Morningstar recently updated their mutual fund fixed income categories resulting in significant changes impacting the Intermediate-Term Bond category[1]. Under Morningstar’s prior methodology, Intermediate-Term Bond funds were funds investing primarily in domestic investment-grade debt with an average effective duration of 0.75 to 1.25 of Morningstar’s Core Bond Index.
Under the new methodology, Morningstar has separated the Intermediate-Term Bond category into two new categories: Intermediate Core Bond and Intermediate Core-Plus Bond. Like the original category, Intermediate Core Bond funds have an average effective duration of 0.75 to 1.25 of Morningstar’s Core Bond Index and invest primarily in U.S. investment-grade debt. However, these funds also must ordinarily invest less than 5.0% in below investment-grade debt.
Intermediate Core-Plus Bond also has the same base definition as the original Intermediate-Term Bond category but adds the flexibility to hold non-core positions including high yield debt, bank loans, emerging markets debt, and currency.
Per Morningstar, the new Intermediate Core Bond category covers approximately 140 open-end and exchange traded funds with over $830 billion in assets. The median allocation to below investment-grade debt is 0.0%. The new Intermediate Core-Plus Bond category covers approximately 190 strategies with total assets of about $720 billion and the median allocation to below investment-grade debt is 8.0%.
We use Morningstar categories to divide the investment universe into peer groups for analysis and comparison. Under the original broader category, we often had to explain peer-relative performance as an outcome of the amount of non-core debt the fund held. We view these new categories as a positive change for investors as it will allow a more apples-to-apples comparison. Intermediate Core-Plus Bond investors will still need to acknowledge how much non-core debt their mutual fund can hold, but the peer group’s more narrow definition will provide better comparative data.
Note:
[1] Bush, Sarah. (2019, May 2). Introducing Two New Morningstar Bond Categories. Morningstar, Inc. https://direct.morningstar.com/research/doc/_926636
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