That “flexible and opportunistic” approach combined with investments in only “high-conviction ideas” led the fund to a 12.52% gain in 2020 compared with 9.2% for its benchmark, according to Envestnet.
Those gains are even more impressive given that the fund was underperforming its benchmark by 11% in the first quarter of 2020. Needless to say, it far outperformed its benchmark and peers in the remaining three quarters.
Envestnet credits the firm’s “deep and experienced team that has been implementing the same investment process over a number of decades,” which has led to “exemplary” long-term performance on an absolute and risk-adjusted basis.
They add that “the fund’s elevated risk profile can lead [to] bouts of significant short-term underperformance, with 2020 being a perfect example.” Those differences “underscore the importance of a long-term investment horizon with this strategy.”
In the long term, the fund has placed in the top quartile for absolute returns for almost 70% of rolling three-year periods since its inception in late 2006.
Hoffman describes that management as buying money — or rather, buying the future return on money, which consists of interest rate return and real yield spread return for corporate bonds and currencies that may appreciate or depreciate. “We manage uncertainty,” he says. “When there is a lot of uncertainty, there’s almost always a lot of value.”
He says the fund tries to isolate three major risks in the bond market: duration, credit risk and currency risk, which it sometimes hedges, and looks for relatively high growth rates around the world.
It starts with a top-down analysis of the fundamentals of different countries, looking for value. “The higher the real yield — the spread between yield and inflation — the more potential value there is. But you have to adjust for the quality of a country,” Hoffman explains.
The fund looks to identify pricing anomalies across countries, sectors and currencies, a minimum average portfolio credit quality of A- or better and an effective duration of one to 10 years. It aims to beat its benchmark target by at least 2%, and it has achieved a 3.5% excess gain for 25 years, he says. Turnover averages about 50% a year.
The fund typically holds 10 to 30 positions, but that can rise if it holds more corporate and mortgage securities. The portfolio now has about 30 positions, a duration of 2.3 years, which is a measure of its sensitivity to interest rate changes and far below the 8.5 duration of the FTSE World Government Bond Index and the almost 10-year duration of the fund in mid-2020, Hoffman points out.
At the end of March 2021, nearly 60% of the portfolio was in U.S. securities, including cash, but it also owned fixed-income securities from Mexico, South Africa, Malaysia, Colombia, Brazil, Indonesia, Australia, Canada and Poland.
Hoffman, who manages the fund with four other portfolio managers, says that in addition to the normal drivers of value he is watching Federal Reserve policy, inflation data, the U.S. dollar and the data on COVID vaccinations around the world.