Managing through credit cycles with an asset owner’s steady hand

Joseph Higgins, CFA, portfolio manager of the TIAA-CREF Core Bond Fund and TIAA-CREF Core Plus Bond Fund, discusses how his team’s fundamental underwriting capabilities and Nuveen’s legacy as an asset owner support an unwavering focus on producing strong, long-term risk-adjusted returns.

How do the core and core plus funds’ mandates differ?

It’s helpful to start by thinking about how the funds are similar. Both are actively managed, driven by fundamental research with a focus on delivering attractive risk-adjusted returns over the long term. The same team — research analysts, sector portfolio managers and traders — works on both funds.

The goal of the Core Bond fund is to generate well-balanced returns with investments that are often not held in the index¹, meaning that the portfolio does not possess many of the specific risks inherent in the index. Unlike many of its competitors, the Core Bond fund has access to nearly every esoteric corner of the bond universe, with the opportunity to invest up to 10% in higher-yielding, non-benchmark securities. We believe that the fund’s latitude in going beyond the index is a powerful risk mitigator. This is especially true during times when the infusion or removal of liquidity in the bond market causes spreads to become detached from fundamental value and indexes reflect the excesses of the times.

The Core Plus Bond fund has a limit of 30% exposure to higher-yielding, non-benchmark securities, which gives us more room to pursue diversifying and yield-enhancing opportunities. Because of this flexibility and breadth, the Core Plus Bond fund is a great vehicle for investors who want one strategy that can tactically allocate across a variety of fixed income sectors.

What are the guiding principles that shape the way you manage the funds?

The pillars of the funds are a focus on fundamental credit research analysis, diversification and risk management. Underpinning this approach is a long-term perspective that is part of our heritage.

Through extensive fundamental research led by one of the industry’s largest credit research teams, we focus on finding the right assets, understanding their fundamental values and being prepared to hold them through any market cycle, if needed. Liquidity comes and goes, so we underwrite and stress-test assets across multiple scenarios.

Our approach to research, diversification and risk management go hand-in-hand. We believe that a high-conviction approach to security selection, combined with a thoughtfully constructed, defensive allocation across sectors is the best volatility reducer there is.

We don’t take large positions on interest rates or make overly concentrated bets on individual sectors. And we don’t seek to achieve diversification simply by owning as many different credits as possible. This results in highly differentiated portfolios that can opportunistically capitalize on market disruptions while delivering the returns investors expect across market cycles.

How has this approach of being opportunistic yet long-term focused served your investors well in the past?

The global financial crisis in 2008 resulted in a liquidity shock across the entire market. Commercial mortgage-backed securities (CMBS) and other types of securitized credit, however, were particularly hit hard through 2016. For example, many funds became forced sellers of CMBS, especially once external ratings for these securities ceased.

But we had — and continue to have — one of the asset management industry’s largest CMBS research teams. As a result, we understood the credits we owned extremely well and realized that the markets didn’t reflect their true value or projected recovery rates. Not only did we avoid becoming forced sellers, we significantly added to our CMBS position in 2015 and 2016. Thanks to our long-term focus and the strength of our research team, we were able to monetize this extreme market dislocation and generate strong returns for our investors.

How does Nuveen being a part of TIAA and working with its general account influence how the funds are managed?

In addition to being an asset manager, our heritage as a highly respected asset owner via our own $300 billion general account permeates everything we do. Our fiduciary responsibility shapes how we think about risk, and the nature of the general account allows us to be steadfastly focused on preserving capital and generating long-term returns.

Being part of TIAA provides scale and stability that empower us to capture more value for investors. Deep, fundamental research across the fixed income universe requires a massive amount of talent and infrastructure. The backing of an organization with $1.1 trillion in assets under management² gives us the resources to maintain a world-class research team integral to navigating across market cycles. TIAA has always been AAA-rated³, and this stability allows us to participate in markets and monetize extreme volatility even when everyone else is selling. We apply the same philosophy across the Core Bond and Core Plus Bond funds.

On a personal note, how did you get into asset management?

I started my career as an accountant. I love numbers, but in accounting, you’re only working with backward-looking numbers. I had a major career aspiration to look to the future and help build and lock in income for the long term. I came to the organization 27 years ago, immediately after completing an MBA at Wharton. I was attracted to the firm’s philosophy, the people, the respect for research and particularly the mission of providing for the well-being of our clients.

I was an analyst for years, covering sectors such as international banking, high-grade Asian credit and private placements. I then served as co-head of corporate credit research and ran our asset-backed securities and CMBS groups. After all that experience, I wanted to apply what I had learned as a sector analyst to a lead portfolio management role. I’ve led the Core Bond fund since 2011 and the Core Plus Bond fund since 2020.

What is your role in the process of managing the funds?

I see myself as being at the center of a constant flow of information that is coming from multiple directions — top-down and bottom-up. I’m involved in weekly meetings with members of our Global Investment Committee, our chief investment officer and our head of strategy. These conversations inform the overlay that I apply to our funds. It’s a tremendous advantage to have access to the firm’s macro ideas but still have the freedom to adapt them how I see fit for our funds.

I’m also in constant dialogue with the heads of our sector teams and their underlying research staffs. These conversations allow me to learn more about what’s underpinning each sector manager’s views. Just as importantly, the sector managers understand the funds’ mandates and implicitly know what types of investments are appropriate from a risk and liquidity perspective for core and core plus. From a tactical perspective, I’m also getting ideas from our trading desk about technical conditions in the market.

My job is to take all this information and look at the big picture to determine what the aggregate environment is offering in terms of risk and reward — and how this all translates to the mandate of each fund.

There are no star portfolio managers here. If I were to be abducted by aliens tomorrow, the funds would continue to run quite well. It’s all about the process in place and the ongoing dialogue.

How do you think about risk management given the funds’ mandates?

We’re extremely proud of the funds’ track records of generating returns. But how you get there is even more important. For a core bond fund, the objective is always to avoid or minimize volatility. Investors entrust us with their capital, and there shouldn’t be any surprises. That’s why we pay close attention to risk/return measures to understand how much risk we took to generate those returns. Information Ratio⁴ is our primary measure of success because it aligns the strategy’s results with our clients’ expectations.

In our view, one of the best ways to mitigate risk in a core bond fund is to deviate from the index at times, which is why active management is such a powerful risk management tool. As I mentioned earlier, when you own an index, you’re going to be over concentrated in the excesses of that period, whether that’s telecoms during the early 2000s or securitized credit during the run up to the global financial crisis.

Environmental, social and governance (ESG) issues are also important risk factors that we consider and are incorporated in analyst assessments when underwriting individual issuers. We have been a leader in responsible investing for more than 50 years, so that is another way that the firm’s legacy shapes how we underwrite securities.

An important aspect of risk management is ensuring that all our processes are sound. For example, the portfolio managers have no say on a credit rating or the pricing of a security. We’re constantly in dialogue with each other to understand those decisions, but each part of the process has complete autonomy. The mutual respect and independence that our teammates have for each other creates a very healthy investing environment.

Given the funds’ long-term view and focus on fundamental research, what is your assessment of today’s market environment?

With the Federal Reserve raising interest rates into a weakening economy for the first time since the 1970s, many fixed income asset classes are already pricing in recessionary spread levels. While risk is rising, we also think that value opportunities are rising, too. This highlights the importance of keeping some powder dry and having the underwriting resources needed to selectively step into wider spreads that could generate attractive long-term returns and income. But, again, you must be prepared to potentially hold those securities through the market cycle.

The massive removal of liquidity from markets in 2022 has created a very attractive environment for credit pickers—and we’re ready for it.

Contact us for more information on TIAA-CREF Core Bond Fund, TIAA-CREF Core Plus Bond Fund or the full TIAA-CREF fund suite.