Expanding the Core with Global Corporate Bonds

fixed-income
harper1
Head of Fixed Income & Currency
04/25/2013

“I’m absolutely convinced, and I’ve been talking about this a lot, that we need a total corporate bond index fund. So a total bond market index fund investor says, ‘Look, 70 percent in low-yielding government debt is just too hard for me to deal with. I’d rather take a little bit longer duration, and a little bit lower credit quality, and take maybe half of my total bond market index portfolio and move it into a corporate bond portfolio."–John Bogle     At WisdomTree, we believe that John Bogle, the founder of Vanguard, is correct in recommending increased positions in corporate bonds as an alternative to U.S. government debt. With interest rates already near all-time lows in many markets around the world, prospects for lower interest rates are limited. In our view, a more likely scenario would see gradually higher U.S. interest rates over time. The incremental income investors receive for taking credit risk in excess of U.S. government debt may help mitigate losses from rising interest rates. However, this is where the WisdomTree approach begins to take Bogle’s thinking a step further. If investors are inclined to take a global approach to stocks, why would they not take a similar approach in their bond portfolios? By expanding the investable universe to corporations outside the United States, the size of the opportunity set more than doubles (2.54x).1 In fact, there have been a growing number of institutional investors pursuing wider corporate credit mandates, a strategy referred to as “expanding the core.” As we noted in a recent blog, we believe many investors are beginning to reassess what positions should constitute the “core” holdings of their portfolio. When taking a comprehensive view of their opportunities, investors develop greater interest in a more global approach to corporate bond investing. As the chart below shows, in addition to expanding the number of opportunities, investors have also been compensated with higher yields across virtually all credit ratings2 by investing in global credit risk as opposed to a purely U.S. approach. Past performance is not indicative of future results.
Yield to Worst (YTW): U.S. Credit vs. Global Credit
With nearly 13,000 securities in the Barclays Multiverse Index, which ones are worth investing in? In many instances, bond indexes take an agnostic view of a borrower’s creditworthiness. Just because one bond has a similar credit rating to another does not mean they have similar economic prospects. In an effort to mitigate credit and interest rate risk, we believe it is important to have an active manager monitoring the positions in the portfolio on a daily basis. Additionally, static or inflexible approaches to an evolving asset class seem inconsistent with today’s rapidly changing markets. We believe an experienced manager can help investors more fully take advantage of these opportunities.     1Source: Barclays, March 31, 2013. Comparison based on the Barclays Global Credit Index vs. the U.S. credit portion of the Barclays Multiverse Index. 2Credit ratings based on Moody’s rating provided by Barclays, as of March 31, 2013.

Important Risks Related to this Article

ALPS Distributors, Inc., is not affiliated with The Vanguard Group, Inc. Fixed income investments are subject to interest rate risk; their value will normally decline as interest rates rise. In addition when interest rates fall income may decline. Fixed income investments are also subject to credit risk, the risk that the issuer of a bond will fail to pay interest and principal in a timely manner, or that negative perceptions of the issuers ability to make such payments will cause the price of that bond to decline.

About the Contributor
harper1
Head of Fixed Income & Currency
Rick Harper serves as the Head of Fixed Income and Currency for WisdomTree Asset Management, where he oversees the firm’s suite of fixed income and currency exchange-traded funds.  Rick has over 22 years investment experience in strategy and portfolio management positions at prominent investment firms. Prior to joining WisdomTree in 2007, Rick held senior level strategist roles with RBC Dain Rauscher, Bank One Capital Markets, ETF Advisors, and Nuveen Investments. At ETF Advisors, he was the portfolio manager and developer of some of the first fixed income exchange-traded funds. His research has been featured in leading periodicals including the Journal of Portfolio Management and the Journal of Indexes. He graduated from Emory University and earned his MBA at Indiana University.