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Market Perspectives

A Defensive Stand

Tom Carney, CFA

Director of Fixed Income Research, Portfolio Manager

Nolan P. Anderson

Portfolio Manager, Research Analyst


On February 25, 2021, the U.S. bond market experienced its biggest one-day selloff since the COVID-19 uproar of March 2020. Robust fiscal and monetary stimulus coupled with positive vaccination news has fueled optimism for strong economic growth as well as concern for rising inflation expectations. And while the Federal Reserve has not indicated any tapering to quantitative easing (QE) or potential rate hikes, the current selloff in U.S. Treasuries marks one of the five largest in the last 25 years.

The cause of the chaos notwithstanding, we believe it highlights two important facts: (1) Fed tightening is not a prerequisite for bond bear markets and (2) starting valuation matters, even when the Fed is engaged in QE. Such environments help demonstrate one of our fundamental principles of fixed income investing: a good defense is the best offense. Our investment philosophy and process are defined by constructing portfolios one security at a time, sector by sector, based on what we believe are the best risk/reward opportunities available to us. In practice, this results in the active management of every aspect of our portfolio, including duration (a measure of a bond's sensitivity to interest rate risk). 

The Weitz Core Plus Income Fund has now been through two of the five largest selloffs in U.S. Treasuries over the last 25 years. In both cases, given our view of risk (duration) relative to reward (yield), we constructed our portfolio with materially shorter duration than the Bloomberg Barclays U.S. Aggregate Bond Index. As you can see below, the Weitz Core Plus Income Fund's relative performance demonstrates that active managers can help investors navigate a rising interest rate environment through a disciplined approach to balancing risk and return.


U.S. Treasury Selloffs (%) 07/08/2016 − 12/15/2016  08/04/2020 − 02/25/2021
10-year U.S. Treasury Yield Range 1.36 − 2.60 0.51 − 1.52
10-year U.S. Treasury Yield Increase +1.24 +1.01
Cumulative Return (%) 07/08/2016 − 12/15/2016  08/04/2020 − 02/25/2021
Core Plus Income Fund-Institutional (WCPBX) -1.45 1.69
Bloomberg Barclays U.S. Aggregate Bond Index -4.28 -3.29
 Relative Performance +2.83 +4.98
Average Effective Duration (years)
06/30/2016  09/30/2016  12/31/2016  06/30/2020  09/30/2020  12/31/2020
Core Plus Income Fund - Institutional (WCPBX) 3.5  3.6 3.6  4.7 4.4  4.2
Bloomberg Barclays U.S. Aggregate Bond Index 5.5 5.5 5.9  6.0  6.1  6.2
 * Average effective duration provides a measure of a fund's interest-rate sensitivity. The longer a fund's duration, the more sensitive the fund is to shifts in interest rates. Rising interest rates exert downward pressure on bond prices and can lead to bond selloffs.

AS OF 12/31/20
  1YR 3 YR 5YR  Since Inception
Net Expense Gross Expense
Core Plus Income Fund - Institutional (WCPBX) 10.32%  6.47% 5.94%  4.82% 0.40% 0.80%
Bloomberg Barclays U.S. Aggregate Bond Index 7.51% 5.33% 4.43%  3.88%  

While each selloff comes with its own unique circumstances and causes, they all have one thing in common: nobody can predict exactly when they will begin nor when they will end. Likewise, nobody knows when the next one will happen. Given that we started the year with record low yields across the fixed income marketplace, we believe investors should be extra vigilant of rising inflation and interest rates and the effects they may have on their fixed income portfolios. 

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