| NEW YORK, March 15
NEW YORK, March 15 Managers of top-performing
"unconstrained" bond funds have slashed their stakes in U.S.
corporate bonds following a monstrous rally, reflecting
skepticism that any tax changes enacted under President Donald
Trump can drive prices even higher.
Wealth management firms Guggenheim, Pioneer and TCW, which
have beaten at least 96 percent of their peers in Morningstar's
non-traditional bond category over five years, said those bond
prices also appeared stretched because the U.S. Federal Reserve
looks poised to raise interest rates multiple times.
Unconstrained bond fund managers can make big bets on a wide
array of assets because they are not tethered to a benchmark
Their moves are worth following because they can be more
objective than stewards of plain-vanilla corporate bond funds,
which must hold a high percentage of the asset category
regardless of market conditions, said Todd Rosenbluth, director
of ETF & mutual fund research at CFRA Research.
Optimism about Trump's avowed policies, which include a
pledge to slash tax rates on businesses and let companies bring
overseas profits into the country at a low rate, has helped
drive up corporate bond prices.
The Bloomberg Barclays U.S. Corporate High Yield Index has
fallen 1.6 percent this month but is still up 1.3 percent for
2017 after surging 17 percent last year, while the index
tracking investment-grade bonds is down 0.3 percent this year
after gaining 6.1 percent in 2016.
Stephen Kane, co-manager of the $3.4 billion Metropolitan
West Unconstrained Bond Fund, said yields on junk
bonds could widen by up to 5 percent against Treasuries over the
next one or two years, which would equate to a roughly 10
Kane said he favored non-agency mortgage-backed securities.
Their underlying loans are not backed by the U.S. government.
The fund has chopped its corporate bond allocation to 28
percent, which Kane called conservative, and its 4 percent
exposure to junk bonds is near its lowest ever.
"One way or the other, we think that the U.S. economy is due
for a significant slowdown in growth and a deleveraging where
credit performs poorly," he said.
Demand for unconstrained funds has rebounded this year.
Morningstar said investors poured $2.6 billion into the U.S.
non-traditional bond fund category in the first two months of
2017 after withdrawing more than $34 billion from the funds over
the past two years combined.
The $4.8 billion Guggenheim Macro Opportunities Fund
last had record-low holdings of 5 percent for junk
bonds and about 1 percent for investment-grade corporate debt,
co-manager Steven Brown said.
Brown said the fund preferred commercial and corporate
asset-backed securities as well as non-agency residential
mortgage-backed securities since those asset classes were still
NOT COUNTING ON TAX REFORM
Trump has pledged to cut the corporate tax rate to 15
percent from 35 percent and has called for a 10 percent rate for
repatriated overseas profits held in cash, payable over a
decade. He has also called for an elimination of the tax
deductibility of interest payments for corporations.
Some investors have said that a reduced tax rate would
prompt companies with cash abroad to bring that money back into
the United States and use it toward capital expenditures,
thereby boosting corporate earnings.
They have also said a greater amount of cash held in the
United States would cause companies to issue fewer bonds,
pushing up prices by reducing supply.
The top unconstrained fund managers doubted that scenario.
Cash repatriation would probably not lead to significantly
higher corporate bond prices since companies with large amounts
of money overseas, such as Apple Inc and Alphabet Inc
, already have strong credit ratings, said Michael
Temple, co-manager of the $271 million Pioneer Dynamic Credit
Since they can issue bonds at reasonably low interest rates,
these companies would feel no pressure to use any repatriated
cash to repurchase their own debt, he said. As a result, prices
would not benefit from a reduction in supply.
Most high-yield companies do not have much cash overseas and
would probably be unaffected, Temple added.
Temple said his fund had cut its stake in corporate bonds
and junk exposure while increasing its position in
insurance-linked assets such as catastrophe bonds and
Brown of Guggenheim said the potential outcome of Trump's
tax promises was unclear and did not warrant making bigger bets
on corporate bonds.
"We assign a relatively high discount rate to the proposed
changes," Brown said. "We just don’t think you’re getting fairly
compensated right now for the unknowns."
(Reporting by Sam Forgione; Editing by Jennifer Ablan and Lisa