During the disinflationary period, strategic long-term, fixed-income benchmarks have worked well for investors.
The question now is, with a sea change happening, albeit slowly, are fixed-income products still doing what they are supposed to in a wealth manager’s client accounts?
Michael Kelly, global head of multi-asset at PineBridge Investments, addresses this point in detail in explaining the benefits of the IA Clarington Global Bond Fund; the two companies have joined forces to offer one of the first multi-asset credit strategies in Canada.
With the objective to deliver a 4-7% total return, the fund sets out to defend portfolios from rising rates and duration risks, diversifying holdings across the globe to take advantage of different interest rate cycles.
He believes too many advisors have used fixed income as a “one-size fits all” to occupy the area of the portfolio that needs a positive return each year.
“It’s done a great job for 37 years,” he said. “But the set-up doesn’t look good with yields as low as they are; the return potential as low as it is at the same time. The risks related to that return profile is as high as it’s ever been.
“So this unconstrained [approach], in our view, is something that, job number one, doesn’t lose money when rates go up. And to do that you can’t be chain-linked to a benchmark; you can’t be a relative-term product.
“So these products don’t manage to a benchmark they manage to an objective –a make-money-in-any-environment objective.”
Kelly said the fund is able to cherry pick the world of fixed income and pick the right spot. “Sometimes they will be in safety but that’s the objective of what we call unconstrained and about a half of the unconstrained product is multi-credit, the other half is multi-saving. The biggest part of the job is to know when to steer towards credit and return, and when to steer towards safety.”
Kelly, who spent 15 years at JPMorgan Investment Management, said the PineBridge team's ability to shop the globe for opportunity was never more evident than in 2016, when Brazil brought in a market-friendly government.
He said: “Brazil had 14% policy rates, 11% inflation peaking while everything was troughing. So here we owned longer-duration fixed maturity. We did tremendously well, but we also did the same in Peru, Indonesia and a handful of countries out of cycle.”
Opportunities the fund is positive on include the “investment grade slice of CLOs (Collateralized Loan Obligations)". Kelly said: “There’s a stigma attached to them [because of their poor 2008 performance] that is keeping the risk premium more elevated than it should be.”
He also highlighted Indonesia’s local currency as an opportunity after it received a huge boost from an economic amnesty programme where, according to Kelly, 25% of its GDP returned money to the country’s coffers from accounts in Singapore.
Kelly added: “It helped build a currency reserve, that is now enormous, that will be used to defend that currency. It’s been upgraded twice since we owned them by the ratings agency so it’s an improving credit.
“We also like certain European contingent, convertible bonds attached to banks - CoCo bonds. [The risk] is not spelled out well but we have a brilliant Russian mathematician portfolio manager who manages this corner of the world for us and we go through contingency by contingency and we go through credit by credit. European banks are getting a lot stronger now so risk is falling. Anything opaque and hard to understand usually invokes a risk premium.”
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