February 2017 IssueLong scroll reading

T. Rowe Price Global Multi-Sector Bond (PRSNX)

By David Snowball

Objective and strategy

The fund seeks “high income with the potential for some capital appreciation.” Their target is to maximize total return on a risk adjusted basis through a blend of high yield and global fixed income securities. They hope to achieve that end by investing primarily in income-producing instruments including:

  • US, international and emerging country sovereign debt
  • US, international and emerging market corporate debt
  • Mortgage- and asset-backed securities
  • Bank loans
  • Convertible securities and preferred stocks.

The fund may invest entirely in dollar-denominated foreign securities; other than that, the restrictions in the prospectus come down to “we may invest in risky parts of the bond market but we’re not going to go crazy.” The manager will actively allocate the portfolio based on market conditions.

Adviser

T. Rowe Price. Price was founded in 1937 by Thomas Rowe Price, widely acknowledged as “the father of growth investing.” The firm now serves 11 million retail and institutional clients through more than 450 separate and commingled institutional accounts and more than 150 stock, bond, and money market funds. Price had $810 billion under management at mid-year. It’s generally regarded as one of the industry’s best firms for its combination of a healthy corporate culture, risk sensitivity, thoughtful design and strong performance.

Manager

The lead manager, Steven Huber, is responsible for the fund’s critical asset allocation decisions. Before joining Price in 2006, he managed the State of Maryland’s $34 billion retirement fund for three years. From 1987 – 2003, he was the director of asset allocation and quantitative strategies for Aeltus Investment Management. Aeltus is an institutional money manager, once part of Aetna (hence the funky spelling) and now part of ING. He has managed this fund since inception.

Strategy capacity and closure

Huge: Price has substantial analytic resources and the manager has considerable freedom to move around inside the $100 trillion global bond market.

Management’s stake in the fund

Mr. Huber has between $500,000 – 1,000,000 invested in the strategy, a portion of which is invested in the retail fund.

Opening date

The fund launched December 15, 2008 under the name T. Rowe Price Strategic Income, which changed in July 2015.

Minimum investment

$2,500 for regular accounts, $1000 for IRAs.

Expense ratio

0.71% on assets of $350 million, as of 2/1/2017.

Comments

T. Rowe Price Global Multi-Sector Bond has been left behind by Morningstar. That’s a common fate, even for outstanding funds, as Morningstar commits itself to “covering those investments that are most relevant to investors and that hold a significant portion of industry assets.” That makes perfect sense given their business model. Our “left behind” series looks at outstanding funds which Morningstar once covered but has now ignored for five or more years.

We’re following-up on Morningstar’s last analyst review, from December 2011, which made two points: really promising fund but we’ll need to see a longer record before we get excited.

Kathryn Young who until lately was an analyst for Morningstar – Australia, wrote on December 11, 2011:

Though promising, T. Rowe Price Strategic Income still needs to make its case.

This multisector-bond fund starts out on the right foot. It’s got a sensible, if standard, strategy and the tools to execute it successfully…

The problem is that Huber’s public track record is much shorter than those of the managers backing him up. He has plenty of experience–having spent nearly 20 years managing institutional assets before joining T. Rowe Price in 2006–but this fund is just three years old, and its record thus far is uninspiring.

The quality of resources backing Huber here and his tendency to keep a close eye on risk make the fund worth monitoring, but it’s difficult to have greater conviction in it until Huber’s proved he can be right more often than not.

Two quick notes. First, uhhh … it’s been five years since you wrote that, guys. Second, the record is clear: Mr. Huber has been right far more often than not.

What does the fund do?

The fund invests broadly and globally, tapping into a variety of income-producing assets. About 40% of its portfolio is invested in the US, with Brazil, Serbia, Mexico and Malaysia rounding out the top five. Sovereign bonds make up 40% of the portfolio, which is their largest slice but which is also a lot lower than the average global bond fund. They offer substantially more exposure to corporate and asset-backed securities than their peers. They offer more exposure to high-yield bonds than do their peers, but we’re hesitant to cite percentages because global ratings are often hard to compare. The upper limit is 65% high yield and 50% non-dollar-denominated. The manager tries to add value by altering sector allocation, credit selection, interest rate management, and currency exposures in response to evolving market environments.

How well does it do it?

By any measure, quite well.

The fund has whomped its Lipper global income group. From inception through 12/31/2016, the fund returned 6.6% annually while its peers made 4.4% – a difference of 200 bps. And it’s whomped its Morningstar world bond peer group. From inception through the end of 2016, a $10,000 initial investment here would have grown to $17, 264 versus $13,841 for its Morningstar peers. And it’s whomped its benchmark Bloomberg Barclays Global Aggregate ex Treasury Bond USD Hedged Index by more than 200 bps/year (704 to 494), which would have translated to a $17,264 to $14,735 margin to victory.

Are you detecting a pattern yet?

Over the same period, it also outperformed Morningstar’s only Gold rated global bond fund. Of five Silver-rated global bond funds, two substantially outperformed PRSNX, one of those at the cost of far higher volatility.

It’s also much less volatile than its peer group.

Across our array of risk, return and risk-return metrics, it’s consistently a top ten fund.

Had we mentioned it’s also a useful diversifier for a portfolio rich in US bonds? Its correlation to the total US bond market, which it has also outperformed, is 0.45. Even its correlation to two top-rated global bonds funds is only about 0.55.

For our MFO Premium subscribers, here is link to latest Risk Profile.

Bottom Line

The argument T. Rowe Price makes for such funds is straightforward: as the bond market, in the US and globally, becomes increasingly unsettled, you want to be able to actively adjust your exposure to keep an asymmetrical balance between risk and reward. Passive fixed-income products have a series of design flaws that don’t occur in passive equity ones and they have embedded risks that are masked when markets are steadily appreciating and that are painfully apparent when the tide turns. Unless you’re very good or very lucky, you are likely better served now by a manager who has the opportunity to move in the face of changing conditions and the experience to move well. You shouldn’t repeat Morningstar’s mistake in ignoring this singularly strong fund.

Fund website

T. Rowe Price Global Multi-Sector Bond

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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.