), favors corporate bonds poised to gain as interest rates rise. Marthaler's fund is comfortably ahead of most intermediate-term, medium-quality bond funds for this year and in past years. For 2001 through October, Capital Bond rose 9.4%, versus 8.1% for its peers, and for the five years through October, the fund returned an annualized 7.5%, versus 5.6% for its peers.
This year, the fund's gains have come from convertible bonds and an underweighting in mortgage bonds, according to Marthaler. Over the long-term, Marthaler said his asset class -- intermediate-term investment-grade bonds -- shows higher results than either short-duration or long-duration bonds.
Bill Gerdes of Standard & Poor's FundAdvisor recently spoke with Marthale about about the fund's investing strategy. Edited excerpts of their conversation follow:
Q: What's the fund's asset allocation?A: Currently, we're 40% in corporate bonds, 32% in government securities, 10% in high-yield bonds, and 2% in asset backed securities. Our long-term view is that corporates will do better as the economy recovers and interest rates move higher.
Q: What is the fund's
duration?A: It's about 4.5 years, since we've been slightly defensive this year. Generally, we're within 98% of the duration of the Lehman Aggregate Bond Index.
Q: What are the largest sectors for your high-yield holdings?A: Most of our high yields are in industrial categories, but we're also overweighted in health care, which, year-to-date, is probably the fund's best performing area. In addition, we have exposure to telecoms, though we'll probably sell a Global Crossing holding by the end of the year because it hasn't done well. To reduce risk, our maximum weighting for a high-yield holding is 1.5%.
Q: How do you monitor risk?A: We use stress testing, which looks at a bond's expected returns compared with its sector and risk-free securities. Since we focus on the long-term, we don't actively increase or shorten our duration based on day-to-day economic events.
We also control risk by diversifying, with no bond making up more than 3% of the portfolio.
Q: How do you select securities?A: We calculate the cost of adding a bond to the portfolio, and then projecting its returns, typically for a two-year time horizon. We consider a bond's future returns under a variety of scenarios and will only buy those with expected returns matching or exceeding the Lehman Aggregate Index for at least 75% of the time.
Q: What has helped the fund's returns this year?A: Some convertible bonds, such as Waste Management, have done well, as have low-duration securities of under five years. Our underweighting in mortgages has also had a positive impact.
Q: What's the benefit of investing in intermediate-term investment-grade bonds?A: They have the highest risk-adjusted returns relative to short-duration and long-duration securities.
Q: How has ABN AMRO's acquisition of Alleghany Funds, Chicago Capital Bond's previous owner, affected the fund?A: ABN AMRO Bond Fund merged into our fund in September, but we had transitioned our holdings before then so the merger had little impact on our shareholders. From Standard & Poor's FundAdvisor