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Core Fixed Income — Alive & Well

Mark Jackson, CFA and Henry Song, CFA

Five years ago, the “death of core” was a trending topic. Fast forward to today and we continue to believe, as we did then, that core remains a vital part of a well-balanced fixed income portfolio. Learn why.

(Expand Transcript)

The following text is a transcript of portions of the speakers’ podcast originally recorded in July 2021. This transcript solely represents the views of the individuals who spoke, which are subject to change.

Core Fixed Income — Alive & Well

Douglas Gimple, Senior Portfolio Specialist:

The Diamond Hill Core Bond Strategy has experienced consistent growth since its launch in 2016. And as we've reached our five-year anniversary, we're starting to see an increase in interest. So, Henry, I'll ask you, is it safe to say that core is not dead, and in fact remains a vital part of a well-balanced portfolio?

Henry Song, CFA, Portfolio Manager:

I think that question is almost similar to, "Where are rates going to go into the next three months?" It's very similar to that. And it's really hard for me to say for sure, but looking at all the data, we started talking about the death of core really post 2008. All these unconstrained bond funds came about and you started hearing some of the consultants and others are doing their own calling it “satellite core” approach where they're picking managers from various sectors to combine, to make a core work.

But the results so far, we're over 10 years in this experiment now, but the results is very much a mixed bag. People were expecting these go anywhere funds, or mix and match approach, to far outperform the Agg index. And that really just hasn't been the case. And they actually probably added a lot more volatility to their portfolio as a result.

In theory, that should really work if you're picking the right managers, doing the right thing. In various sectors, if you pick the best manager in every single sector, in theory, you should do better. But I think the issue ends up being one, sometimes it's hard to pick a manager; and two, you're going to have an overall allocator who's allocating amongst these different sectors, making a macro call. And that's extremely difficult, that's basically our belief. It's very difficult to make that sort of call. So, in some ways, again, beauty of simplicity, I think sticking to something that's simple, I think it works.

And I think the other part of it too, why those funds haven't done as well. And I really think part of that is just also the fees, right? These newer, exciting strategies had much higher fee associated with them, or when you start mix and match different managers in different sectors, those sector funds tend to charge a higher fee as well. So, at the end of the day, your hurdle of beating the Agg index became higher. And so, that also didn't help in their cause as well.

The views expressed are those of the portfolio manager as of July 2021, are subject to change, and may differ from the views of other portfolio managers, research analysts or the firm as a whole. These opinions are not intended to be a forecast of future events, a guarantee of future results, or investment advice. Investing involves risk, including the possible loss of principal. Past performance is not a guarantee of future results.

The Bloomberg U.S. Aggregate Index is an unmanaged index representing the U.S. investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through, and asset-backed securities.

Click here for Short Duration Securitized Bond strategy performance.

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