They benefited in 2015 from investors fleeing Pacific Investment Management Co.’s Total Return Fund after Bill Gross departed the prior year, and then from an effort to be included in companies’ 401(k) retirement plans and mutual-fund advisers’ recommended offerings. The PGIM Total Return fund’s performance has bolstered their case. It’s averaged almost a 3 percent annual gain over the past five years, better than 82 percent of peers, Bloomberg data show.

But their bullish view on interest rates, which paid off in 2017 as yields failed to move higher for much of the year, is backfiring in 2018. Even though the team says their broad macro view accounts for just 10 to 15 percent of performance, the fund is down 2.3 percent this year, trailing around 90 percent of peers.

‘February Is Worse’

As bad as January was, “February is worse,” said Peters, a senior portfolio manager. He’s the newest team member, joining four years ago from Morgan Stanley, where he was chief global cross-asset strategist. The challenge is building because, in addition to Treasury yields grinding higher, credit spreads have also started to widen. 

The broad macro call is always the most difficult, said Peters, who credits PGIM Fixed Income’s arsenal of over 100 fixed-income analysts and managers for the group’s success. Most sit together in a large trading room on the tower’s seventh floor. On Mondays around noon, many gather in a conference room and connect with overseas colleagues to brainstorm on investment plans.

As part of building the portfolio, the firm also uses security selection, sector allocation and duration views, and it frequently taps derivatives to adjust to the desired duration and yield-curve view.

Spread Anticipation

A big chunk of the 2017 performance came from anticipating narrowing spreads in investment-grade and high-yield corporate debt, Tipp said.

Their conviction that rates will remain low is evident in the fund’s duration, a measure of sensitivity to moves in interest rates. It’s about a half-point longer than the benchmark, the Bloomberg Barclays U.S. Aggregate Bond Index, which has a duration of about 6.

There are also areas where they’ve pulled back.