Morningstar takes decisions about assigning funds to their Morningstar Categories seriously, and one of our main goals is to help investors avoid risks they don’t mean to take on.
That’s why we recently elected to introduce three new fixed-income peer groups: government mortgage-backed bond, securitized bond-diversified, and securitized bond-focused.
The rationale for the new categories is similar to the reasons behind our decision, years ago, to require funds to have at least 90% in debt linked to Uncle Sam to qualify for Morningstar’s US government-bond categories. Before we made that change, funds meeting the Securities and Exchange Commission’s rule requiring funds to have at least 80% of their assets in actual government-issued securities to use the word “government” in their names sometimes went right up to the line. They would pack the other 20% with more risk than most peers ever would. Strategies that pushed the limit often left rivals in the dust when credit markets were hot—and burned investors when they were not. As a result, we now assign funds with less than 90% in government debt to other categories that come closest to matching their composition.
In that spirit, we recently broke out the three new groups. Here’s a look at each, starting with the government mortgage-backed bond category.
Government Mortgage-Backed Bond
The interest rate sensitivity of mortgages is very attuned to homeowner refinancings, which can cause dedicated mortgage fund durations to swing to extremes. That metric for the Morningstar US Mortgage-Backed Securities Index has been as short as 0.6 years and as long as 6.5 years since the turn of the century.
That sets mortgage portfolios apart from those intentionally managing their rate sensitivity within predictable ranges, often via a mix of US Treasuries, government agency bonds, and government agency-backed mortgages. Those funds remain in our existing government categories, which are organized by duration ranges set around the interest rate sensitivity of the Morningstar US Core Bond Index.
Securitized Bond–Diversified
By contrast, the new securitized bond–diversified category comprises funds with a broader range of securitized sectors, including agency, nonagency, and commercial mortgages; asset-backed securities; and collateralized loan obligations, for example. Most had been mixed in with intermediate-term core bond or core-plus bond funds based on their credit quality and interest rate sensitivity, but their lack of exposure to corporate and Treasury bonds often made them outliers.
The new category launched with more than 35 distinct open-end funds and exchange-traded funds, the largest of which included Pimco Mortgage Opportunities and Bond PMZAX, JPMorgan Mortgage-Backed Securities ETF JMTG, and iShares U.S. Securitized Bond Index BISBX.
Securitized Bond–Focused
Single-sector funds are less common in bondland than in equities, but the popularity of ETFs as portfolio building blocks has ushered in several devoted to single securitized sectors. Roughly 60% of these funds focus on CLOs, with the rest clustered around commercial mortgages and a few on ABS.
Risk was a prominent factor in deciding to break them out into the new securitized bond–focused category. Many have interest rate exposures consistent with the ultrashort bond category, but their single-sector design meant most hugged the edges of their categories. That translated to outlier returns and the potential to zig while others zag, making them ill-suited for the most conservative portion of investor portfolios. The new category launched with roughly 25 distinct ETFs and open-end funds, including Janus Henderson AAA CLO ETF JAAA, which dominates the group with more than $25 billion in assets.