Lord Abbett currently has 40% of assets in corporate bonds, including a stake in high-yield issues, which are rated below-investment grade. The managers shift allocations as conditions change. Most often, the moves have been on target. During the past five years, the fund has returned 7.0% annually, outdoing 95% of short-term funds.
As markets began reaching a trough in 2009, the Lord Abbett portfolio managers began buying riskier commercial mortgage-backed securities. Those are based on loans for commercial properties, such as office buildings and malls. Before the financial crisis, investment-grade commercial mortgages had been considered sound investments that only yielded a percentage point more than Treasuries. Then, as defaults rose, prices of the mortgages crashed, and investors demanded yields that were 14 percentage points over Treasuries.
Lord Abbett grabbed high-quality mortgages and scored big gains as the market recovered. The portfolio still has 16% of assets in commercial mortgage-backed securities. "Commercial mortgage-backed securities suffered huge dislocations in 2008, and they still represent relative value," says Lord Abbett portfolio manager Stephen Hillebrecht.
The fund has 20% of assets in high-yield bonds. Those have delivered big gains as default risk has declined and prices rebounded up from the lows. The Lord Abbett portfolio managers limit risks by focusing on bonds that are rated BB and B, the two highest grades in the below-investment grade universe. The fund also emphasizes bonds with maturities of one and two years. Those have suffered relatively low default rates. With the economy growing and interest rates low, companies have been able to refinance debt before they run into trouble.
At the time of publication the author had no position in any of the stocks mentioned.Follow @StanLuxenberg This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.