EVOLUTION OF THE BOND MARKETS
For as long as most can remember, investors have maintained a steadfast commitment to diversifying their equity portfolios… yet we have noticed many do not hold the same proclivity for diversifying their fixed income portfolio.
From financial advisors to large institutions to individual retirees — billions of dollars in investor portfolios are linked to the Bloomberg U.S. Aggregate Bond Index (the Agg). The Agg is much more than just an index; it is the foundation for many fixed income investment strategies, including actively managed funds benchmarked to the index and passive investments that track the bonds within the Agg.
Perhaps the willingness to closely track the Agg is attributable to the decades-long bull market for bonds during which volatility and returns were muted. After all, why spend valuable time carefully constructing a diversified bond portfolio only to achieve what is likely to have been just a handful of basis points over the index?
WHY ONLY TRACKING THE AGG CAN RESULT IN MISSED OPPORTUNITIES
Over the years, the bond markets have undergone a massive evolution. At its inception in 1986, the Agg was a reasonable proxy of the U.S. bond market. But nearly four decades later, that is no longer the case. Today, the U.S. fixed income market is broader and more diverse than ever. But less than half of its $50+ trillion overall value is represented by the Agg.
Why is the Agg's Scope Limited?
The Agg is market-cap weighted, meaning the biggest debtors (in this case, U.S. government entities) have an outsized influence on the index. Factoring in U.S. Treasuries and U.S. government-backed mortgage-related securities, more than two-thirds of the Agg's holdings are in government debt. In other words, the Agg alone doesn't provide much diversification benefits for fixed income investors.
For a security to be included in the Agg, it must meet certain eligibility rules, including at least one year until final maturity; minimum of $300 million outstanding for Treasury, government-related, and corporate securities; minimum $500 million deal size for ABS and CMBS; a fixed-rate coupon structure; and must be fully taxable. As a result, the Agg's scope is limited.
WE BELIEVE THAT CASTING A WIDER NET CAN CREATE OPPORTUNITIES FOR FIXED INCOME INVESTORS.
Because of its limitations, investors who don't look beyond the Agg may be missing out on opportunities in assets less-correlated to the index.
Within the Weitz fixed income funds, we invest across the broad bond market wherever we see valuable risk/reward opportunities in today's U.S. bond market. This typically results in a portfolio that is not correlated to the Agg, although there are times when the market warrants, that the portfolio may incidentally look more similar to the Agg if those are the best opportunities at the time.
Click below to learn how our approach to fixed income has manifested in strong performance for both our Core Plus Income Fund (WCPNX) and Short Duration Income Fund (WSHNX)!
Data quoted is past performance and current performance may be lower or higher. Past performance is no guarantee of future results. Investment return and principal value of an investment will fluctuate, and shares, when redeemed, may be worth more or less than their original cost. Please visit weitzinvestments.comfor the most recent month-end performance.
Holdings are subject to change and may not be representative of the Fund›s current or future investments.
The Bloomberg U.S. Aggregate Bond Index is a broad-based benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market.
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The Morningstar Rating™ for funds, or "star rating", is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product's monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The Morningstar Rating does not include any adjustment for sales loads. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating metrics. The weights are: 100% three-year rating for 36-59 months of total returns, 60% five-year rating/40% three-year rating for 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods. Morningstar rated the Core Plus Income Fund Institutional Class shares 5, and 5 stars, among 557 and 527 Intermediate Core-Plus Bond funds for the 3- and 5-year periods ended 3.31.2024, respectively. Morningstar rated the Short Duration Income Fund Institutional Class shares 5, 4, and 4 stars, among 354, 494, and 359 U.S. Short-Term Bond funds for the 3-, 5-, and 10-year periods ended 3.31.2024, respectively.
Consider these risks before investing: All investments involve risks, including possible loss of principal. Market risk includes political, regulatory, economic, social and health risks (including the risks presented by the spread of infectious diseases). Changing interest rates may have sudden and unpredictable effects in the markets and on the Fund›s investments. The Fund may purchase lower-rated and unrated fixed-income securities, which involve an increased possibility that the issuers of these may not be able to make payments of interest and principal. See the Fund›s prospectus for a further discussion of risks.
