Fresh out of the University of Wisconsin, Janet Rilling was working as an auditor for one of the major accounting firms when she had a career-changing epiphany.
“I was seeing a variety of businesses up close during the audit process and realized that it wasn’t the ticking and tying that I enjoyed, but learning about the management strategies and what the drivers were of the business,” says Rilling, who went back to the university for her master’s degree in finance from the Applied Security Analysis program. “I really liked the idea of being able to manage a portfolio while in school,” she adds.
More than 25 years later, Rilling is the head of the multisector fixed-income-plus and high-yield team at Wells Fargo Asset Management, which in 2005 acquired Rilling’s previous employer, Strong Capital Management.
The past year has been an interesting time for fixed-income investors, to be sure, but Rilling and her team have been adept at navigating the market’s twists and turns. In fact, a hallmark of their strategy is focusing on a six-month investment horizon, with the goal of anticipating market inflection points and tilting allocations accordingly.
“It’s not that we turn the portfolio over every six months,” she is quick to add. “But we’re comfortable making changes.”
Rilling, 52, credits that approach with giving her team an edge in running the $1.9 billion
Wells Fargo Core Plus Bond
fund (ticker: STYAX), which is up 8.9% over the past 12 months—better than 93% of its Morningstar peers—and has returned an average of 4.9% a year over the past decade, better than 84% of its peers.
The fund owns a minimum of 65% of its assets in sectors included in the Bloomberg Barclays U.S. Aggregate Bond Index—Treasuries and U.S. investment grade bonds, for example. It has leeway to put up to 35% of its assets to work in so-called plus sectors, ranging from U.S. high-yield bonds and European corporates, to emerging markets and foreign-currency exposures. In theory, an investor could get broad fixed-income exposure with this single portfolio. “The idea is this takes some of the decision-making off the table so investors don’t have to worry about how their fixed income is allocated,” says Rilling, who has led the team since 2015.
In typical times, Rilling and her four co-managers sit nearly elbow-to-elbow on an open trading floor in Menomonee Falls, Wis., a town just outside of Milwaukee where, coincidentally, Rilling grew up. Like most in their industry, they have had to replicate that camaraderie virtually. “We’ve done a really good job re-creating that, but nothing beats being in person,” she says. Rilling takes the lead on investment-grade corporate credits, while four other sector specialists cover their respective areas; the group is supported by nearly 70 people on the fixed-income research team.
Heading into 2020, Rilling and her team were worried about the rich valuations across the fixed-income universe—and at a time when the economic cycle was long in the tooth. “They were at levels we hadn’t seen since before the financial crisis,” she says. “But of course things changed very quickly.”
By the end of January 2020, the team had brought the plus allocation of the portfolio down to 11%, with U.S. high-yield bonds representing less than 3% of assets at that point. The team wasn’t anticipating the Covid-19 selloff, but they were well-positioned to take advantage of it.
By the end of April, they had increased plus holdings to 21% of assets and brought their U.S. high-yield allocation up to nearly 15%. They used a combination of individual securities and exchange-traded funds that serve as placeholders when they want to quickly gain exposure to an area while analysts are still vetting securities. “Over time we rotate into individual names,” she says. The team added to its plus exposure in other areas, including European and emerging market debt, bringing the category to nearly 26% of the portfolio by the end of August.
Note: Allocations as of Dec. 31. Returns through Feb. 8; five- and 10-year returns are annualized.
Sources: Morngingstar; Wells Fargo Asset Management; Bloomberg
Meanwhile, the team positioned its core holdings to take advantage of fire sales among investment-grade securities. “The highest-quality companies started tapping the investment-grade market to gain back balance sheet liquidity,” says Rilling. She added such names as
(DIS), which issued bonds at yields close to 4%. In other words, A-rated bonds were trading at spreads (yields above Treasury bonds with the same maturity) similar to where BB bonds had traded just a few months earlier.
But yields didn’t stay there for long. Just as equity investors flooded back to the market in the spring, so, too, did yield-hungry bond investors. Valuations for most pockets of fixed income are back where they were a year ago. “It’s pretty remarkable that you could go through an entire credit cycle, coming in at the best place, going to the worst place, and then recovering back almost to the best place, in just a year,” Rilling says. The portfolio’s breakdown was recently 78% core and 22% plus.
The current market environment offers an important distinction from this time last year. “Today we’re in the early stages of a new economic cycle, and with fiscal stimulus providing additional support,” she says. While equity investors have dipped their toes in hard-hit sectors, Rilling’s team has been selectively buying bonds in Covid-sensitive areas.
The fund bought investment-grade airline bonds secured by cash flow from mileage-incentive programs, including 2027 United Airlines Holdings (UAL) bonds issued in June at 6.5%. Her team has since added unsecured airline bonds, small positions in cruise operators, and higher-quality energy names. “U.S. high yield is our favored spot in credit, particularly BB bonds that have more room to recover than BBB,” she says.
The fund also owns bonds that were investment-grade before the Covid-19 crisis led to downgrades. With a new economic cycle unfolding, these so-called fallen angels—including bonds from
(EQT)—could reclaim their wings.
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