May 4, 2005 — Bond funds are suffering cash outflows as investors become spooked by rising interest rates in the U.S. But some fixed-income fund managers can minimize losses, and even find positive returns by diversifying their assets with an array of bond issues from around the globe.
Multi-sector bond funds have several advantages over regular fixed-income portfolios: They can invest across the broad spectrum of bond asset classes in allocations that reflect the portfolio manager’s expectations for relative outperformance, as well as his risk-reward perspective. The Putnam Diversified Income Trust/A (PDINX) is such a fund.
The $5-billion portfolio gained 5.61% for the one-year period ended March 31, 2005, versus a return of 5.32% for its fixed-income global multi-sector fund peers. For the three-year period, the portfolio registered an annualized return of 10.70%, edging out similar funds, which climbed 10.35%. For the five-year period, the portfolio just surpassed its peers again, rising 7.31%, versus 7.21% for the average global multi-sector bond fund.
Boston-based D. William Kohli supervises a team of portfolio specialists — Rob A. Bloemker, Jeffrey A. Kaufman, Paul D. Scanlon and David Waldman — who help construct the portfolio. Choosing from a long menu of fixed-income securities — primarily investment-grade bonds, high-yield corporate bonds and foreign bonds — the fund managers determine an appropriate asset-allocation profile based on, among other factors, the outlook for interest rates, and the relative attractiveness of various bond sectors. After that, individual security selection is strictly a bottom-up affair.
“From a multi-sector perspective, our fund has done well because we have adhered to a defensive posture in the high-yield market, in emerging markets bonds, and with respect to duration,” said portfolio leader Kohli. “Regardless of market environment, our basic philosophy lies with broad-based asset allocation. We want as many sources of ongoing returns as possible so no one particular event or development can damage the fund’s overall performance. Whether or not rates keep rising or credit spreads widen, our defensive, diversified strategy will protect us from downside.”
The fund has shown below-average volatility recently, and below-average turnover relative to its peers. The expense ratio on the portfolio is 0.95%, is also below the peer group average of 1.32%. In addition, the fund recently reduced its front-end load to 3.75% from 4.50%. By geography, U.S. bonds represented the lion’s share of the fund’s assets (77.3%) as of March 31, 2005. The remaining assets were spread across 32 different foreign nations, both developed and emerging, with no individual foreign market accounting for more than 3.4% of total assets. Kohli explained that while many overseas bond markets can provide rich returns, some of their illiquidity, volatility and fragile credits makes broad diversification an imperative.