Fund manager Q&A: A diversified approach to income-investing

By Alex Veiga
AP Business Writer

Bond investors aren’t exactly known as risk-seekers.

But when interest rates and inflation could be on the rise, playing it too safe in a “vanilla” bond index fund may not cut it.

That drives the strategy for Eaton Vance Management’s Multisector Income Fund (EVBAX). The fund, which was founded in 2013, approaches fixed-income investing by taking positions in a variety of bonds and other types of debt, including those issued by companies and governments outside the U.S. It also buys stocks and doesn’t shy away from higher-yield, and therefore higher-risk, bonds.

In addition to its more risk-friendly pursuit of return, the fund’s diversified approach may also lessen the impact of interest rate fluctuations, something that can often weigh on bond investors, Eaton Vance says.

The fund ended last year with a gain of about 22 percent, compared with a gain of 3.1 percent for its benchmark, the Bloomberg Barclays U.S. Government/ Credit Bond Index.

Kathleen Gaffney, portfolio manager of the fund, details how a diversified approach that includes higher-yielding, lower-rated bonds may be a good way to go. Questions and answers have been edited for length and clarity:

Q: How does your fund differ from other fixed-income bond funds?

A: It’s definitely not your plain vanilla bond fund. I tend to think of it as not your average bond fund. It’s really about best ideas and opportunities in the fixed-income universe, and a very broad universe. I have the ability to own corporate bonds, investment-grade, high-yield, non-U.S., developed world and emerging. I can own convertible bonds, preferred, bank loans, structured finance, munis. So it’s a really broad mandate to look for best ideas. It’s a very opportunistic strategy and that’s where it’s not typical.
To be opportunistic, you’re willing to veer away from a static benchmark.

Q: What’s an example of how a plain fund would not be as opportunistic as yours?

A: A plain vanilla bond fund would really orient itself around the government credit index as a benchmark and make smaller decisions about what was going to be the best areas within that index in order to outperform.

I’m looking at the areas where I can invest away from the benchmark, because I think that’s where you’ll find the best long-term opportunities.

Q: Which types of investments are you avoiding now, given the expected rise in interest rates?

A: If you look back in history, over the last couple of decades, with the decline in interest rates, Treasurys almost outperformed everything. But there is a view, and I do believe, that tailwind of a declining interest rate environment has come to an end. So, right now, I don’t own Treasurys. I view it as a lot of risk, because Treasurys are the most interest-rate sensitive fixed-income security you can hold and there’s very little return there.

So then your next option is taking credit risk in investment-grade corporate. And, generally, that’s really tied to where we are in the business cycle. If we’re full-steam ahead, it’s good to be in corporate bonds, as long as you’re getting compensated for taking that risk. But the likelihood of General Electric or Apple or Verizon not paying you back is really almost zero.

Q: How do you look for better returns while still remaining a fixed-income fund? You’re buying stocks, too, correct? And higher-risk bonds?

A: The two constraints on the fund are a maximum of 35 percent below investment grade, but also 20 percent in equities.

I’m really thinking about what are the best fundamentals out there that I can invest in, whether it’s a company, a country or a currency that is mispriced by the market because they’re taking a short-term view. I like to look through the cycle in order to find the best opportunities.

For example, we own Seagate Technology. It was investment grade and has been downgraded, so it’s a fallen angel.

And that’s an interesting place to find good opportunities, because if the company is on the right track but it’s going to take some time for it to de-lever and for its credit metrics to improve, there may be enough uncertainty about their ability to do that, that you’re actually getting paid for taking that credit risk.

We think it has the ability to get back to investment grade over time.

Q: Are you investing in utilities and other bond-proxies?

A: Right now I’m not. I think they’re overvalued and they’re much more sensitive to interest rate risk.

When I think about the types of risk I can hold in the fund, it can be a security that has interest rate risk, or some degree of credit risk or some degree of country or currency risk. And right now, I think because there’s not a lot of value out there, I’m very focused on specific credit or company risk, and specific country or currency risk. Those are the best opportunities right now.