Three names dominate the U.S.
world of bond investing - Jeffrey Gundlach, Dan Ivascyn and Scott Minerd. But
funds run by these star investors are lagging their respective benchmarks this
year.
The proximate cause for the
underperformance of these high-profile bond investors: the monstrous rally in
U.S. corporate bonds and Treasuries.
Investors had been feasting
on U.S.
corporate credit bonds for years, though recession fears and mounting
defaults late last year put an abrupt end to that. This year, the appetite for
U.S. corporate bonds picked up dramatically when investors’ views on the
economy began to improve and central banks became more accommodative.
U.S. corporate bonds have
posted a total return of 13.4% this year, measured by the Bank of America Merrill
Lynch US Corporate Bond Index, while year-to-date Treasury returns are up 8.1%,
according to an index compiled by Bloomberg and Barclays .
What’s more, a lack of
alternatives against the backdrop of ultra-low, even negative-yielding, debt
has made U.S. corporate bonds the natural destination for many investors. Some
95% of all investment-grade corporate debt in the world that has a positive
yield is in the United States, according to Bank of America Merrill Lynch.
All three investors – Gundlach, the chief
executive of DoubleLine Capital; Ivascyn, group chief investment officer of
Pacific Investment Management Co, known as Pimco; and Minerd, global chief
investment officer of Guggenheim Partners – have been underweight corporate
credit relative to their benchmarks.
But all three told Reuters
they can live with the underperformance because of the greater damage that they
see coming for corporate bonds.
“We have never owned a single
corporate bond in the Total Return Strategy dating back to 1993. Look it up,”
Gundlach said. “When corporate bonds become very overvalued, especially when
rates fall due to recession prospects increasing — well?” he added of why he
has avoided the asset class.
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