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Utilizing a Multi-Sector Strategy Emphasizing Structured Securities

Fort Washington Investment Advisors, Sub-Advisor to the Touchstone Ultra Short Duration Fixed Income Fund
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The Touchstone Ultra Short Duration Fixed Income Fund’s multi-sector orientation allows the Fund’s management team to gain exposure to fixed income security types such as corporate debt, asset-backed securities (ABS), commercial mortgage-backed securities (CMBS) and residential mortgage-backed securities (RMBS). Fort Washington believes this strategy can be beneficial to investors as it allows for the further diversification of the types of risk assumed by the Fund, while, at the same time, improving the return potential.

Specialized Knowledge: Collaboration Among Sector & Asset-Class Specialists

The Touchstone Ultra Short Duration Fixed Income Fund seeks to provide investors with excess returns relative to traditional cash management strategies, while introducing a modest amount of incremental price risk and maintaining liquidity. Fort Washington Investment Advisors, the Fund’s sub-advisor, targets bonds with slightly longer effective durations and/or slightly more credit risk than traditional cash equivalents. Relatively low spread duration is maintained in order to minimize the downside when risk premiums are volatile. The Fund’s strategy is generally a buy-and-hold strategy, but certain positions are traded opportunistically. Securities are generally held to maturity. However, significant cash flows tend to be produced, with 60-70 percent of the Fund maturing each year (emphasizing the strategy’s low spread duration nature).

While the macroeconomic outlook is important in determining duration, yield curve positioning and credit quality bias, the Fund relies heavily on its strategic sector focus and bottom-up security selection in its effort to generate returns over its benchmarks — the ICE BofA Merrill Lynch 1-Year U.S. Treasury Note Index and the ICE BofA Merrill Lynch 3-Month U.S. Treasury Bill Index. Because of the Fund management team’s historical ability to uncover undervalued and inefficiently priced securities, Fort Washington believes this bottom-up bias may reduce volatility and may produce an attractive return profile across a wider range of interest rate and credit scenarios.

By utilizing a team of seasoned sector specialists, Fort Washington seeks to maximize opportunities within each fixed-income sector, particularly in times of increased volatility or market dislocation. The core areas of competency include MBS, corporate bonds, CMBS, ABS, government securities, municipal securities and cash equivalents. While all of these fixed income sectors are utilized to varying degrees, a strategic focus of the Fund will be structured securities of MBS, CMBS, and ABS, with a target allocation in the 50-70 percent range.

Sector Capabilities

  • Mortgage-Backed Securities (MBS) – Historically, mortgage-related assets have been a source of alpha1 in the ultra short duration space. In particular, agency adjustable-rate mortgage securities with their low duration, attractive risk profile and implicit government guarantee have traditionally been a core holding for the Fund. However, with the MBS sector fully valued, Fort Washington is targeting a historically low allocation to this sector.
  • Non-agency Residential Mortgage-Backed Securities and Commercial Mortgage-Backed Securities (RMBS & CMBS) – Non-agency RMBS and CMBS have also been sources of alpha.1 Fort Washington employs a sophisticated approach in managing these sectors. By utilizing a host of proprietary quantitative models, including loan-level modeling, surveillance tools and third-party analytical software, the team is able to identify those securities with a well-defined cash flow profile, forecast perceived potential rating changes and manage risk. In an effort to avoid price volatility, the Fund tends to focus on non-agency RMBS and CMBS with highly certain cash flows and low spread duration.
  • Asset-Backed Securities (ABS) – ABS are an important source of “core” return with a stable price profile. Fort Washington, utilizing sub-sector specialists, focuses on those sub-sectors with securitization models that were used successfully during the 2008 financial crisis. Fort Washington believes some of the best opportunities for risk-adjusted returns are available in off-the-run ABS, such as collateralized loan obligations, equipment trusts, subprime auto loans and timeshare receivables.
  • Cash Equivalents – Fort Washington’s cash management team also plays a key role. The team is able to exploit inefficiencies in the front end of the curve by actively trading those securities in what is typically the most liquid portion of the Fund.
  • Corporate Bonds – Corporate bond capabilities at Fort Washington are strong with a seasoned team of portfolio managers and sector-specific credit analysts averaging more than 20 years of experience. The bottom-up selection bias historically has favored lower beta2 securities, which have produced a high Sharpe Ratio3 over time.

The collaboration between, and integration of, sector specialists produces a robust active management process incorporating risk budgeting and reporting, security-level surveillance reporting and dynamic team interaction. The Fort Washington Investment Committee meets weekly to review macro strategy and to discuss its top-down view and risk positioning. The Fund management team meets weekly to determine the fund-level application of these decisions. The team then meets daily with the specific asset managers to execute the strategy. The high level of communication and the dynamic nature of the process, combined with regimented risk management and reporting, have historically helped to produce consistent, low-volatility returns.

Enhanced Opportunities

The Touchstone Ultra Short Duration Fixed Income Fund’s multi-sector orientation allows the Fund’s management team to gain exposure to fixed income security types such as corporate debt, ABS, CMBS and RMBS, including some smaller, off-the-run sub-sectors offering incremental value. Fort Washington believes this strategy can be beneficial to investors as it allows for active management and diversification of the types of risk assumed by the Fund, while also improving the return potential.

The year 2020 will go down as one for the history books, as unprecedented shutdowns from the COVID-19 pandemic produced the steepest decline in economic activity in the post-war era. Fortunately, a vigorous policy response generated a swift recovery in the second half of the year, and investors believe vaccines will allow a return to normalcy during 2021. While the end of the pandemic seems to be in sight, the road ahead remains a challenging one in the near-term, as COVID-19 cases continue to surge and hospitalizations and deaths have resulted in targeted shutdowns of businesses in parts of the country. The U.S. economy has thus far proved to be more resilient than we would have initially thought, and though our outlook for the economic recovery remains favorable, we anticipate some near-term volatility as we work toward a full resolution of the pandemic.

In spite of an elevated potential for near-term volatility, spreads on short duration assets have returned to pre-COVID-19 levels or even tighter, leaving the relative value landscape quite flat. While the spread that ultra short duration investors can earn over cash equivalents has compressed toward the narrower end of its historic range, the space remains attractive for cash investors who can tolerate the slightly higher risk profile. Ultra short also remains a useful alternative for traditional core fixed investors looking to reduce interest rate risk while seeking to give up little yield (if any) versus more traditional core fixed investments. While systemic factors such as the shape of the yield curve give the ultra short duration space broad appeal, Fort Washington cautions investors on the diverse range of risk profiles within the ultra short duration peer group, and the importance of discerning the level of spread duration risk within their ultra short duration strategy of choice.

Glossary of Investment Terms & Index Definitions

Fort Washington Investment Advisors, Inc. is the Sub-Advisor to the Touchstone Ultra Short Duration Fixed Income Fund. Touchstone Investments and Fort Washington Investment Advisors are members of Western & Southern Financial Group.

Alpha is the portion of a fund’s total return that is unique to that fund and is independent of movements in the benchmark.
Beta is a measure of the volatility of a fund relative to its benchmark.
Sharpe Ratio is a measure used to determine a fund’s reward per unit of risk. It is calculated by dividing annualized returns less the risk-free rate by annualized.

The indexes mentioned are unmanaged statistical composites of stock market or bond market performance. Investing in an index is not possible. Unmanaged index returns do not reflect any fees, expenses or sales charges.

A Word About Risk
The Fund invests in fixed-income securities which can experience reduced liquidity during certain market events, lose their value as interest rates rise and are subject to credit risk which is the risk of deterioration in the financial condition of an issuer and/or general economic conditions that can cause the issuer to not make timely payments of principal and interest also causing the securities to decline in value and an investor can lose principal. When interest rates rise, the price of debt securities generally falls. Longer term securities are generally more volatile. The Fund invests in investment grade debt securities which may be downgraded by a Nationally Recognized Statistical Rating Organization (NRSRO) to below investment grade status. The Fund invests in U.S. government agency securities which are neither issued nor guaranteed by the U.S. Treasury and are not guaranteed against price movements due to changing interest rates. The Fund invests in mortgage-backed securities and asset-backed securities which are subject to the risks of prepayment, defaults, changing interest rates and at times, the financial condition of the issuer. The Fund invests in foreign securities which carry the associated risks of economic and political instability, market liquidity, currency volatility and accounting standards that differ from those of U.S. markets and may offer less protection to investors. The Fund invests in repurchase agreements which are considered loans by the Fund and may suffer a loss of principal and interest in the event of counterparty defaults. The Fund invests in municipal securities which may be affected by uncertainties in the municipal market related to legislation or litigation involving the taxation of municipal securities or the rights of municipal security holders in the event of bankruptcy and may not be able to meet their obligations. The Fund may experience higher portfolio turnover which may lead to increased fund expenses, lower investment returns and higher short-term capital gains taxable to shareholders. Events affecting the financial markets, such as a health crisis, may at times result in unusually high market volatility, which could negatively impact Fund performance and cause it to experience illiquidity, shareholder redemptions, or other potentially adverse effects. Current and future portfolio holdings are subject to risk. The Advisor engages a sub-advisor to make investment decisions for the Fund’s portfolio; it may be unable to identify and retain a sub-advisor who achieves superior investment returns relative to other similar sub-advisors.

There is no guarantee that the information is complete or timely. Performance data quoted represents past performance, which is no guarantee of future results. The investment return and principal value of an investment in the Fund will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be higher or lower than performance data given. For performance information current to the most recent month-end, visit TouchstoneInvestments.com/mutual-funds.

Please consider the investment objectives, risks, charges and expenses of the fund carefully before investing. The prospectus and the summary prospectus contain this and other information about the Fund. To obtain a prospectus or a summary prospectus, contact your financial professional or download and/or request one on the resources section or call Touchstone at 800-638-8194. Please read the prospectus and/or summary prospectus carefully before investing.

Touchstone Funds are distributed by Touchstone Securities, Inc.*
*A registered broker-dealer and member FINRA/SIPC.

Not FDIC Insured | No Bank Guarantee | May Lose Value

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