Morningstar - Q1 2023 - 65

The only drawback was that his wife was based
in Washington, D.C., where she is a senior
economist at the International Finance Corp. arm
of the World Bank. She had decided to relocate
when their first child was born, when Sud
got a call from a headhunter. He normally ignored
such inquiries, but this one was about a job
in Baltimore, a reasonable commute from D.C.
" I prioritize family life, " says Sud. " And at the
same time, I was excited to do something new. "
The opportunity was to launch a new credit
product for T. Rowe Price. " It was going to be
a great learning experience for me from a
business standpoint, developing a product, and
it was an opportunity to get out of the
shadows of the people I was working with
and go out on my own. "
Today, the family is settled in the Capitol Hill
neighborhood of D.C., with two children
and a third on the way. " My one condition when
we moved was that we buy a place where
I can run to the Capitol and back, " Sud says.
" I can do a loop of about three miles, which is good
enough to clear my mind. "
He also carves out time for squash and a boxing
class each week, and weekends bring family
bike rides along the Anacostia River. " My evenings
and weekends are busier than my daytime,
I would say, " Sud laughs, " but it's a lot of fun. "
Sum of Many Parts
While he leaves plenty of room for family time,
Sud's workday often starts as early as 5:30.
His charge is one of a small suite of Dynamic
strategies, relatively new entries in T. Rowe's fixedincome
lineup. His boss, Arif Husain, runs
Dynamic Global Bond RPIEX, which aims to get
70% to 80% of its performance from rates. Sud,
meanwhile, aims for 70% to 80% of performance
from credit selection and sector rotation.
Despite that difference, their shared research
approach allows them to often make the same
moves, though not necessarily on the same
scale. " Earlier in 2022, Dynamic Global Bond was
shorting German rates, and I implemented
some similar trades, " Sud says. " Likewise, when
I have a high-conviction credit short idea
that I know would be a risk diversifier from their
perspective, I will pitch it to them. Wherever
we see best ideas, we come together. "
Sud is also part of T. Rowe's sector strategy
advisory group of sector specialists and
quantitative analysts, which identifies credit
opportunities, as well as the multi-asset
credit group, which synthesizes findings into
actionable output for the firm's global
multi-asset portfolio managers and clients.
" I'm part of the debate going into the
discussion, " he says, " and finalizing it, then
publishing it for platform products and
clients, and then I'm using this output [for the
Dynamic Credit strategy]. "
Sud chooses carefully for Dynamic Credit,
holding only 100 to 200 names in the portfolio at
any time, which is relatively concentrated for a
fixed-income fund. He's not beholden to a
benchmark when building the portfolio, and he
aims to achieve attractive returns in a variety of
market environments. His return target over a full
credit cycle is " cash plus three to five " -to
outperform the three-month T-bill by 300 to 500
basis points. Today, that would be 7% to 9%.
" Given that this is an opportunistic, flexible, highconviction
product where there's no benchmark,
capacity is a concern, " Sud says. While the
mutual fund had less than $50 million in assets
between its two share classes as of September,
the strategy includes institutional accounts
and is a sleeve in other T. Rowe Price funds, for a
total of about $75 million. Sud figures his
process would be impeded at around $5 billion
under management under today's conditions.
Multifaceted Diversification
Since its inception in January 2019, the strategy's
performance has been strong. Sud sets out
to deliver decent returns without undue credit and
duration risk and has done so to date. The
fund's institutional shares are up a cumulative
16.4% through 2022 compared with 3.6%
for the nontraditional bond-fund category, 4.6%
for the average multisector bond fund, and
negative 9.9% for the Global Core Bond index. Its
three-year Sharpe ratio compared with those
benchmarks is higher, as well. In accelerated stock
selloff periods, the strategy has outperformed
both high-yield and emerging-markets bonds
(which tend to be more highly correlated
to equities than investment-grade bonds)-and in
2022's stock selloffs, it outperformed U.S.
investment-grade bonds, too.
That said, this strategy isn't a stand-alone
fixed-income investment. " It needs to be thought
of as complementary to benchmark credit
allocations, " Sud says. " Because there is an
environment, when credit spreads tighten
and interest rates rally, when benchmarks will
look a lot better than us. "
What investors can count on is diversification.
Dynamic Credit's correlation to the Bloomberg U.S.
Aggregate Bond Index has been quite low,
and it has also had low correlation to high-yield
bonds, emerging-markets debt, and equities.
According to T. Rowe's performance attribution
analysis, the fund's long-credit positions have
delivered positive returns since inception and so
have the relative value and credit shorts and
Sud's macro and tactical hedging.
Shorts and hedging can clip returns when bond
markets rally. However, they've cushioned the
downside even in times when both equities and
fixed income have plunged together-such as
the COVID-19 crash in early 2020 and much of 2022.
Despite the fund's strong showing as interest
rates rose in 2022, it shouldn't be counted on to
play the same role in a portfolio that shortterm
bonds would. While the strategy has been
short rates in recent years, Sud says that
" we're going to explore the long side when the
opportunity presents itself, when inflation
has peaked. "
But shareholders can count on Sud to actively
focus on dampening volatility. " If we clip the
downside, then capture the upside, " he says, " our
long-term returns will look a lot better than
passive alternatives. " If past is prologue, T. Rowe
Price Dynamic Credit is on track to deliver. K
Laura Lallos is managing editor of Morningstar magazine.
Photography by Matt Roth.
morningstar.com/products/magazine
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