…or, to paraphrase the slogan from Capital One’s credit card commercial, what’s in your portfolio? This important question came up in the context of a recent Wall Street Journal article, which stated that:

The number of bond funds that own stocks has surged to its highest point in at least 18 years, another sign that typically conservative investors are taking bigger risks to boost returns.

In particular, the article mentioned the Loomis Sayles Strategic Income mutual fund (ticker NEFZX, Class A shares) that lately increased common and preferred stock holdings to 19% of its portfolio. Per the prospectus, the stock allocation in this fund can be as high as 35%. Is that what an average investor would reasonably expect? Is monitoring stock allocation in quarterly filings sufficient? Certainly not.

According to the Alpholio™ analysis, at the end of March 2013, the fund’s equivalent positions in equity exchange-traded products (ETPs) totaled over 40% (in part, this reflects the fact that the fund can invest in convertibles and foreign debt):

Reference Weights for NEFZX

The fund had a significant exposure to the healthcare sector (VHT, Vanguard Health Care ETF, weight of 10%), technology sector (MTK, SPDR® Morgan Stanley Technology ETF, 5.6%), and gold miners (GLD, SPDR® Gold Shares, 4.1%).

A recent Morningstar analyst report on the fund stated that

“Since mid-2011, the team has grown increasingly concerned about the potential for rising rates and the limited opportunity for upside in most fixed-income investments. That’s led it to take increasing advantage of the fund’s broad flexibility to invest up to 35% of the portfolio in stocks… This portfolio’s flexibility may hold appeal for those who share the team’s concerns about bond valuations. However, the fund’s large equity stake adds risk to the portfolio, which, with large positions in high-yield (20%) and non-U.S. dollar denominated bonds (30%), is already one of the multisector category’s most volatile.”

Alpholio™ provides a month-by-month or even more frequent insight into the equivalent ETP holdings of mutual funds. Investors can take advantage of this information to determine a true exposure of their portfolios to various types of securities.


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