Quick Take: In a year when bonds have received an unprecedented amount of interest from stock market-weary investors — as well as delivered good returns — certain fixed-income portfolios have stood out from the pack. Among them is the TIAA-CREF Bond Plus Fund (TIPBX), which has greatly benefited from its exposure to U.S. Treasury-Inflation Protected Securities, otherwise known as TIPS.
For the year ended September 30, the fund has gained 8.50% while the average intermediate-term high-quality bond fund rose 6.73%. For the three-year period ended September 30, the fund delivered an average annualized return of 9.50%, versus 8.05% for its peers. The fund’s benchmark, the Lehman Brothers Aggregate Bond Index, gained 9.48% over that period.
Lisa Black, lead portfolio manager, has been on the $354-million fund since its inception in October 1997. Standard & Poor’s recently upgraded its rating on the fund to 5 stars from 4.
The Full Interview:
S&P: How do you construct the portfolio?
BLACK: We use our benchmark, the Lehman Brothers Aggregate Bond Index, as a starting point for asset allocation. However, we are not an `index fund’ per se. For example, we hold about 190 long-term securities, whereas the Index has about 6,600 securities.
S&P: What is your current asset allocation?
BLACK: As of the end of the third quarter, we had 33.2% of our assets in government securities, which includes both Treasuries and agencies, versus a figure of 34.6% for the Index; we had 34.5% in mortgage-backed securities, versus 37.7% for the Index; we had 27.9% in corporate bonds, versus 26.1% for the Index; and we had 3.8% in asset-backed securities, versus 1.6% for the Index. We also had a 0.6% position in cash.
Although these exposures don’t vary widely from the Index, these absolute percentage figures don’t fully reflect the nature of our holdings. For example, from a duration basis, we have a significant underweight in agency securities, an 8% overweight in corporate bonds, and a 15% underweight in mortgage-backed securities. Thus, we can deviate significantly from the benchmark.
S&P: What is your duration?
BLACK: We tend to keep the fund’s average duration within a very narrow range — that is, plus or minus 5% — relative to the Index. At the end of the third quarter, the fund’s duration was 3.8 years, versus 3.9 years for the Index. We make some bets around the yield curve. Most of the year we’ve had more of a `bullet’ portfolio as opposed to a `barbell’, heavily overweighted to the intermediate part of the curve.
S&P: What are your top individual holdings?
BLACK: As of September 30 our top ten holdings were: U.S. Treasury Inflation-Indexed, 01/15/07 (16.83%); U.S. Treasury Inflation-Indexed, 01/15/08 (4.72%); U.S. Treasury Bond, 05/15/10 (4.35%); GNMA TBA 10/15/31, (3.59%); Freddie Mac 08/01/32, (3.53%); FNMA TBA 11/25/31, (3.24%); FGLMC. 11/25/31 (2.70%); U.S. Treasury Bond, 05/15/30, (2.08%); FNMA, 07/01/32, (1.74%); and Freddie Mac, 07/01/32/ (1.71%).
S&P: Do you avoid high-yield bonds?
BLACK: By prospectus, we can purchase high-yield bonds. Our high-yield exposure has been as much as 8% in the past. Currently, we have less than 1% in high-yield bonds.
S&P: To what do you attribute your fund’s relative outperformance?