Payden Global Low Duration Fund (PYGSX), May 2013

By David Snowball

Objective and Strategy

Payden Global Low Duration Fund seeks a high level of total return, consistent with preservation of capital, by investing in a wide variety of debt instruments and income-producing securities. Those include domestic and international sovereign and corporate debt, municipal bonds, mortgage- and asset-backed debt securities, convertible bonds and preferred stock. The maximum average maturity they envision is four years. Up to 35% of the portfolio might be investing in non-investment grade bonds (though the portfolio as a whole will remain investment grade) and up to 20% can be in equities. At least 40% will be non-US securities. The Fund generally hedges most of its foreign currency exposure to the U.S. dollar and is non-diversified.

Adviser

Payden & Rygel is a Los Angeles-based investment management firm which was established in 1983.  The firm is owned by 20 senior executives.  It has $85 billion in assets under management with $26 billion in “enhanced cash” products and $32 billion in low-duration ones as of March 31, 2013.  In 2012, Institutional Investor magazine recognized them as a nation’s top cash-management and short-term fixed income investor.  They advise 14 funds for non-U.S. investors (13 focused on cash or fixed income) and 18 U.S. funds (15 focused on cash or fixed income).

Managers

Mary Beth Syal, David Ballantine and Eric Hovey.  As with the Manning & Napier or Northern Trust funds, the fund relies on the judgments of an institution-wide team with the named managers serving as the sort of “point people” for the fund.    Ms. Syal is a managing principal, senior portfolio manager, and a member of the firm’s Investment Policy Committee. She directs the firm’s low duration strategies. Mr. Ballantine is a principal, a portfolio manager and develops investment strategies for short and intermediate-term fixed income portfolios.  Both have been with the fund since inception.  Mr. Hovey is a senior vice president and portfolio manager who specialty is in analyzing market opportunities and portfolio positioning.

Management’s Stake in the Fund

None.  Two of the three managers said that their own asset allocation plans were heavily weighted toward equities.

Opening date

September 18, 1996.

Minimum investment

$5000, reduced to $2000 for tax-sheltered accounts and those set up with an AIP.

Expense ratio

0.55% after an annually-reviewed, apparently-permanent fee waiver on assets of $80 million.

Comments

Two things conspire against the widespread recognition of this fund’s long excellent record, and they’re both its name.

“Global” and “low duration” seems to create a tension in many investors’ minds.   Traditionally, global has been a risk-on strategy and short-term bonds have represented a risk-off strategy.  That mixed signal – is this a strategy to pursue when risk-taking is being rewarded or one to pursue when risk-aversion is called for – helps explain why so few investors have found their way here.

The larger problem caused by its name is Morningstar’s decision to assign the fund to the “world bond” group rather than the “short-term bond” group.  The “world bond” group is dominated by intermediate-term bonds, which have a fundamentally different risk-return profile than does Payden.  As a result of a demonstrably inappropriate peer group assignment, a very strong fund is made to look like a very mediocre one. 

How mediocre?  The fund’s overall star rating is two-stars and its rating has mostly ranged from one- to three-stars.  That is, would be a very poor intermediate-term bond fund.  How bad is the mismatch?  The fact is that nothing about its portfolio’s sector composition, credit-quality profile or maturities is even close to the world bond group’s.  More telling is the message from Morningstar’s calculation of the fund’s upside and downside capture ratios.  They measure how the fund and its presumed act when their slice of the investing universe, in this case measured by the Barclays US Bond Aggregate Index, rises or falls.  Here, by way of illustration, is the three-year number (as of 03/31/13):

 

Upside capture

Downside capture

Payden Global Low

44

(28)

World bond group

100

134

When the U.S. bond market falls by 1%, the world bond group falls by 1.34% while Payden rises by 0.28%. At base, the Payden fund doesn’t belong in the world bond group – it is a fundamentally different creature, operating with a very different mission and profile.

What happens if you consider the fund as a short-term bond fund instead?  It becomes one of the five best-performing funds in existence.  Based solely on its five- and ten-year record, it’s one of the top ten no-load, retail funds in its class.  If you extend the comparison from its inception to now, it’s one of the top five.  The only funds with a record comparable or superior to Payden are:

Homestead Short-Term Bond (HOSBX)

Janus Short-Term Bond (JNSTX)

Vanguard Short Term Bond Index (VBISX)

Vanguard Short Term Investment-Grade (VFSTX)

There are a couple other intermediate-term bond funds that have recently shortened their interest rate exposures enough to be considered short-term, but since that’s a purely tactical move, we excluded them.

How might Payden be distinguished from other funds at the top of its class? 

  • Its international stake is far higher.  The fund invests at least 40% of its portfolio internationally, while it’s more distinguished competitors are in the 10-15% range.  That becomes important if you assume, as many professionals do, that the long US bull market for bonds has reached its end.  At that point, Payden’s ability to gain exposure to markets at different points in the interest rate cycle may give it a substantial advantage.
  • Its portfolio flexibility is more substantial.  Payden has the freedom to invest in domestic, developed and emerging-markets debt, both corporate and sovereign, but also in high-yield bonds, asset- and mortgage-backed securities.   Most of its peers are committed to the investment-grade portion of the market.
  • Its parent company specializes, and has specialized for decades, in low duration and international fixed-income investing.  At $80 million, this fund represents 0.1% of the firm’s assets and barely 0.25% of its low-duration assets under management.  Payden has a vast amount of experience in managing money in such strategies for institutions and other high net worth investors.  Mary Beth Syal, the lead manager who has been with Payden since 1991, describes this as their “all-weather, global macro front-end (that is, short duration) portfolio.”

Are there reasons for caution?  Because this is an assertive take on an inherently conservative strategy, there are a limited number of concerns worth flagging:

  • No one much at Payden and Rygel has been interested in investing in the fund. None of the managers have placed their money in the strategy nor has the firm’s founder, and only one trustee has a substantial investment in the fund.  The research is pretty clear that funds with substantial manager and trustee investment are, on whole, better investments than those without.   It’s both symbolically and practically a good thing to see managers tying their personal success directly to their investors’.  That said, the fund has amassed an entirely admirable record.
  • The fund shifted focus somewhat in 2008.  The managers describe the pre-2008 fund as much more “credit-focused” and the revised version as more global, perhaps more opportunistic and certainly more able to draw on a “full toolkit” of options and strategies.
  • The lack of a legitimate peer group will obligate investors to assess performance beyond the stars.  With only a small handful of relatively global, relatively low duration competitors in existence and no closely-aligned Lipper or Morningstar peer group, the relative performance numbers and ratings in the media will continue to mislead.  Investors will need to get comfortable with ignoring ill-fit ratings.

Bottom line

For a long time, fixed-income investing has been easy because every corner of the bond world has, with admirable consistency, gone up.  Those days are past.  In the years ahead, flexibility and opportunism coupled with experienced, disciplined management teams will be invaluable.  Payden offers those advantages.  The fund has a strong record, 4.5% annual returns over the past 17 years and a maximum drawdown of just 4.25% (during the 2008 market melt), a broad and stable management team and the resources of large analyst corps to draw upon.  This surely belongs on the due-diligence list for any investor looking to take a step or two beyond the microscopic returns of cash-management funds.

Company website

Payden Global Low Duration

Quarterly Report

Commentary

Fact Sheet

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About David Snowball

David Snowball, PhD (Massachusetts). Cofounder, lead writer. David is a Professor of Communication Studies at Augustana College, Rock Island, Illinois, a nationally-recognized college of the liberal arts and sciences, founded in 1860. For a quarter century, David competed in academic debate and coached college debate teams to over 1500 individual victories and 50 tournament championships. When he retired from that research-intensive endeavor, his interest turned to researching fund investing and fund communication strategies. He served as the closing moderator of Brill’s Mutual Funds Interactive (a Forbes “Best of the Web” site), was the Senior Fund Analyst at FundAlarm and author of over 120 fund profiles. David lives in Davenport, Iowa, and spends an amazing amount of time ferrying his son, Will, to baseball tryouts, baseball lessons, baseball practices, baseball games … and social gatherings with young ladies who seem unnervingly interested in him.