-month periods ending September 30, although the PIMCO fund held onto positive-three year returns of an annualized 0.63%, and five-year returns of +1.82%. The Fortress fund is much smaller than its PIMCO counterpart, with the former at just $4.9 million in AUM as of October 19, while the latter had $644.2 million.
Nontraditional and Heterogeneous
According to the MPI Research Corner, nontraditional bond funds remain a “heterogeneous group.” The category includes so-called unconstrained, absolute return, long/short, strategic income, and flexible income funds, none of which are constrained by benchmarks, and thus are difficult to evaluate. The tremendous variance within the category also leads to a tremendous amount of performance dispersion, as seen by the 827 basis-point disparity between September’s best and worst performers. But according to MPI, the real difference between the best- and worst-performing nontraditional bond funds over the past two years has come down to two factors: Security selection and timing.
What’s in a name? Last month top performers boast labels of “unconstrained” and “long/short,” while the worst performer was a so-called “opportunistic” fund. Adding to the difficulty of analyzing nontraditional bond funds, their holdings are reported with a lag – and without benchmarks for guidance – looking at a fund’s holdings is one of the best ways to distinguish between funds in the category. The solution, in MPI’s view, is for investors to give “extra care to the quantitative due diligence processes and ongoing monitoring they employ when analyzing sophisticated nontraditional bond strategies.”
Past Performance does not necessarily predict future results.
Jason Seagraves and Meili Zeng contributed to this article.