If two heads are better than one, could three heads be better than two?
“We think so,” said Chris Vella, co-portfolio manager of the aptly-named Northern Multi-Manager High Yield Opportunity Fund. “Especially when the three specialists use contrasting strategies in different segments of the market.”
That’s the goal that Vella and his analysts at Northern Trust set out to achieve in constructing a multi-manager offering for investors in high yield bonds.
Roads less travelled
After putting hundreds of advisers under a microscope and back-testing various combinations, Vella thinks the three-headed team — each operating independently — provides style diversification that could dampen volatility.
One sub-adviser specializes in core segments of the high yield market, another focuses on smaller companies not often covered by Wall Street, and a third tracks the shifting trail of value wherever it might lead.
Besides the multi-manager approach, Vella said the Fund differs from its competition in its wide opportunity set.
The three sub-advisers collectively can allocate up to 20% of Fund assets in securities outside its benchmark. That go-anywhere category includes convertible and emerging-market bonds, as well as investment-grade debt and bank loans. (See the Fund fact sheet for more details.)
Though some investors fear rising interest rates as the Fed normalizes monetary policy, Vella said it’s important to understand why that might happen.
“If higher rates are the result of a strengthening economy — as we think is likely — history tells us that the high yield sector could do relatively well,” he said.
Although rising rates negatively affect most bonds, high yield bonds generally are considered less rate-sensitive than their fixed-income cousins.
Even after a multi-year rally, Vella sees attractive value in high yield.
He notes that default rates are low, in part because a wave of refinancings lowered borrowing costs. And while the sector’s yield premium over Treasuries is below average, Vella said spreads are reasonable.
Although high yield bonds are among the “risk assets,” Vella said the sector still could provide a degree of diversification in choppy markets.
“High yield is a way of marginally sensitizing a risk asset portfolio to volatility without necessarily sacrificing too much upside potential,” Vella said. “And in the more volatile environment that we think lies ahead, that could be important.”
The three heads agree.
Diversification does not guarantee a profit nor protect against a loss.
Bond Risk: Bond funds will tend to experience smaller fluctuations in value than stock funds. However, investors in any bond fund should anticipate fluctuations in price, especially for longer-term issues and in environments of rising interest rates.
High Yield Risk: Although a high yield fund’s yield may be higher than that of fixed income funds that purchase higher-rated securities, the potentially higher yield is a function of the greater risk that a high yield fund’s share price will decline.
Not FDIC insured | May lose value | No bank guarantee
An investment in Northern Funds is not insured by the FDIC, and is not a deposit or obligation of, or guaranteed by The Northern Trust Company or any affiliate. An investment in Northern Funds involves risks, including possible loss of principal.
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