Morningstar Magazine - August/September 2018 - 22

Dispatches

the market that are notorious for their light levels
of trading: The fund held a whopping 60% stake
in a mix of nonrated securities and securities
rated below B. (The category norm at that time
was less than 20%.)

Given the strategy's girth-the $17.5 billion fund
represents less than half of the team's $45
billion high-yield market footprint-staying nimble
in the cash bond market is easier said
than done. The team attempts to overcome those
challenges by broadening the fund's scope
to include up to 20% in bank loans and investmentgrade corporates and up to 10% in equities,
which gives the fund additional levers to avoid
selling less-liquid holdings in a period of
severe outflows. Diversification is also taken very
seriously: The portfolio typically counts close
to 1,500 holdings across more than 20 industries,
and the allocation to nonrated securities
and securities rated below B has been kept under
27% over the past five years, which is below
the group norm.

As performance went south starting in mid-2014,
outflows spiked. The fund saw nearly
half of its assets go out the door in 2015, and
the managers found themselves in a vicious
cycle, sending cash to investors and
being forced to sell their most liquid positions
to have cash ready for those next in line.
Factoring in its losses, the fund's assets
in December 2015 were one fourth of what
they were 12 months earlier and even
more heavily concentrated in its least liquid and
most pressured positions. As redemptions
continued, the firm transferred the fund's assets
to a liquidating trust.
Ultimately, the investment process is key in
managing the various facets of liquidity
in order to mitigate losses during stressed markets.
BlackRock High Yield Bond BRHYX, with
a Morningstar Analyst Rating of Silver,
is a good example of how size and cash don't
tell the full story. While the fund is one
of the largest in the high-yield bond category
and generally carried little to no cash
over the past five years, its versatile and highly
diversified approach to managing liquidity
supports our confidence level.

The takeaway: Liquidity is a multifaceted, protean
concept. Cash is only one facet of liquidity
management, and nothing replaces a balanced
and diversified portfolio.
Benjamin Joseph, CAIA, is a manager research analyst
with Morningstar Research Services.

Proposed BestInterest Reforms Cut
Some Slack
AMERICAS

Canada

Trailer commissions for mutual funds are here
to stay. Had the Canadian Securities
Administrators decided to ban all embedded
commissions, not just deferred sales charges and
trailers paid to discount brokers, the
regulators would have completely eliminated
the conflict that arises when advice-givers
are paid by fund companies, rather than directly
by their client. But in one of the two major
policy papers released on June 21 by the
CSA, the industry's referees revealed they are
taking a broader approach to improving investor
outcomes. In doing so, they recognize that
conflicts of interest are about much more than
trailer commissions.
Advisor-investor conflicts can arise in both
third-party and proprietary salesforces and involve
commissioned, salaried, and fee-based
advisors. Consider, for example, a heavily indebted
investor who would be best advised to pay
down her loans, even if that leaves the advisor
with fewer assets to manage.

Surface Temperatures: Not Just Rising but Accelerating
Temperature Anomaly (Celsius)
+1.5°
+.025° C per year

01/31/1900-08/31/2016

+1.0°
+0.5°
+.015° C per year

0.0°

+.007° C per year

-0.5°
1958

1900

1910

1920

1930

1940

1950

-1.0°
1960

Source: NASA Goddard Institute for Space Studies. Data as of 08/31/2016.

22
26

Morningstar February/March 2018

1970

1980

1990

2000

2010

Surface temperatures are not only increasing;
they're increasing at a faster rate, doubling since
1958. Between two recent powerful El Niños,
which created surges of heat, temperatures
increased even faster, 0.025 degrees Celsius, from
peak to peak.

Table of Contents for the Digital Edition of Morningstar Magazine - August/September 2018