Morningstar Advisor - December 2012/January 2013 - (Page 57)

Volatility is a great thing. People should embrace it and hope for it. We hope for it every day, and we’ve used it to our success over long periods of time. Mark Egan things in fixed income.” He was leery about a move to southern Indiana, but was intrigued by Reams’ approach to fixed income. The firm, headed by Robert Crider, was an early arrival to the high-yield market. Reams was also investing in currencies and long-duration bonds at a time when few others were. “It was ‘core-plus’ investing back when nobody knew what to call it,” Egan says. In addition to a core of investment-grade bonds, the strategy allows managers to use high-yield debt and other higher-risk instruments that could bring higher return. This approach to fixed-income appealed to Egan’s desire to invest differently. Having come from a background of more traditional fixed-income investments, such as Treasuries and investment-grade corporate bonds, he welcomed the chance to try something new. He began managing Reams’ Frontegra Core Plus Fund at its inception in 1996. Kansas City-based Scout Investments acquired Reams in 2010 and renamed the fund Scout Core Plus Bond. Volatility Welcomed a pretty unique approach. They’ve been really good at timing those moves generally,” Sjoblom says. Egan welcomes volatility because of the opportunities it presents. “Volatility is a great thing. People should embrace it and hope for it. We hope for it every day, and we’ve used it to our success over long periods of time,” he says. “Volatility, especially in this low-rate environment, is one of the only friends you are going to have. It’s going to give you the opportunity to buy a lot more Bank of America 10-years like you could a year ago at 8%, instead of today at 3%.” Core Plus Bond has a 10-year annualized return of 8.74%, and a five-year annualized return of 10.23%. The fund got smacked hard in 2008, which Sjoblom attributes to a move into corporates and commercial mortgages ahead of the Lehman Brothers collapse in September of that year. Sjoblom adds that the fund rebounded in 2009 and has been in an uptrend since then. Egan acknowledges that the fund’s approach toward volatility—accepting more of it to gain higher returns going forward—can result in short-term declines. “Our approach is a bit different from others, and that sometimes gets us into trouble over the volatility. In 2008, we underperformed the market, but we told people then that they would look back on that period of time and early 2009 as an opportunity lost if they didn’t take advantage of it,” he says. While plenty of pundits and portfolio managers have become skittish about fixed income, Egan believes their fears are misplaced. “There’s always a place for bonds in people’s portfolios, and we understand that and we would hope to garner our fair share of that,” he says. But he adds that investors will need to become more selective in how they incorporate debt instruments into portfolios. Two New Funds Reams recently added two more bond funds to its mix. The firm opened Scout Low Duration Bond SCLDX this year and Unconstrained Bond SUBFX in 2011. Low Duration Bond, which is less volatile than a longer-term bond fund, is intended for use in capital-preservation strategies. Egan expects the fund to return about 1% to 2%, a higher yield than money market funds. “We think investors will gravitate toward a lower duration profile, knowing they will give up tens of basis points, to what they might get in a longer portfolio,” Egan says. “But should rates rise ultimately, as people expect they will one day, you’ll make that back. So we think low duration will be an area of increasing interest.” Scout Unconstrained Bond, as the name suggests, seeks value throughout the fixed-income market. Explaining the fund’s approach, Egan quips, “There’s nothing wrong with bonds per se, except the possibility of negative returns should interest rates rise. But in an unconstrained mandate, the only Morningstar fixed-income analyst Miriam Sjoblom, who covers the fund, says that with around $544 million in assets under management, the offering is small enough to allow fast moves in response to market volatility. “When the market gets volatile, they use that as a signal to take on more risk. When risky sectors are selling off, they tend to make pretty sizeable moves quickly, which I think is MorningstarAdvisor.com 57 http://www.MorningstarAdvisor.com

Table of Contents for the Digital Edition of Morningstar Advisor - December 2012/January 2013

Morningstar Advisor - December2012/January 2013
Contents
Contributors
Letter From the Editor
What Stands Between Me and Stupid
Why Do You Use Dynamic Funds of Funds?
Serving Clients and Community
How to Pick an ETF Managed Portfolio Strategy
Tactical View of Risk
Investments á la Carte
Investment Briefs
Unbundling ETF Managed Portfolios
Risks Loom Over Telecom Industry
Outsourcing Asset Allocation
ETF Managed Portfolios on the Rise
Age-Based Options Take Over 529 Industry
How the Landscape for Advisors Is Changing
Mark Egan Embraces Volatility
Alpha, Beta, and Now … Gamma
Performance Gaps
Gains in Momentum
Companies Where Management Teams Add Value
Our Favorite Mutual Funds
50 Most-Popular Equity ETFs
Undervalued Stocks With Wide Moats
The Once and Future King

Morningstar Advisor - December 2012/January 2013