Where the manager of this top Morningstar-rated fund is finding income right now
There is still opportunity to grab attractive income in the market these days, but it’s also important to protect against potential risks to the economy, according to portfolio manager Chitrang Purani. As a manager of the Capital Group Core Plus Income ETF (CGCP), he looks to balance those needs for its investors. The exchange-traded fund has a four-star and a bronze rating from Morningstar. It has a 5.23% 30-day SEC yield and an expense ratio of 0.34%. CGCP YTD mountain Capital Group Core Plus Income ETF year to date As a core-plus offering, the ETF adds some exposure outside of the investment-grade space, including high-yield, emerging markets and securitized credit. It was launched in February 2022 and now has $6 billion in total assets. “What we’re trying to achieve is all the benefits of an active core bond strategy — that is, providing a ballast to portfolios, delivering-bond like returns, but with a more consistent pattern of excess returns,” said Purani, whose 20 years of investment experience includes 11 years at Pimco. He joined Capital Group in 2022. He and the team, which includes principal investment officer David Hoag and portfolio managers Damien McCann and Xavier Goss, keep a close eye on the economy and valuations. They are currently focusing on cheaper areas of the market and exiting from richer areas. “We have this discussion on a continuous basis, in a very fluid manner, to ensure that we’re capturing value and we’re remaining active against market opportunities and volatility,” said Purani, who opened his first brokerage account in middle school with the help of his parents. Leaning up in quality These days, credit spreads remain tight. Economic growth is also still solid, but risks may be tilted toward the downside, he noted. The key risk is the labor market, he said. If there are layoffs or a weakness in wages, that will make it more challenging for consumption to do the heavy lifting for gross domestic product — and that doesn’t seem to be priced into the market, he noted. “What we’re trying to do is lean up in quality, taking advantage of certain parts of the fixed-income markets where fundamentals are still solid and we can still get a yield advantage that we feel is attractive, adjusted for the risks,” Purani said. “You don’t have to give up a lot of yield to fortify the portfolios against potential economic volatility,” he added. Therefore, the team has shifted away from high yield and into investment grade and securitized credit, which includes asset-backed securities and mortgage-backed securities, he noted. The ETF’s heaviest weighting is in AA-rated bonds at 34.2% of total assets, as of Oct. 31. It has nearly 45% of its holdings in MBS — agency, commercial and non-agency — and about 7% is in ABS. Some 32% is in corporate bonds, notes and loans. Of that, the highest allocation, 7%, is in financials. With securitized products, Purani said he can take advantage of what’s known as a complexity premium — or the potential for higher returns that investors can get from buying complex assets. That premium remains attractive compared to the tight spreads in investment-grade bonds, he said. Still, research depth matters in order to understand the underlying collateral risks and the structures themselves, he noted. The ETF also holds nearly 14% in Treasurys. Purani currently favors those with maturities of five years or shorter. The market is pricing in the assumption that the Federal Reserve will end its cutting cycle at about 3%, he said. Yet there could be a little bit more risk premium to be had if economic growth falls below the Fed’s expectations, he said. “We either can be a scenario where the 3% that’s priced into the front-end of the curve in terms of fed funds provides a fair yield, or it provides an attractive yield that the Fed has to cut more aggressively in a scenario where inflation drops and unemployment rises,” Purani said. “That risk-reward symmetry appears attractive to us.” The central bank’s next meeting is in December. Traders are pricing in about 65% odds that the Fed will decrease the federal funds rate by 25 percentage points to a range of 3.50% to 3.75%, according to the CME FedWatch tool .
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