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How multisector bond funds can diversify portfolios

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Diversification in fixed income is a goal for most clients, but advisors may have different approaches on how to get there.

“What you want to do in this environment of rising rates is to try to mitigate the interest rate sensitivity of your bond portfolio,” says Matt Peden, chief investment officer at GuideStone Capital Management in Dallas.

One way to do that, through diversified fixed-income holdings, is to invest in multi-sector bond funds.

“They allow you to diversify into sectors that have less interest rate sensitivity,” Peden says.

Multisector funds allow clients to invest in a variety of bonds, such as emerging markets or global that will have exposure to different yield curves in different regions, which may not be experiencing rising rates.

“Global bond funds also further diversify the return pattern, due to credit and currency,” Peden says.

Of course, multisector funds can include more than just global bonds. They can encompass virtually any kind of fixed income, and that is what makes them so attractive to Peden.

But it is important for advisors to find the right manager, he says.

“Allow the investment professional, the portfolio manager, to find a good fund that allows a lot of flexibility and has had a good historical track record,” Peden says. “In other words, leverage the expertise of the portfolio manager who will have a lot more experience than the average investor or client, for whom it will be much more difficult, even from an advisor perspective.”

Not all advisors are as sanguine about multisector bond funds.

“We don’t do multisector,” says Eric Aanes, president of Titus Wealth Management in Larkspur, California.

“The reason is that you never know what’s in there,” he says. “Oftentimes the asset allocation mixture changes, and it’s hard to keep up on a daily basis, because the managers will post in hindsight what’s in their portfolio, so you won’t know on a day-to-day basis what they own.”

Aanes points to an example in which his firm owned both a high-yield bond fund and a multisector one.

“Both were going down, almost at the same levels, which was a bit surprising, because the high yield was riskier,” he says. “What we found out was that the multisector bond fund had a big chunk of high yield, much greater than we had known about.”

Still, a multisector bond fund is a way to diversify that may work better for some clients and advisors than others, often depending on the size of a portfolio.

“A multisector bond fund is a way to set it and forget it,” Aanes says. “We prefer to do the allocation ourselves.”

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