Welcome to Soundbites, weekly insights on market trends and investment strategies, brought to you by Investment Executive and powered by Canada Life. For today’s Soundbites, we’re talking about multi-sector fixed income with Brian Giuliano, senior vice-president and client portfolio manager with Brandywine Global Investment Management. We talked about where opportunities can be found, the importance of active management, and we started by asking him to give us the best case for fixed-income investing.
Brian Giuliano (BG): Many investors are still underweight fixed income. And that was a good decision for a long time. But times have changed. And I think investors should consider increasing their allocations to fixed income. Because when we look across different sectors and countries, regions, the starting place today is so different from where we were just a few years ago. You can earn a reasonable coupon and have that optionality that if risks increase, an economic surprise occurs, something breaks, you get attractive return. If the torrid pace of appreciation within the equity market slows, fixed income can deliver attractive returns, thanks to the starting place for yield today.
The prospect of lower interest rates
BG: Headline economic activity is strong, but there are cracks beneath the surface of the global economy that do have our attention. We just lived through a very aggressive central bank rate-hiking cycle, and one that took place in a very short period of time. And the lagged effects of that monetary tightening are still working their way through the economy. So, ultimately, we think that both growth and inflation are likely to be biased lower in the coming quarters. Ultimately, that allows central banks to be able to ease their very restrictive policies, lower interest rates, at least to some degree. And historically, bonds have performed well in that environment, and we expect them to perform similarly well over the next nine to 12 months.
The high-yield and investment-grade space
BG: Yields across both the high-yield and investment-grade credit space are attractive, but credit spreads are tight. And when credit spreads are tight, you don’t have much margin of safety in the event of economic turbulence. So what we want to do right now is balance income and safety. So take advantage of the attractive income that can be earned but stay higher in credit quality, have less interest-rate sensitivity in the event that spreads do widen.
Emerging market debt
BG: We think that some segments of emerging market debt look very attractive. In particular, we like the commodity producing emerging markets in Latin America. They have very attractive yields on both a nominal and inflation-adjusted basis. And the central banks in these markets were amongst the first to raise interest rates a few years ago, during the inflation shock. They’re lowering rates today. They’ve been lowering rates for the past couple of quarters. And if inflation in the developed world proves maybe stickier than anticipated, maybe because commodity prices are increasing, those commodity producing emerging markets should benefit in that environment.
Active management
BG: Being able to play offense and defense at different times, or take advantage of opportunities, minimize risk, I think is so important. And right now we want to balance income with safety in our multi-sector strategy. But again, we want to stay higher in quality, we want to have less interest-rate sensitivity in the event that spreads widen. So, right now we like higher-quality, high-yield bonds, as well as some select investment grade corporates. We think segments of the emerging market debt world — in particular, those commodity producing emerging markets are very compelling. But there are some heightened economic risks. And to that last point, we also own some higher-quality government bonds right now, as an insurance policy, a tail risk hedge, for those economic risks.
Finally, what’s the bottom line for fixed-income investors?
BG: This is a really good time to reassess your asset allocation, to think about increasing fixed-income exposure. But as I’ve alluded to, it’s important in this environment to balance income with safety. Yields have normalized to levels that historically have generated attractive long-term returns — so take advantage of that income — but credit spreads are tight. So perhaps don’t go too far down in quality, reach for too much yield, until a better margin of safety appears. And I think ultimately a multi-sector strategy can be a really good way to take advantage of opportunities within fixed income without taking on too much risk.
Well, those are today’s Soundbites, brought to you by Investment Executive and powered by Canada Life. Our thanks again to Brian Giuliano of Brandywine Global Investment Management. Visit us at investmentexecutive.com, where you can sign up for our a.m. newsletter and never miss another Soundbite. Thanks for listening.
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