MARKET OUTLOOK POSITIONING
In the third quarter, the fixed income investing landscape remained challenging. Our recommendation is to focus on individual credit selection rather than making broad-based asset class or rate calls. Given the uncertainty surrounding the impact of the rate hike cycle on the economy, credit selection is crucial. While index-level valuations in many areas are uninviting, there are noticeable disparities at the subsector and individual security levels due to the turbulence created by this cycle. Therefore, we advocate for a discerning approach to high-quality leverage loans, non-agency securitized products, and unique narratives within the high-yield and investment-grade sectors.
Our focus within these sectors is on securities that not only offer promising total returns but also possess robust credit profiles that can withstand potential adverse outcomes from the Federal Reserve’s policies. If yields continue to rise without a significant repricing of credit default risk, our strategy will involve adding high-quality duration, including U.S. Treasuries, agency-backed securitized products, and investment-grade corporate bonds.
We have stabilized our exposure to corporate credit overall after reducing our exposure in the first half of the year. We have shifted towards securitized and premium duration assets. However, if there is a significant repricing of credit risk in the lower quality sectors of corporates, we would likely shift from a protective stance to a proactive one, considering individual corporate credits in the lower quality portions of the credit market.
In the realm of junk bonds, our guidance remains consistent: meticulous due diligence is essential. We emphasize investing in entities that are independent of short-term capital market reliance and have sufficient liquidity to weather a potential recession.
The Oakmark Bond Fund outperformed its benchmark, the Bloomberg U.S. Aggregate Bond Index, in the third quarter. The Fund returned -2.21% compared to the benchmark’s -3.23%. For the fiscal year ended September 30, 2023, the Fund returned 2.00% while the benchmark returned 0.64%. The Fund’s outperformance in the quarter was driven by security selection, asset allocation decisions, and its shorter duration profile compared to the benchmark.
Approximately 40bps of the Fund’s outperformance in the quarter was attributed to security selection, primarily driven by credit opportunities within asset-backed securities and strong performance from select corporate credits. The top contributors to the Fund’s security selection were CPS Auto Trust ABS, FHLMC Multifamily Structured Pass Through, and BANK 2022-A4 Commercial Mortgage Pass Through. On the other hand, Tenet Healthcare Corporation (THC) 6.75% Sr. Secured Note, Parsley Energy LLC (PE) 4.125% Sr. Unsecured Notes, and Wells Fargo & Co. (WFC) 3.9% Jr. Sub Perpetual were the largest detractors.
Allocation decisions also contributed positively to the Fund’s performance in the quarter, accounting for approximately 34bps of outperformance. The Fund’s overweight to corporate credit and securitized debt contributed to this. Additionally, the Fund’s shorter duration position relative to the benchmark accounted for 42bps of outperformance, given the increase in rates across the curve.
For the fiscal year, asset allocation decisions and duration positioning accounted for a combined 173bps of outperformance, while security selection contributed an additional 13bps of outperformance. The top contributors to positive security selection for the fiscal year were CPS Auto Trust ABS, Freddie Mac STACR 2022 Uninsured U.S. Agency Mortgage Pass-through, and Oceaneering International Inc 6.0% Sr. Unsecured Note. The top detractors were SVB Financial Group (OTCPK:SIVBQ) 4.25% Perpetual Preferred bond, Signature Bank New York (OTCPK:SBNY) 4.0% Subordinated bond, and SVB Financial Group 4.0% Perpetual Preferred bond.
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We value our relationship with our investors and are available to address any questions or concerns. Feel free to reach out to our team. We regularly hold investor calls and meetings where you can interact with us and learn more about our strategies and future plans. You can also email us at firstname.lastname@example.org or email@example.com.
Adam D. Abbas | M. Colin Hudson, CFA
The information provided in this content is for informational purposes only and represents the views and investments of the portfolio managers and Harris Associates L.P. as of the date written. It is subject to change based on market and other conditions without notice. This content is not a recommendation to buy or sell any security and is not warranted to be correct, complete, or accurate. Forward-looking statements are based on the portfolio managers’ perception of historical trends, current conditions, expected future developments, and other factors they believe are relevant, but actual future results may differ. The Bloomberg U.S. Aggregate Index is an unmanaged index and cannot be invested in directly. The Oakmark Bond Fund invests primarily in a diversified portfolio of bonds and other fixed-income securities, with a focus on investment-grade and below investment-grade securities. Fixed income risks include interest-rate and credit risk. Bond values fluctuate based on market conditions. The Fund’s portfolio holdings are subject to change without notice.