July 2021 IssueLong scroll reading

Channel Short Duration Income Fund (CPSIX)

By David Snowball

Objective and strategy

Channel Short Duration Income Fund pursues total return, comprised of both income and capital appreciation. In general, at least 65% of the portfolio will be investment-grade securities and up to 35% might be high-yield bonds. The bulk of the portfolio is short-term investment-grade debt, but the manager can opportunistically add other securities – longer-term debt, for instance – so long as the portfolio as a whole maintains a weighted average duration of 1 to 3.5 years.

The adviser expects the portfolio to be actively managed, with relatively frequent moves to exploit emergent opportunities and reallocate resources toward attractive sectors. The willingness to re-weight sectors and tweak duration are the primary sources of alpha.

Adviser

Channel Investment Partners, a boutique fixed-income investment firm founded in August 2019 by Matthew Duch. The Channel Short Duration Income Fund is the firm’s sole focus.

Manager

Matthew Duch.

Mr. Duch formed Channel Investment Partners in 2019 and registered it with the SEC in April 2020 with a bigger business vision built around the launch of the Channel Short Duration Income Fund. From 2016 to the present, Matt has managed private investments through Duch Capital Management LLC. From 2006 to 2016, Matt was a vice president and senior portfolio manager for Calvert Investment Management. He chose to leave Calvert shortly before its acquisition by Eaton Vance, which is not unusual. Prior to Calvert, Mr. Duch had stints at Deutsche Asset Management and Zurich Scudder.

Strategy capacity and closure

Mr. Duch successfully managed over $1 billion with rapid asset growth in a comparable short-duration strategy at Calvert. As with many thoughtful managers, he believes that the size of the strategy is less important than the predictability (hence, manageability) of inflows and outflows. With consistent inflows, the advisor might build out its infrastructure by adding people, then $4 billion would be manageable.

Management’s stake in the fund

None, or a lot. Mr. Duch has no direct investment in the fund, nor do any of the fund’s trustees. At the same time, Mr. Duch founded the adviser and is personally underwriting the majority of its start-up expenses.

Opening date

Nominally, October 4, 2005, but that was under a different adviser and strategy. The current iteration of the fund began to emerge in March 2020 as the new advisor transitioned –in and became formal in August 2020 as the transition period ended. FCI Bond Fund (FCIZX)

Minimum investment

$2,500. The fund is now available on Schwab and TDAmeritrade, Interactive Brokers, and Apex Clearing.

Expense ratio

0.90%, without a waiver, on assets of $29 million. That’s good news.

Comments

Riddle me this, Batman: when is a five-star fund not a five-star fund, though possibly still a five-star fund?

Adam West might not have puzzled his way to “when it’s the Channel Short Duration Income Fund,” but that’s the answer.

At Morningstar, Channel Short Duration Income (CPSIX) is rated as a five-star fund with a 15-year record but that is invalid and misleading. What Morningstar is actually reflecting is the performance of the now-defunct FCI Bond Fund. FCI Bond was managed by a private asset manager in Kansas City, primarily for the benefit of one core client (a bank in Pennsylvania). FCI managed it as a conservative short-to-intermediate term bond fund. They managed it quite well but, apparently, did not see it as an important part of their business future.

They arranged in 2020 to transfer ownership of the fund to a newly created adviser, Channel Investment Partners. Under Channel, the fund’s name and advisor changed but the strategy was simply tweaked and better defined to fit more traditional investor allocation buckets. As a result, the prior fund’s record and five-star rating should not be used to assess Channel Short Duration Income.

Nonetheless, it might well be a new five-star fund in the making as performance under Channel is very strong. In consequence, it earns the Observer’s “most intriguing new funds” designation.

What does the manager do?

The fund invests primarily in a diversified portfolio of short-term, investment-grade, fixed-income securities. The fund may purchase intermediate and long-term bonds while maintaining an effective weighted average portfolio duration, under normal circumstances, of one to three and one-half years.

Its FCI predecessor fund had greater stress on intermediate-term bonds, landing it in Lipper’s “short-intermediate bond” peer group. 

In general, the manager expects to have a core allocation “bucket” that offers broad exposure to his primary asset class. The prospect of outperforming his benchmark and peers would be driven by a few, opportunistically acquired issues. The challenge is identifying outlier opportunities while not becoming antsy and making purchases based on hope rather than on clear-eyed, unemotional analysis.

Why might you have faith in his ability to do it?

Mr. Duch has a long and distinguished track record as a fixed-income manager. As lead manager of Calvert Short Duration Income, he earned a five-star rating from Morningstar. In 2013, his fund won the Lipper Fund Award for Best Short-Investment Grade Debt Fund, 10 Years. He also helped manage successful ultra-short, intermediate-term, and high-yield portfolios. The latter was also recognized by Lipper as having the best five-year record of any corporate debt / BBB-rated fund (2008).

He describes himself as being “responsible for portfolio construction, credit analysis and trading delivering top decile and quartile performance, winning Lipper Fund Awards in 2008 and 2013. [During his tenure] assets under management nearly doubled from approximately $5bn in 2006 to approximately $9bn in 2009.”

Channel’s approach to security selection is driven by an interplay between the manager and analysts. The Channel Investment Partners site describes them as something like “reformed specialists,” folks whose responsibilities at larger firms forced them to focus narrowly on a single asset class or sub-class. That focus might, they believe, have limited their ability to comprehend and respond to the bigger picture: “The push to specialize has resulted in reduced relative value analysis and misallocations of capital. Time spent managing people and processes through preset, philosophical meetings rather than [those] with tangible outcomes result in missed opportunities.”

We subscribe to the old mantra, “No bad bond, just bad price.”

The [portfolio manager uses] a top-down approach while the Analysts use a bottom-up approach. The meaningful conversation happens in the middle around the security’s role in the portfolio, creditworthiness, expectations, liquidity, and valuation. This is important because it defines responsibilities and reduces biases while aligning views toward timely, specific actions upon market-moving events.

In theory, that interplay reduces the number of errors arising from cognitive bias and improves the quality of the resulting decisions.

Bottom Line

Mr. Duch hopes to achieve returns comparable to an intermediate-term fund with volatility comparable to a short-term fund’s. That would be a recipe for a five-star fund.

Channel’s 2021 (1.62%, top 10% of its peer group) and first-year performances (4.03%, top 20% of its peer group) have been promising and it has been cash-flow positive as investors have begun to take notice. The ability to use high-yield bonds in a short-term fund offers a valuable tool to combat what appears to be the Fed’s long-term commitment to real interest rates at or near zero.

On whole, the fund bears watching. It has many of the hallmarks of an intriguing new fund.

Fund website

Channel Short Duration. The advisor’s site, Channel Investment Partners, has a bit more content and a couple of interesting graphics.

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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.