That's what Northern Trust's fixed income team strives to deliver to bond fund investors — consistent, reliable performance in all economic and market environments.
"Our view of the fixed income market is that it's not a place to take on a lot of risk," says Frank Szymanek, Northern Trust senior product manager for taxable fixed income. "That doesn't mean we don't take any risks. It means we take calculated risks."
Taking calculated risks means we identify risks that are present and evaluate them carefully and we remain within a zone of higher-quality fixed income securities, selected for their potential to deliver attractive and consistent risk-adjusted returns. It's a philosophy that has helped drive a solid performance record for the Northern fixed income funds during various market environments (see chart below).
"Unlike some managers, we avoid making sizable bets on interest rate movements or specific market sectors," explains Szymanek. "Furthermore, we don't invest in currencies, emerging markets debt or implement risky hedging strategies in our fixed income portfolios. Instead, we believe we offer high-quality exposure to traditional fixed income securities, giving investors the well-defined asset-class coverage their investment goals demand in a manner they expect."
This effort requires a disciplined approach to identify government, corporate and mortgage-backed bonds representing good value. The approach combines a macro economic and market framework with a heavy reliance on fundamental credit research to identify securities offering the potential for price improvement.
The research process is similar to the approach value stock investors take, as the fixed income team looks for securities whose prices they determine are not properly aligned with their fundamentals — that is, they are undervalued. Depending on the type of security, the team's detailed effort includes reviewing company filings and annual reports, meeting with corporate management, and examining third-party research reports and credit ratings.
The team's focus on higher-quality securities doesn't rule out investments in the high-yield sector. If there are compelling opportunities among high-yield bonds, the team will invest in them, as long as the risk is appropriate and the specific portfolio's guidelines permit such investments.
"We may purchase a security with a below-investment-grade credit rating, but we do so because we think the bond represents good value and its credit rating is more likely to improve," says Szymanek. "We will not purchase any securities — investment-grade or high-yield — that have not been scrutinized and approved by our research team."
Collaboration among all fixed income specialists remains crucial to Northern Trust's fixed income management success. Portfolio managers, research analysts and securities traders work together to identify the most attractive investment opportunities while constantly monitoring and managing each portfolio's risk/reward profile.
This disciplined approach seeks to "eliminate excessive or unnecessary risk, embrace a reasonable level of measured risk and enjoy solid long-term performance," says Szymanek.
Past performance is no guarantee of future results. There is no guarantee the investment objectives and strategies of the funds will be realized. Mutual fund investing involves risk, including the possible loss of principal. Value-based investments are subject to the risk that the broad market may not recognize their intrinsic value.
Performance quoted represents past performance and does not guarantee future results. Investment return and principal value will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than that shown here. Performance data current to the most recent month end is available by calling 800-595-9111.
The Advisor has agreed to reimburse certain expenses of the Funds. The contractual reimbursement arrangement is expected to continue until at least July 31, 2012. After this date, the contractual arrangements may be terminated if it is determined to be in the best interest of the Fund/Funds and the shareholders. In the absence of fee waivers, yield, total return, growth since inception and dividends would have been reduced. Total return is based on net change in NAV assuming reinvestment of distributions. The 30-day SEC yield more closely reflects the current earnings of the Fund than the total returns.
1Bond 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.
2High 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.
3Mortgage-Backed Securities Risk: Mortgage-backed investments involve risk of loss due to prepayments and, like any bond, due to default. Because of the sensitivity of mortgage-related securities to changes in interest rates, the Fund's performance may be more volatile than if it did not hold these securities.
4Non-Diversified Risk: The Fund invests in a smaller number of securities than the average mutual fund. The change in value of a single holding may have a more pronounced effect on the Fund's net asset value and performance than for other funds.
5U.S. Government Guarantee: U.S. Government guarantees apply only to the underlying securities of a Fund's portfolio and not the Fund's shares.
It is not possible to invest directly in an index.
Barclays Capital U.S. Aggregate Bond Index is an unmanaged index of prices of U.S. dollar-denominated investment-grade fixed income securities with remaining maturities of one year and longer.
JP Morgan Government Bond Index Global is an unmanaged, total return, market capitalization-weighted index of traded government fixed income securities which can be purchased by international investors.
Barclays Capital U.S. Corporate High Yield 2% Issuer Cap Index is an unmanaged index of the 2% Issuer Cap component of the Barclays Capital High Yield Corporate Bond Index, which is a market value-weighted index of fixed rate, non-investment grade debt.
Barclays Capital 1–5 Year U.S. Government Bond Index is an unmanaged index of securities issued by the U.S. government with maturities of one to five years.
Merrill Lynch Blend Index is comprised of 75% of the Merrill Lynch 6–12 Month U.S. Municipal Securities Index and 25% of the Merrill Lynch 1–3 Year U.S. Municipal Securities General Obligations Index.
Merrill Lynch 6–12 Month U.S. Municipal Securities Index tracks the performance of U.S. dollar denominated, investment grade, tax-exempt debt, publicly issued by U.S. states and territories, and their political subdivisions, in the U.S. domestic market. Qualifying securities must have been between six months to one year remaining term to final maturity, a fixed coupon schedule and an investment grade rating (based on an average of Moody's, S&P and Fitch).
Merrill Lynch 1–3 Year U.S. Municipal Securities General Obligations Index tracks the performance of U.S. dollar denominated, investment grade, tax-exempt, general obligations publicly issued by U.S. states and territories, and their political subdivisions, in the U.S. domestic market. Qualifying securities must have one to three years remaining term to maturity, a fixed coupon schedule and an investment grade rating (based on an average of Moody's S&P and Fitch).
Merrill Lynch 1-Year U.S. Treasury Note Index is composed of a single issue: the outstanding Treasury note that matures closest to, but not beyond, one year from each monthly rebalancing date.
Barclays Capital Intermediate U.S. Government/Credit Index is an unmanaged index including all public obligations of the U.S. Treasury and all publicly issued debt of U.S. government agencies with maturities of up to 10 years.
Standard deviation is a statistical measurement that sheds light on historical volatility. It measures how much variation there is from the average or expected value. A low standard deviation indicates that the data points tend to be very close to the average whereas a high standard deviation indicates that the data are spread out over a large range of values.