“3 Questions” delves into investment approaches used by Federated Investors strategists. This installment features Portfolio Manager Brian Ruffner.
Q: Could you briefly explain the Federated Bond Fund strategy? We believe an investment-grade focus with a strategic high-yield allocation provides an optimal mix for income and total return potential. The focus is on U.S. corporate bonds, with investment-grade securities accounting for the majority of the portfolio and high-yield securities representing up to 35%, depending on economic conditions and valuations. When the economy is expanding, we typically allocate more to high yield. When it isn’t or if valuations tighten, we tend to allocate less. Our approach to portfolio construction is driven by a stringent bottom-up security-selection process. Every candidate for inclusion in the portfolio is subject to a fundamental analysis of its industry outlook, relative value, credit quality and structural characteristics.
Q: How is the sector performing, particularly in light of recent stronger growth and rising rates? As returns showed in 2017, a year in which corporate bonds performed particularly well, credit sectors can offer a cushion in rising-rate environment as long as increases are reflective of improving economic environment. The U.S. economy continues to expand, so that part of the equation remains solid. But Federal Reserve communication and concerns about inflation have caused Treasury yields to rise more rapidly and with more volatility than last year, resulting in a weaker start in investment-grade and high-yield sectors year-to-date. Our view is that spreads likely have not yet stabilized, but will, continuing the general positive narrative of previous quarters.
Q: What is the outlook and positioning for the strategy over the next 3 to 6 months? Our main thrust is that we think spreads will generally tighten and begin to offset some of this year’s rapid rate increase. Volatility surely will play a role, but corporate fundamentals remain solid, with upside relating to tax reform and a generally improving economy. With that as the backdrop, we expect to maintain our overweight to the investment-grade and high-yield asset classes, focusing on a gradual reduction to these positions as spreads tighten. As always, we will evaluate our allocation mix between high yield and investment grade on an ongoing basis and will continuously search for the right companies with appropriate valuations to include in the portfolio.