Mike Schnitzel
May 4, 2022

Lipper Leaders Spotlight—TIAA-CREF Fund Uses Asset Allocation to Find Alpha While Managing Risk

by Mike Schnitzel.

The Lipper International Income Funds classification is defined as funds that state in their prospectus that they invest primarily in U.S. dollar and non-U.S. dollar debt securities of issuers located in at least three countries, excluding the United States, except in periods of market weakness, according to Lipper methodology. These funds provide investors with assets that can be beneficial to diversifying their portfolios.

The Lipper Leaders Rating System is a toolkit that helps guide investors and their advisors in selecting funds that suit individual investment styles and goals. According to Refinitiv Lipper, “Each fund is ranked against its peers based on the metric used (such as its flagship risk-adjusted return measure, Consistent Return, Total Return, or Expense), and the highest 20% of funds in each peer group are named Lipper Leaders, the next 20% receive a rating of 4, the middle 20% are rated 3, the next 20% are rated 2, and the lowest 20% are rated 1.”

Using Lipper Leader metrics for the month ended March 31, 2022, one of the best International Income Funds is the TIAA-CREF International Bond Fund, Institutional (TIBWX). The fund has a Lipper Leaders rating of 5 for the three-year and five-year Consistent Return and Total Return ratings, and it has beaten its benchmark—the Bloomberg Global Aggregate ex-USD Index (Hedged)—over the three- and five-year periods to March 31. We spoke with fund manager Anupam Damani to examine the strategies she uses to manage the fund, and her team’s outlook on international bonds and International Income Funds in general.

A focus on dynamism across interest, credit rates, and the FX market

Damani said she and her management team take a dynamic approach to asset allocation with a focus on the interest rate, credit, and the FX markets. “This lets us provide diversified sources of alpha and income while constraining overall risk,” she said. The fund uses the Bloomberg Global Aggregate ex-USD Index (Hedged) as its benchmark, which Damani notes is quite constrained—it is heavily concentrated in government bonds and developed market credit.

“We use a broader lens of the wider fixed income universe that allows us to capture opportunities in both the developed and the emerging markets world. I like to find attractive valuations and stories wherever I can,” she said.

Damani said the team manages the fund using tactical sector rotation to improve returns while minimizing risk. She said they use class sectors inside or outside of the fund’s benchmark, including the Euro high yield segment and emerging markets, and eye both credit and interest rates. “We like idiosyncratic stories where there is lower market correlation,” Damani said. “We invested in local Dominican and Ugandan local bonds. They can be more illiquid and higher risk, so we make sure to right-size our positions and carefully consider liquidity and volatility profiles.”

Nuveen, the asset manager which oversees TIAA-CREF funds, has a lot of expertise across different sectors in fixed income, which helps TIBWX’s management team go beyond in-benchmark securities to find value. “For example, last year we started rotating out of some of our euro and investment-grade risk and into European CMBS. It offers significantly raised premiums to similar euro and U.S. bonds while offering a shorter duration portfolio. That has helped us,” Damani said.

Damani said a lot of people look at emerging markets as a monolithic asset class but said there are a lot of opportunities with lower risk that goes unnoticed. “Seventy percent of our EM is investment-grade rated. We have tapped into some very developed rates in Israel and Singapore.”

Managing risk efficiently

Core risk is integrated through TIBWX’s investment process, and the team uses a risk budget to determine when and where risk is appropriate.

“We focus on risk-adjusted return measures so that when we use risk we are using our risk budget more efficiently. If you look at some of the risk in our portfolio—duration risk, credit risk, liquidity risk—there can be some amount of FX risk, although we largely hedge out that position, but we can use that as an additional source of alpha,” Damani said. “In the global marketplace, we are in unprecedented times, but geopolitical risk always figures into how we approach the markets and our security selection process. We diversify elements of risk, like rate risk, by going into EM and we also diversify our credit risk, which allows a diversification of duration and by going to multiple sectors and subsectors.”

Opportunity in spite of geopolitical turmoil

Between the COVID-19 pandemic, supply chain constraints, war between Ukraine and Russia, Chinese regulatory tightening and rampant inflation in the U.S. and around the world, the globe is experiencing a level of turmoil not seen in decades. In spite of this, there are opportunities for International Income Funds as long as managers are nimble in their approach, according to Damani.

“Many central banks are looking to raise interest rates to combat inflation. They are expeditiously looking to get rates above neutral, and the markets are moving rapidly to price in these changes,” Damani said. “We think international fixed income is a great place to be over the next six to 12 months because the markets have adjusted. There is a lot of risk, but we have moved a lot from the beginning of the year even in developed rate markets and spreads have moved, so there is an opportunity to play with rates in the market.”

Damani said there will be good opportunities, but managers need to be diverse, selective, and nimble over the next six to 12 months because of the high level of uncertainty. Damani does expect some supply side pressures will ease a bit.

International Income Funds provide diversification

Rather than being allocated solely to U.S. fixed income within one sector, International Income Funds have multi-sector, multi-country, multi-currency exposure, Damani noted. This is a source of alpha for portfolios.

“Investing with the belief that no single sector, style, or strategy will perform in all markets. Staying nimble and using multiple sources of outcome is the way we approach things,” Damani said. “Also, the experience and stability of our investment team in uncertain times can show a track record, and focus remains on delivering a diversified source of income and risk-adjusted returns through cycles goes a long way.”

International Income Funds see record year-to-date inflows

International Income Funds have experienced $32.4 billion in net inflows this year through April 27, making it the top money taker of any fixed income fund classification year to date, according to figures from Refinitiv Lipper. This beats any other full year of flows going back to 1993 for International Income Funds, when Lipper began tracking weekly flows for the classification.

Preliminary numbers for April saw some money (-$160 million) moved out of the classification given all of the global turmoil—but investors put money into the classification every other month. February was a gangbusters month for International Income Funds. The classification took in $31.85 billion over the course of February.

Overall, International Income Funds have been out of favor since the start of the COVID-19 pandemic. Investors moved money out of the classification in both 2021 (-$4 billion) and 2020 (-$1.3 billion).

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