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2022 Envestnet Asset Manager Awards

Fixed Income Manager of 2022: Federated Hermes

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Diversification was the key to Federated Hermes Total Return Bond Fund’s success last year.

The fund, which received the 2022 Envestnet Asset Manager of the Year Award in the Fixed Income category, outperformed both the Bloomberg Aggregate Bond and Bloomberg US Universal benchmark indexes in 2021, achieved an 18-basis point return and placed in the top quartile of Morningstar’s intermediate core-plus bond fund peer group last year, according to Envestnet analysts.

“Our strategy was all about diversification, as we always try to generate alpha from multiple sources that include duration management, sector allocation, yield curve strategy, currency management as well as securities selection,” Vice President and Senior Portfolio Manager Chengjun (Chris) Wu said. “We have different trades in the portfolio and we try to make sure those trades are as diversified, as uncorrelated as possible. So that’s our secret sauce.”

The fund, Wu said, “has one goal — to generate strong, risk-adjusted returns. It has been our strategy for decades, and this strategy over different market cycles has helped us generate a consistent, competitive performance, without taking excessive risks.”

Although the 2021 strategy remained the same, the “market just allowed us to capture stronger performance,” Wu explained. “Most of our trades worked extremely well. That includes shorter duration management, tactical yield curve strategy, and overweight to high-yield, investment-grade corporates, bank loans, trade finance and allocation to TIPS — Treasury Inflation-Protected Securities. They all had positive contributions last year.”

Jerome Conner, vice president and senior portfolio manager, added that the team took advantage of the “reopening trade” in the second half of 2020 and into 2021 by being overweight in the credit sectors.

Coming into 2022, fund managers expected interest rates would become a more dominant factor in generating returns, Conner said, citing inflation data and the Federal Reserve’s acknowledgment that inflation wasn’t transitory and it would start removing its accommodative monetary policy.

In the portfolio, Conner said, “we shortened the duration relative to the benchmark and as rates have gone up significantly in 2022, that was the largest positive contributor to our performance in the first quarter.”

During periods of Fed rate-hiking cycles, the Treasury curve usually flattens, so managers positioned the portfolio by underweighting shorter securities and overweighting longer securities, Conner noted.


“As fixed income managers, we think that inflation and the corresponding response from the Federal Reserve are the greatest risk for the markets. The Fed, as 2022 has progressed, has become more hawkish throughout that time,” including a recently announced 50 bps rate increase and plans to draw down its balance sheet, Conner added.

“We think that quantitative easing was supportive for risk assets, and that’s why we think this quantitative tightening that the Fed is going to go through is going to be negative for risk assets,” he said

The fund has gone underweight in its investment-grade corporate allocation, its high-yield allocation and its emerging market allocation and has reduced its exposure to bank loans. In addition to underweighting its benchmark duration, the fund is neutral to the yield curve and to the U.S. dollar.

Wu suggested that clients increase cash allocations in their portfolios, noting that cash yield may exceed 2% by the year- end. “For the first time in a long while, cash may be a reasonable alternative for investors to consider,” he said.


Jerome Conner, left

Title: Manager; Years with firm: 20; Years in financial services: 26

Chengjun (Chris) Wu, right

Title: Manager; Years with firm: 16; Years in financial services: 16

Investment/asset class focus: Fixed Income; Asset management firm: Federated Hermes; Year firm founded: 1955; Number of employees: 1,962; AUM as of March 31, 2022: $631.1 billion


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