Dynamic Core Plus ETF: Managing yield and risk

Investors and advisors have many options in the Core Plus space, and many of which are suited to perform well in stable to improving credit market environments. These strategies tend to have a more persistent overweight to higher yielding segments of the market with pretty well-entrenched sector biases.

The Loomis Sayles Dynamic Core Plus ETF

The Loomis Sayles Dynamic Core Plus ETF takes a more flexible approach, dynamically adjusting our liquidity and quality skew, our sector allocations, our industry allocations, and our durations in order to provide a more durable experience and outperform our benchmark, the Bloomberg Aggregate Bond Index, through all phases of the credit cycle.

I mentioned the benchmark. We are a benchmark-aware strategy, which means that we measure our risk exposures and returns relative to our benchmark rather than on absolute basis. But there’s deeper meaning to it than that. This actually a foundational concept underpinning our philosophy.

We understand that investors allocating to agg-based products are allocating to a very high-quality portfolio. The index itself has about 70% in government securities and a low AA average quality. So we believe that investors making this allocation do expect their portfolio to deliver diversification benefits and downside protection of a high-quality bond portfolio.

Of course, they also value yield and income provided by fixed income allocations. So there’s this tension between the two key attributes of a fixed income allocation – yield and safety. You can’t increase one without sacrificing the other. Our process is built around trying to manage that trade-off using a credit cycle framework leaning in to risk, income, and yield when credit cycle dynamics are favorable and risk premiums are adequate, while emphasizing defensive properties, quality, and liquidity when credit cycle dynamics and valuations are less favorable. In doing so, we aim to deliver a more durable bond market experience that will deliver excess return of 100 to 175 basis points over the benchmark through a full market cycle, while also being sure to deliver those defensive natures of diversification and downside protection when they’re most needed.

A compelling time to choose LSCP ETF

We think it’s a compelling time to choose the Loomis Sayles Dynamic Core Plus ETF because that trade-off between yield and safety is especially challenging right now. All-in yields are attractive, but uncertainty around the Federal Reserve policy, longer-term interest rates, growth, and inflation are elevated, while risk premiums remain tight. It’s a classic late-cycle environment.

We don’t pretend to have any edge in calling market turns, but our disciplined process and broad toolkit allow us to effectively manage that trade-off between yield and safety through these difficult points in the cycle. Big picture – late-cycle bond market investing is never easy. The Loomis Sayles Dynamic Core Plus ETF can take some anxiety out of this process, allowing your bond market allocation to generate incremental income through this challenging phase of the cycle while holding enough liquidity and defensive properties to weather a downturn while being positioned to ultimately being able to take advantage of eventual widening out in risk premiums.

The investment team behind the new ETF

We have an experienced management team. The portfolio managers – myself, Rick Raczkowski, and Devin McKenna – have an average 27 years of industry experience, with an average Loomis tenure that exceeds 20 years. We have plenty of market experience, familiarity, and institutional knowledge.

While we have diverse backgrounds, we are generalists that look across the whole portfolio and take a holistic view of risk and opportunities. We’re always asking ourselves how a particular allocation fits, given our view of the credit cycle, fits with other potentially correlated exposures in other industries and other sectors and if it amplifies or dampens exposure to a particular theme in the portfolio.

As a concentrated team of generalists, we can make these assessments without bias in a timely manner and with full and clear accountability. We are supported by a deep investment team with dedicated strategists and analysts, and also supported by Loomis Sayles’ renowned centralized resources, including over 100 analysts and traders helping us to identify relative value opportunities and generate security selection returns across credit rates and securitized.

From a top-down perspective, we also have the support of a globally staffed macro-strategies team that is hyper focused on assessing at all times where we are in the credit cycle and where we’re likely headed. And we have teams providing us with world class proprietary quantitative and risk management tools.

How does it fit with the other Relative Return offerings?

The Loomis Sayles Dynamic Core Plus ETF will be managed with the same process and philosophy as our existing mutual fund, the Natixis Core Plus Bond Fund and our larger institutional trusts. However, there are some key differences, as this ETF is tailored to appeal more to the retail investor and advisor community.

Relative to our more institutional-focused products, LSCP will emphasize higher quality sources of yield and spread, with a structurally higher allocation to agency MBS securities, investment-grade credit, and investment-grade CLOs. LSCP will also have, on average, a lower allocation to high-yield credit and nondollar exposures.

While, like our other products, sector allocations will be adjusted dynamically throughout the phases of the credit cycle, we do expect that LSCP will have a more stable yield advantage relative to our benchmark and a moderately lower tracking error.