Morningstar - Q2 2023 - 64

Investors
MainStay MacKay US Infrastructure
Bond MGOIX
Growth of $10K
$12K
11
10
9
8
04/2020
Morningstar Category
Morningstar Rating 3-Yr*
Expense Ratio (%)
03/2023
Interm Core Bond
QQQQ
0.60
*Fund adopted current strategy on Feb. 28, 2019.
Source: Morningstar Direct. Data as March 31, 2023.
MainStay
MacKay US
Infrastructure
Bond
9.62
Morningstar
US Core Bond
9.18
a natural geographic expansion for one of
the larger healthcare systems in New York City, "
says Burke.
Then in March 2022, a deal was announced
that the hospital was being acquired by
NYU Langone Health, which carries a stronger
credit rating. That led ratings agencies to
upgrade Long Island Community Hospital in May.
" The total return impact ... was pretty
substantial, " says Burke. As of late February,
the fund still held the bonds.
In addition, at the sector level, the fund's
performance in 2022 was bolstered by an
underweighting in healthcare bonds compared
with the fund's benchmark.
6% throughout the year. Historically, the fund
has tended to hold 2%-3% cash.
Between the tilt toward longer durations and the
increased cash holdings, " we had kind of
an extended barbell on that benefited the fund, "
Burke says.
Opportunities in Taxable Bonds
But it's the work on the taxable side of the
equation that the MacKay Shields team
says separates them from the rest of the pack.
For example, there's their approach to
debt issued by healthcare providers
both at the individual security level and at
the sector level.
At the individual security level, the team points
to an October 2020 investment the fund
made in bonds from Long Island Community
Hospital. The bonds were carrying a relatively low
BBB- rating but yielding around 4.9%.
" We thought there was an opportunity for
M&A in this particular instance ... that it was
64
Morningstar Q2 2023
" It's not just looking at an individual credit,
or a bunch of credits and making a sector call;
there's a macro aspect to it, " says Sprauer.
Healthcare providers are struggling with staffing
shortages, and federal reimbursements for
hospital care are coming down, he notes. " The
post-COVID world looks a little bit different
and the stress at the hospital level is showing.
So, we're sticking with the larger systems,
the strong systems, and getting out of those
that have downgrade risk. "
Strong Credit Quality
With an eye toward the macro-level risks
of a recession, the MacKay Shields
team has been more broadly tilting toward more
highly rated debt. As of late February,
they had raised the fund's allocation to AAA
rated debt by 11.5 percentage points
from where it stood a year ago and reduced
holdings of A rated debt by 7 percentage
points. They also took down BBB debt by
6 percentage points.
" We have traded a lot among these credits,
or even within the BBB or A credit bucket, " says
Gill. But with the bottom-up approach,
" we're trying to buy the best credits within
those buckets. "
While the infrastructure fund lost money for
the 12 months ended Feb. 21, it's still outperformed
most traditional core bond funds. The
MacKay Shields strategy lost 8.3% during that
period compared with an 8.9% decline on
the average core bond fund, leaving it in the
27th
percentile for one-year performance.
Overall, the team is optimistic about the
ability of muni issuers to weather a potential
economic slowdown.
" Yes, sales taxes have come down, " Sprauer says.
" Yes, income taxes will come down and capital
gains, but many of the states put money aside
post-COVID, with help from federal money and also
with the robust consumer economy that we
really had. " As a result, governments " put a
tremendous amount of money into rainy day funds
and reserve funds at the state levels and it also
filled the coffers. We're going into this potential
downturn in much better shape. "
Sprauer says that the taxable muni portfolio
is well protected against the type of credit quality
issues that could dog corporate-bond funds
in a recession. " There are a tremendous amount
of levers that states can pull if there is some
kind of revenue shortfall, " he notes.
These are the kinds of dynamics that the MacKay
Shields team points to when it comes to the
value of the taxable muni strategy.
" We think it's a great either complement to
your IG corporate exposure, or substitute
through different economic cycles, " says Sprauer.
" And that's what we're trying to get people
to understand, because we do think it
has a place in a lot of different types of assetallocation
models. " K
Tom Lauricella is chief markets editor for Morningstar.
Photography by David Zentz.
https://www.morningstar.com/authors/1953/tom-lauricella
Morningstar - Q2 2023

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