USAA Income Fund

Scorecard
4 / 5 Stars
Lipper
4 4 5 4 2
Zacks Investment Research
2 (Buy)
Standard & Poor's
4 / 5 Stars
TheStreet.com
A- (Buy)

#25 in Intermediate-Term Bond

U.S. News evaluated 280 Intermediate-Term Bond Funds. Our list highlights the top-rated funds for long-term investors based on the ratings of leading fund industry researchers.

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Performance

The fund has returned 1.36 percent over the past year, 5.01 percent over the past three years, 8.67 percent over the past five years, and 5.20 percent over the past decade.
 

Trailing Returns Updated 02.28.2014
Year to date 2.3%
1 Year 1.4%
3 Years (Annualized) 5.0%
5 Years (Annualized) 8.7%
10 Years (Annualized) 5.2%

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Summary

The USAA Income fund is a respected long-term bond fund that, like many of its peers, is taking a wait-and-see approach. Although it’s diversified among fixed-income securities, management is mopping up short-term bonds at the moment with the hope that it can sell them to reinvest in longer-term securities when interest rates rise to more attractive levels.

As of March 05, 2014, the fund has assets totaling almost $4.63 billion invested in 632 different holdings. Its portfolio consists of a broad mix of fixed-income securities, with a noticeable preference for corporate debt of lower-credit quality. It also carries a minimal percentage of dividend-paying equities.

Manager Didi Weinblatt has proved her mettle over the years. In 2009, the fund’s 19 percent return reflected Weinblatt’s equanimity in the face of the financial crash. As her compatriots slashed and burned their way out of the flailing bond market, Weinblatt moved in with abandon, buying up a large number of corporate mortgage-backed securities at rock-bottom prices. The decision put her in the top 16 percent of similar intermediate-term bond funds, a designation signifying the fund’s tendency toward bonds that mature between three and 10 years. But as the bond market rose precipitously over the last two years, Weinblatt has grown more conservative. With the expectation that interest rates will rise in the next year or so, she’s moved the fund’s focus toward short-term securities. If rates do rise, short-term securities are the least affected, and she can easily sell them to reinvest in longer term bonds at higher rates.

But Weinblatt is still admittedly nervous. “The big thing right now is the Fed[eral Reserve],” Weinblatt says. “I used to say that the Fed controls short-term rates, and the market controls long-term rates. But now the Fed is trying to control the longer end, at least out to 10 years.” But her turnoff to low rates has allowed her to be creative. Although the fund traditionally only holds a small amount of preferred stock, Weinblatt purchased blue-chip common stocks like Johnson & Johnson and AT&T in the second half of 2010, because their dividends were higher than their own bond yields, an unusual abnormality. Weinblatt has also moved toward lower-credit qualities in a bid to keep yields high. The fund yielded 4.4 percent in 2010. As of its Oct. 31, 2010, filing, a third of the fund’s bond portfolio had coupon rates of 6 percent or greater. Half of its portfolio consists of foreign and domestic corporate bonds. The fund relies much less than its peers on government agency debt and treasuries. The fund has returned 1.36 percent over the past year and 5.01 percent over the past three years.

This short-term focus is at odds with the fund’s normal keel. Weinblatt’s long-term focus has paid off in the past. The fund’s three-, five- and 10-year annualized returns, all under Weinblatt’s watch, place the fund in the top third of its peer group. By her own acknowledgement, she’s not an index-obsessed manager. While the fund holds a wide variety of fixed-income assets, its sector preference changes with the market. Continuities reflect a lack of interest in treasuries, a somewhat steady allocation of about a quarter of the portfolio to mortgage-related securities, and a heavy preference for U.S. and foreign corporate debt (which accounted for 50 percent of the portfolio at the end of 2010). The fund has returned 8.67 percent over the past five years and 5.20 percent over the past decade.

Investment Strategy

The fund wields a diverse mix of fixed-income securities, including U.S. and foreign corporate debt, U.S. treasury and agency debt, mortgage-backed securities, and a minimal amount of common stocks and REITs. Management takes on more credit risk than peers, which boosts its average interest rate and thus, its yield.

Role in Portfolio

Morningstar calls this a core holding.
 

Management

Margaret (AKA Didi) Weinblatt has managed the fund since 2000. She also manages the USAA GNMA fund. Weinblatt relies on a pool of nearly 30 analysts for market research.

Fees

USAA Income Fund has an expense ratio of 0.58 percent.

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Risk

The fund is safer than most of its peers. It has only lost money in one of the last 10 years. It could lag its peers in the short term, however, as manager Didi Weinblatt has refused to invest in many intermediate-term securities at current low rates. Instead she has tended to invest in short-term securities with even lower rates in the hope that she can jump back into the market quickly once rates rise for longer term bonds.

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