Morningstar - Q2 2020 - 96

Ten Questions

PGIM's Michael Collins puts a gyrating
bond market into perspective.
Laura Lallos, managing editor of Morningstar
magazine, interviewed Collins in early April.
1. March was rough. What surprised you most?

The absolute, though temporary, breakdown
in bond market liquidity. Investors sold
the highest-quality and shortest-maturity bonds
to raise cash, causing prices on those bonds
to decline disproportionately relative to bonds with
more credit risk. Since the Federal Reserve
stepped in with their myriad stimulus programs
in mid-March, liquidity has improved markedly,
with many fixed-income sectors starting
to recover.
2. What is the biggest challenge for bond investors?

Given the expectation for a deep global recession,
we believe navigating what may be significant
credit rating downgrades and defaults will be the
biggest challenge. The ability to perform
in-depth credit research in this rapidly changing
environment will be the key to success.
3. How was the global financial crisis different?

Michael Collins is managing director and
senior portfolio manager at PGIM Fixed Income.
He manages several multisector bond
funds and is part of the team that earned the
Morningstar Fixed-Income Manager of
2017 award for its work on PGIM Total Return
Bond PDBZX, which has a Morningstar
Analyst Rating of Silver. Collins joined the firm
in 1986 as a software applications designer
and has developed proprietary quantitative
international interest-rate and currency
valuation models. He has a Bachelor of Science
from Binghamton University and an
MBA from New York University's Stern School
of Business.

First, the upcoming economic downturn may be
deeper, but shorter-lived, than the financial
crisis downturn. Second, there is uniform
agreement that COVID-19 is an exogenous shock
that requires a multinational, bipartisan,
unified, and global response. As a result, the
monetary, fiscal, and regulatory initiatives
and policies that are being implemented are more
aggressive and are being introduced more
quickly than during the financial crisis. Finally,
the financial sector, particularly the large
banks, are better capitalized and better equipped
to provide support.
4. What investing lessons from the past are guiding

5. Has volatility created opportunity?

Absolutely! We believe the bond markets have
already priced in a worst-case scenario for defaults.
We are seeking opportunities in recessionresistant sectors and plan to actively add credit
risk in multisector fixed-income portfolios
as the markets recover.
6. What about the oil price war?

If oil prices remain at current low levels, we
expect an increase in defaults from highyield energy companies and rating downgrades
across both high-yield and investmentgrade companies. Much of this credit risk is
already priced in, so there may be opportunities
to add value across the sector.
7. How is PGIM Total Return Bond structured?

Over time, we expect about 90% of the fund's
alpha to come from bottom-up security selection
and sector rotation, both higher informationratio activities. The remaining alpha is typically
generated by active yield curve and duration
management. As the Fed cut rates to near zero in
March, we reduced long-duration positions
but have maintained a yield-curve-flattening bias.
8. What's the best advice you've received?

When I started in this business, I was told that
interest rates were going to move about
100 basis points each year and that my job was
to determine in which direction. Fortunately,
my colleagues and I figured out early on that the
direction would more often be down!
9. What do you enjoy doing when you aren't investing?

Usually thinking about (or even dreaming about)
investing. I also enjoy all types of sports,
particularly golf, tennis, and weight training.

you today?

We have learned that the markets tend to
overreact during a recession, which in turn creates
opportunities for long-term investors.

Morningstar Q2 2020

10. Any media or reading recommendations?

This is a timely question, as we just launched our
own podcast called All the Credit.

Morningstar - Q2 2020

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