lowquality fixedincome securities have had a solid run of late outperforming higherrated bonds in the riskon environments of 2019 2021 and the first half of 2023 as well as in 2022′s downturn when soaring interest rates punished ratesensitive fare highyield bond funds on average surpassed intermediate core bond funds by more than 2 percentage points annualized from january 2019 through july 2023 given this backdrop let’s take a closer look at allocation funds taking on significant credit risk compared with peers some allocation funds consistently limit their exposure to credit risk while others attempt to juice total returns andor income with a substantial stake in lowerrated debt t rowe price capital appreciation prwcx fits in neither category longtime manager david giroux and team are more opportunistic shifting the fund’s fixedincome portfolio based on the team’s views of the bond market for the past several years the team has devoted as much as 15 of the fund’s total assets and roughly half of the bond portfolio to bank loans which are typically subinvestmentgrade securities as a result at the end of march 2023 60 of the fund’s fixedincome exposure was stashed in belowinvestmentgrade debt—far above the 9 weighting of the average moderateallocation fund that credit risk is offset to some degree by the fund’s growing allocation to treasuries following interest rates’ surge the fund has typically been more volatile than its average peer in recent years in part because of its fixedincome positioning but strong security selection has led to consistent outperformance in both up and down markets the fixedincome portfolio of loomis sayles global allocation lgmax casts a wide net like the firm’s fixedincome flagship loomis sayles bond lsbrx this fund is willing to hold substantial stakes in both highyield and emergingmarkets debt such exposures can differentiate the fund from peers and arguably play to the strengths of the firm’s fixedincome group but such tilts come with both credit risk and when emergingmarkets exposure is unhedged currency risk indeed this fund has been more volatile than most of its global allocation morningstar category peers over the long term and while the managers have typically navigated such risks well as evidenced by the fund’s solid longterm record a bet on emergingmarkets bonds contributed to the a shares’ painful 233 loss in 2022 which was worse than nearly all category peers and high yield actually helped relatively speaking during this period oakmark equity and income oakbx has evolved into a vehicle that better balances the risks of its equity and fixedincome portfolios than it did previously but the fund is still not for the timid for years the fund invested heavily in corporate bonds relying in large part on the firm’s accomplished equity team for its research into individual firms but in the past several years the firm has built a dedicated fixedincome team that features four fulltime members including comanager adam abbas and longtime comanager colin hudson serves as cohead of fixed income in addition to his equityrelated duties as a result of the additional resources coupled with changing market conditions the fund’s fixedincome portfolio looks more diversified than ever before at the end of march 2023 corporate bonds constituted less than half of that sleeve with 33 in government bonds and 15 in securitized debt but investors shouldn’t overlook the credit risk that remains here 14 of the bond portfolio was invested in highyield bonds and another 26 was in bbb rated securities this article first appeared in the july 2023 issue of morningstar fundinvestor download a complimentary copy of fundinvestor by visiting this website