Laura Mayfield of Fort Washington Investment Advisors specializes in asset-backed securities (ABS) – a space that offers opportunities that might be overlooked by income-seeking investors. She co-manages funds designed to keep volatility risk at a minimum while providing yields that are higher than investors can get at their bank or in money-market funds.
Fort Washington Investment Advisors subadvises for the $822 million Touchstone Ultra Short Duration Income Fund, which we will call the mutual fund, and the $172 million Touchstone Ultra Short Income ETF TUSI, which was established in August 2022.
Fort Washington Investment Advisors and Touchstone Investments are based in Cincinnati and are both subsidiaries of Western & Southern Financial Group.
The mutual fund has six share classes with varying annual expenses and account minimums, and are distributed in different ways. The Class Y shares TSYYX are available through some investment advisers and are rated four stars (the second-highest rating) within Morningstar’s “Ultrashort Bond” category. This share class has annual expenses of 0.46% of assets under management; however, there is a partial expense waiver so that the expense ratio will be 0.40% until at least Jan. 29, 2026.
In this article, we’ll focus on the Touchstone Ultra Short Income ETF. It has an annual expense ratio of 0.52%, but there is a partial expense waiver, so the expense ratio will be 0.25% until at least April 29, 2026.
Short and ultrashort
In June, David Sherman, who co-manages the CrossingBridge Low Duration High Income Fund CBLDX, said that the fund was appropriate for investors who could commit for periods of between one and three years. At that time, that fund’s duration-to-worst was 0.77 years.
Read: How to select bond funds based on your investing needs and time horizon
Duration is a measurement of volatility, expressed as a number of years. It indicates how much a bond portfolio’s market value can be expected to move in the opposite direction of interest rates. A duration of one would indicate that a portfolio’s market value would decline 1% if interest rates in the economy were to rise 1% and vice versa.
Investors can take an even more conservative approach to volatility with an ultrashort income fund.
“So these securities can be sold somewhat haphazardly. That is gold to me.” Fort Washington Investment Advisors portfolio manager Laura Mayfield, discussion long-duration bond portfolio managers’ need to sell bonds as they near maturity.
The Touchstone Ultra Short Income ETF had a weighted average effective duration of 0.6 years as of March 31. During an interview with MarketWatch, Mayfield said six months was “the minimum we would recommend” for investors in the ETF for the income to make up for any price volatility.
“When we think about the ultra short duration category, the way we manage it is that it is tailored toward cash or money-market investors who would like a little more return with a little higher risk appetite,” she said.
TUSI is managed for total return, Mayfield said. It makes monthly distributions to shareholders that are calculated to encompass discounts or premiums paid by the fund when it buys securities, and reflects variable interest rates and amortization for some securities.
To put it a different way, Mayfield said that some individual investors “are focused on the dividend-yield return, but some might be leaving some money on the table.”
This chart shows the fund’s total return for one year through June 30, compared with the return for the ICE BofA U.S. Treasury 1- to-3-month index:
For one year through June 30, the Touchstone Ultra Short Income ETF’s total return was 5.79%, while the average return for Morningstar’s U.S. Fund Ultrashort Bond fund category was 5.33%. Another comparison could be made with the 4.76% return for Morningstar’s U.S. Fund Money Market Taxable Index for the same period.
All investment returns in this article include reinvested income distributions. The chart provides a good example of the type of volatility TUSI shareholders can experience. The largest decline over the past year was from April 3, the day after President Trump made his “liberation day” tariff announcements, through April 11. The ETF’s share price declined by 0.39% during that eight-day period.
So this type of fund will have price volatility, where money-market funds are designed to maintain stable share prices of $1.
A focus on investment-grade asset-backed securities
Mayfield said that while the ETF follows the same underlying investment strategy as the mutual fund, it can have high-yield securities making up as much as 15% of the portfolio.
High-yield bonds or other income securities are those rated below-investment-grade by ratings firms such as S&P Global Ratings or Moody’s. You can read S&P’s explanation of its ratings hierarchy here and about the Moody’s rating scale here. And Fidelity also provides a guide, lining up the agencies’ ratings next to each other. The highest bond ratings are AAA at S&P and Aaa at Moody’s. The lowest investment-grade ratings for bonds at these firms are BBB- for S&P and Baa3 at Moody’s.
While the TUSI portfolio is mainly investment-grade, Mayfield stressed that most securities it buys, including securitized loans, aren’t available to individual investors in the secondary market.
About 35% of the fund is made up of asset-backed securities, with about 20% in “short high-quality commercial mortgage-backed securities,” between 6% and 8% in residential mortgage-backed securities and between 20% and 25% corporate credit, which includes bonds and securitized loans.
As she manages the portfolio to have a short duration, some investments feature a “straightforward return calculation,” such as an investment-grade bond with one year left until maturity. She will pay a small premium to face value or a slightly discounted price, which is baked into the return calculation.
The specialty work is done with asset-backed securities. For example, if she is looking at a five-year bond backed by auto loans, “we have principal amortization as the car loans pay down, but the amount of amortization varies greatly. There are many factors that affect the timing of repayment.”
And some fund managers who are running longer-duration portfolios will need to sell these securities as they near maturity. “When [the bonds] go to less than a year, they are thought of as cash substitutes. And many managers must trade out to keep in line with their duration targets,” Mayfield said.
“So these securities can be sold somewhat haphazardly. That is gold to me,” she added.
Mayfield continued: “We manage a $22 billion securitized portfolio. We have resources to get very granular with the cash-flow modeling. We can identify premiums and discounts and apply cash-flow models and find opportunities for discounts.”
Those discounts can enhance the ETF’s return well above its income distribution rate.
Within the asset-backed space, Mayfield stressed the importance of understanding behavior. “The consumer is volatile and seasonal, especially as you go down the spectrum” of credit scores, she said. This means that during the holidays, default rates on auto loans will increase, while default rates decline during tax-refund season.
When asked to discuss a favored credit sector, Mayfield said, “We actually like subprime auto ABS better than prime auto.” Anyone would expect loans to blowers with weaker credit histories to command higher interest rates than loans made to borrowers with high credit scores. But what is so attractive about subprime, according to Mayfield, is that the higher interest rates more than make up for the greater risk of default during periods of economic stress.
She described Fort Washington’s stress-testing of subprime auto loan pools, which she said used the global financial crisis of 2008-09 (GFC) as a guide.
“The base case might be 25% default” rates for subprime during a severe recession, she said, “so we are not giving credit for that 25% right out of the gate.” The pooled subprime auto loans have interest rates ranging from 15% to 25%.
“During GFC, what we saw was that the loss multiple was 1.5 to 2 times. So going into GFC, loss expectations were 15%, we saw losses 1.5 to twice that level,” she said.
Meanwhile, for prime auto loans, the expected loan default rates were 1% to 2%, she said. But during the GFC, the loss multiples were four to five times the normal levels. “We don’t get, in my view, an appropriate level of credit protection, for prime ABS,” she said.
Going further, Mayfield pointed to credit features for auto ABS. “We have some lenders that retain a significant portion of those loans on their balance sheets. They sell a portion of what they originate for the securitization,” she said.
These issuers of securities backed by auto loans retain “anywhere from 20% to 60%” of the credit risk tied to the loan pools, she said. “It is meaningful and it gives us comfort they will not relax their underwriting standards for the sake of volume.”
Mayfield wrote a detailed article about the history of auto financing and securitization, with a discussion of the current market for subprime auto MBS.
