Beyond predictions: thriving in an unpredictable market

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Weitz co-heads of fixed income on fundamentals over forecasts

FOLLOWING THE fourth-quarter rally of 2023, investors and market prognosticators believed – and bet on – predictions that the Fed was poised to make as many as six interest rate cuts in 2024. However, as those predictions changed from six cuts to five cuts to four cuts to three or fewer, some investors have had to pivot. How did this deviation from expectations affect the team at Weitz Investment Management? “Not at all,” says Tom Carney, CFA, co-head of fixed income at Weitz alongside Nolan Anderson. “We’re not in the business of making predictions. Our focus remains on fundamental analysis and seizing individual investment opportunities, regardless of market chatter.” With tenures of 30 and 13 years at Weitz, respectively, Carney and Anderson co-manage the Weitz Core Plus Income Fund, which they have overseen since its inception a decade ago. They attribute the fund’s strong track record to their steadfast commitment in the face of macroeconomic uncertainties – from interest rate forecasts to presidential elections. Their strategy revolves around daily assessment of market dynamics and letting current conditions, rather than speculative forecasts, guide their decisions.

Weitz Investment Management, Inc. is an independent, boutique asset management firm headquartered in Omaha, Nebraska. Since its founding by Wally Weitz in 1983, the firm has focused on providing exceptional service and delivering solid long-term, risk-adjusted returns. Weitz is guided by a steadfast investment philosophy of using bottom-up, fundamental research to build high-quality, high-conviction portfolios. Across its equity, fixed income, and conservative allocation solutions, Weitz takes long-term views that aim to transcend short-term market noise and volatility. The approach aims to deliver enduring value in an ever-changing market.

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“We are fortunate to invest in a diverse range of assets that touch the consumer – including auto loans, consumer loans, home improvement loans, and RV loans – spanning the entire FICO spectrum. This broad exposure provides valuable insights into the US consumer across the credit spectrum”

Nolan Anderson, Weitz Investment Management

Weitz’s investment approach focuses on casting a wide net across the bond market, seeking to create portfolios prepared for any eventuality – an objective beyond the reach of portfolios tethered to the Agg. Anderson explains, “We consistently assess investments across the entire yield curve, both within and beyond traditional indexes, seizing opportunities wherever they exist.” Anderson further explains, “The Agg is a rigid portfolio comprised primarily of Treasuries, agency mortgages, and corporate bonds. It moves on the margin. Decades ago, it was a proxy for the bond market, but today, it has significant limitations when it comes to total bond market exposure as it now represents less than half of the $55 trillion market.”

Anderson and Carney not only assess the relative value of Treasuries, agency mortgages, and corporate bonds but also delve into a broader $30 trillion market that includes asset-backed securities, commercial mortgage-backed securities, CLOs, and high-yield bonds. Their focus spans a wide array of US fixed-income assets, prioritizing high-quality, liquid instruments extending well beyond the confines of the Agg. Carney emphasizes, “These areas outside the Agg often represent significant value. They receive less attention than sectors tied to the index but offer comparable credit quality. So, we see no reason to limit our opportunity set.”

Today’s bond market is constantly evolving, and investors are inundated with information. Active managers face the crucial task of discerning what is relevant, reliable, and actionable. What metrics does the Weitz team emphasize? “All of them,”

says Carney. “Our strategy is informed by macroeconomic factors, but our decisions are firmly anchored in the fundamentals. In other words, we’re paying attention to everything.” Anderson points to the US consumer as one area of the team’s focus. “You can never underestimate the US consumer’s willingness and ability to take on debt and spend money,” Anderson highlights. “We are fortunate to invest in a diverse range of assets that touch the consumer, including auto loans, consumer loans, home improvement loans, and RV loans, spanning the entire FICO spectrum. This broad exposure grants us access to monthly reporting data, offering valuable insights into the US consumer across the credit spectrum.

“We view spreads as a bellwether as we seek to invest on the credit side, to understand the market sentiment, and to find opportunities to be greedy when other investors are fearful. We aim to capitalize on opportunities when fear dominates, as this often leads to better risk-adjusted returns”

Tom Carney, Weitz Investment Management

“Our macro analysis benefits from our substantial exposure to consumer-related assets and the data we gather. Given that US consumers are the backbone of the economy, understanding their financial behavior is crucial in shaping our investment strategy.” Carney underscores the importance of spreads as a critical metric. “We closely monitor current spread levels, historical comparisons, and their relation to the economic cycle,” Carney explains. “This has been especially true in 2024, where it seems abundant capital is chasing opportunities, driving spreads lower. We view spreads as a bellwether as we seek to invest on the credit side, to understand the market sentiment, and to find opportunities to be greedy when other investors are fearful. We aim to capitalize on opportunities when fear dominates, as this often leads to better risk-adjusted returns.”

Though time is well spent understanding the macro environment or analyzing credit spreads, the Weitz team constantly circles back to fundamental due diligence, investing one security at a time. “We’re always focused on the fundamentals, for instance, how a particular corporation is doing with respect to their progress toward leverage targets,” Carney explains. “Or reviewing investments we already own, for example, in the asset-backed securities market, where we regularly monitor the underlying quality and compare that to the market’s assessment. “For instance, we recently bid on an investment-grade bond that the market viewed less favorably. By recognizing the pathway to an improved rating, we anticipate excess returns, benefiting from what we see as the misalignment between market perception and actual fundamentals.” This approach underlines Weitz’s commitment to navigating the bond market with a blend of macroeconomic insight and rigorous fundamental analysis, ensuring informed and strategic investment decisions.

Macro-informed, fundamentally grounded

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Bond market evolution: Beyond the Agg

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Published August 12, 2024

Bond market evolution: beyond the Agg

“For example, we have observed how inflation has significantly impacted lower-income borrowers, particularly those earning $50,000 to $75,000 annually, who rent rather than own their homes. These individuals were hit hard by the rising costs of essentials like groceries and fuel. This data has informed our investment approach, shifting focus towards higher-income homeowners less impacted by inflation.

Today, the Weitz Core Plus Income Fund has an average effective duration of approximately five and half years, compared to the Agg’s roughly six years. While this variance might seem slight, the contrast between the two portfolios is anything but. “Comparing the duration of active versus passive investments can be misleading,” says Anderson. “We invest across the entire yield curve, resulting in a well-diversified portfolio with bonds ranging from zero-duration floating rate securities to treasuries at the long end of the curve. A profile distinctly different from that of our passive counterparts.” Carney adds, “Given the ongoing uncertainty surrounding interest rates and the challenge of predicting their changes, our goal is to construct a portfolio capable of navigating various scenarios, ensuring that regardless of market conditions, a segment of the portfolio will benefit.” Creating a resilient portfolio in today’s evolving landscape requires constant adaptability and flexibility – attributes that Anderson and Carney emphasize within their portfolio allocation process. “As the Fed entered a tightening cycle and throughout 2022, we emphasized short-duration credit risk through ABS and CLOs,” Carney explains. “Simultaneously, we extended portfolio duration by investing in the belly and long end of the curve despite the inverted yield curve environment. As the pace of Fed-tightening moderated and credit spreads tightened, we reallocated capital towards agency MBS.” “This dynamic approach underscores our commitment to avoiding dependence on any single market outcome,” Anderson adds. “For example, if longer-term rates rise or the yield curve steepens, our agency mortgages – with coupons primarily between 5 percent and 6.5 percent – are well poised to perform favorably. Conversely, in an economic downturn with precipitous rate declines and potentially increased MBS prepayment speeds, our longer-term treasuries would see substantial gains. “Additionally, our investments in floating-rate securities, which are tied to the Fed funds rate, stand to benefit if the Fed decides against aggressive rate cuts. This strategic positioning ensures that various segments of our portfolio are well positioned to excel under different interest rate scenarios, enhancing overall portfolio resilience and performance consistency.” Carney and Anderson’s success is a testament to their disciplined investing approach. By focusing on fundamentals, avoiding market noise, and embracing off-benchmark opportunities, they have built a resilient portfolio in the Weitz Core Plus Income Fund. This strategy has delivered strong risk-adjusted returns over the past decade and is well positioned for the uncertain road ahead. Disclosure: Please see Fund’s full performance and disclosures here: https://weitzinvestments.com/funds/wcpbx/core-plus-income-fund

Optimizing the portfolio: preparing for any outcome

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Weitz Core Plus Income Fund (WCPBX)

10 years of strong risk-adjusted returns

LSEG Lipper Fund Awards US 2024 winner, Best Core Plus Bond Fund over 3 & 5 Years

5-Star overall Morningstar rating, Top Decile for 3 & 5 Years

Flexible, benchmark-agnostic approach to discover untapped opportunities

Strong growth, surpassing $2 billion in assets

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Macro-informed, fundamentally grounded

YOUR PRACTICE

RETIREMENT

INVESTING

NEWS

Issue Archive

My Account

Subscribers

Event Calendar

Editorial Calendar

Media Kit

Special Reports

Custom Research Services

Request Reprints

Macro-informed, fundamentally grounded

Issue Archive

My Account

Subscribers

Event Calendar

Editorial Calendar

Media Kit

Special Reports

Custom Research Services

Request Reprints