Pixabay CC0 Public Domain. Jupiter lanza un fondo global de renta variable con su socio estadounidense NZS Capital
Jupiter has launched this week the Jupiter NZS Global Equity Growth Unconstrained fund SICAV, a global portfolio of companies that can adapt and thrive in a world dominated by disruption. The fund is managed by Brad Slingerlend and Brinton Johns, portfolio managers at NZS Capital, Jupiter’s US-based strategic partner. It invests in companies that maximize Non-Zero-Sum, or win-win, value for the benefit of all stakeholders, including customers, employees, society, and the environment.
In a press release, Jupiter has highlighted that “with extensive expertise gained from a combined total of 70 years of investment experience, the NZS team has a track record of generating significant outperformance for investors”. Based on the science of Complex Adaptive Systems, the NZS investment philosophy seeks adaptable and innovative companies that will successfully navigate the increasing pace of disruption as the global economy transitions from analogue to digital.
The asset manager believes that, while the technology sector is driving innovation today, in the coming years, the wave of disruption will impact every sector across the economy including industrials, consumer, financials, energy, and healthcare, and weightings in the strategy will evolve over time to reflect these changing dynamics.
“The team believes that the Information Age affords an unprecedented level of transparency, and companies still using the traditional methods of high barriers, wide moats, and information hording to extract value from customers are losing ground to adaptable companies that maximize Non-Zero-Sum, or win-win outcomes”, they add.
Adaptability for a disruptive future
At the heart of the NZS Complexity Investing philosophy is constructing a portfolio that balances two sets of companies the team calls “resilient” and “optionality”. In this context, resilient companies are those able to adapt and evolve to disruption and changing conditions, while optionality companies are adaptable, but earlier in their lifecycles with high asymmetry.
The fund will hold 50-70 stocks: the resilient portion will typically comprise 10-20 companies with a position size greater than 2.5% each, and the optionality component will have 30-50 names that are each less than 1.5% of the overall portfolio. The holdings will typically have market capitalizations above 5 billion dollars.
“As the global economy moves from the analogue-based Industrial Age to the digital-based Information Age, a vastly different set of characteristics are needed for success. We believe that the two things that matter most as the world makes this switch from analogue to digital are adaptability in the face of an uncertain future and a company’s ability to create more value than it takes – what we call Non-Zero Sum, or NZS”, Slingerlend commented.
In his view, investing in a world shaped by disruption and free-flowing information requires a new approach, and they have “carefully honed” their Complexity Investing framework over the last decade for success in this new investing frontier. “We are delighted to share this strategy with Jupiter’s clients in the shape of this new fund”, he added.
Meanwhile, Andrew Formica, Jupiter’s CEO, pointed out that Slingerlend and Johns are “talented fund managers with a carefully-constructed process” that has the potential to deliver long-term returns. He believes their approach is “clearly aligned” with Jupiter’s culture and focus on high conviction, active fund management, centered around client outcomes.
“We have already seen a real client interest and strong early growth in the strategy since confirming the partnership with NZS, and the launch of this fund will bring the company’s total assets over 1 billion dollars while offering a further opportunity for our clients to access this exciting new strategy, a key strategic priority for Jupiter”, he concluded.
Foto cedidaNadia Grant, directora de Renta Variable Global en BNP Paribas AM.. BNP Paribas AM nombra a Nadia Grant para el cargo de directora de Renta Variable Global
BNP Paribas Asset Management has announced in a press release the appointment of Olivier de Larouzière as Chief Investment Officer for Global Fixed Income. He will be based in Paris and will report to Rob Gambi, Global Head of Investments.
De Larouzière will be responsible for managing BNP Paribas AM’s global fixed income platform, with a strong focus on investment performance and commercial success. He will also retain his existing responsibilities as Head of the Global Multi Strategy Product (GMS) team and will additionally join the Business, Investment and Investment Management committees.
De Larouzière joined the asset manager in January 2019 to manage the GMS team and currently has more than 25 years’ experience in the fixed income investment area. The global fixed income group of BNP Paribas AM that he will be responsible for includes 80 investment professionals located in London, Paris, New York and Asia-Pacific. Collectively managing more than 168 billion euros of assets in single- and multi-strategy products across sovereign debt, corporate credit, emerging market debt, structured securities and currency, the group also encompasses money market products, insurance products and credit research.
“During the past two years in which he has headed multi-strategy fixed income, Olivier has been instrumental in developing the investment philosophy and approach of the teams for which he has been responsible. I welcome him to his new role and look forward to working with him as he develops our fixed income capabilities further in order that we can continue to deliver long-term sustainable returns to our clients”, said Rob Gambi, Global Head of Investments of the firm.
Prior to joining BNP Paribas AM, De Larouzière was Co-CIO of Fixed Income at Ostrum Asset Management and senior portfolio manager at Credit Lyonnais Asset Management, having begun his career as a fixed income portfolio manager at Ecureuil Gestion. He holds a Masters in Applied Mathematics from Paris Dauphine University.
Foto cedidaJames Tomlins, gestor del fondo de bonos flotantes de M&G.. James Tomlins: “Los bonos flotantes high yield ofrecen una forma atractiva de jugar la reflación y protegerse de una subida de los tipos”
In times of economic uncertainty, high yield floating rate notes (FRNs) often offer an attractive source of income. That’s why we spoke to James Tomlins, manager of the M&G (Lux) Global Floating High Yield fund, about how the asset class has performed and what role it can play in portfolios today.
Question. Has this asset class lived up to expectations? How would you assess its performance over the past year?
Answer. The crisis should probably be viewed in isolation given its scale and the lack of any modern-day precedent. The high yield floating rate market faced the same uncertainties as other risk assets when the pandemic struck, so it initially sold off, before recovering strongly during the rest of 2020. The bonds retained the relatively high yield levels that are not present in government bonds or investment grade credit however. High yield FRNs are insulated from rising bond yields, and would even benefit through higher interest coupons if central banks were to begin to increase interest rates. Overall, the asset class has performed largely as one might expect in the prevailing circumstances as the crisis took hold and as the world has tackled it.
Q. Investors have now turned their minds to the economic recovery, which is set to arrive with the vaccination roll-out. In this recovery scenario, what can these assets contribute to investors’ portfolio?
A. Investors should probably express some caution as much of that optimism is already factored into credit spreads, which have returned to levels that prevailed as 2020 dawned. Nevertheless, if bond yields continue to increase, undercutting fixed rate bond values, floating rate bonds will not see the same hit to capital. If, in due course, central banks decide to begin increasing interest rates to combat rising inflation, high yield FRNs will actually benefit from those higher short term interest rates in the form of higher interest coupons, thus being able to provide larger income streams. Such a scenario is the so called “FRN Happy Place”.
Q. Higher inflation is also expected. What are your expectations for inflation and how will it impact this asset class?
A. The prospect of higher inflation and what this means for financial markets has become a key area of focus for investors in recent months. Some factors could indeed push inflation higher, in our view, in particular the unprecedented levels of fiscal and monetary stimulus, combined with the release of pent-up demand as the global economy reopens.
I believe high yield FRNs provide an attractive way to play the reflation theme and to protect against rising interest rates. This was demonstrated in February as concerns over rising inflation triggered a sharp sell-off in global government bonds. In contrast to many fixed income assets, high yield FRNs proved resilient during this period, with their floating rate nature helping to offset the negative impact of rising bond yields. Indeed, if central banks respond to the inflationary threat by hiking short term interest rates, FRNS benefit from higher coupons and therefore higher returns.
Q. In the same vein, what are your expectations for the interest rate horizon and how is this reflected in your M&G (Lux) Global Floating Rate High Yield fund?
A. At present, none of the main central banks appear likely to change their policy stance of being supportive, and begin increasing interest rates. They are likely to prefer to allow economies more time to build on their respective recoveries, even if it means higher inflation begins to become more entrenched. We typically do not attempt to position the fund for particular interest rate moves, preferring to look manage the fund conservatively and invest in value opportunities as we identify them. The more important question though is what does the market expect and can these expectations change. It’s this that will drive the volatility in the fixed rate market. If investors are concerned that this volatility will hurt their fixed income holdings, what FRNS do is provide a safe harbour from such stormy conditions in the bond market.
Q. Where do you see the main opportunities right now?
A. One of our key preferences is to hold lower-priced issues in the fund, as we believe the prevailing market climate offers them greater scope to generate returns than issues that are less market-sensitive and priced closer to par (100), as high yield FRNs typically have lower call prices than their fixed rate counterparts. We also retain underweight allocations relative to the benchmark, to some of the more economically sensitive sectors such as energy and leisure. While the economic backdrop of ongoing stimulus and low interest rates is supportive of companies and risk assets, such as high yield credit, there is a risk that the recoveries may falter and put pressure on credit valuations.
Q. The COVID-19 crisis and governments’ and central banks’ stimulus measures have generated a debate about what is underpinning the quality of fixed income assets. In the case of high yield floating rate bonds, are you concerned about asset quality?
A. Investing in high yield markets means taking on some additional degree of credit risk compared to investment grade markets and even in the most benign conditions, defaults can occur. This is why having a large and deeply experienced team of analysts, dedicated to undertaking the most robust assessments of the credits we hold, is so crucial. Our preference is to focus on issues that offer investors more protection in the event of a default, such as senior secured bonds.
Q. What can the M&G (Lux) Global Floating Rate High Yield strategy provide investors’ portfolios?
A. We believe the strategy, with our careful and conservative management approach, can offer investors the opportunity to achieve an appealing level of returns in a low interest rate environment. It is insulated from the negative effects that rising yields can have on fixed rate bond strategies and actually benefits from rising interest rates, through higher interest receipts.
Pixabay CC0 Public Domain. Por qué los inversionistas que busquen rentabilidad e impacto deben tener en cuenta el agua
As sustainable investing grows in popularity, investors often ask us what they can do to position their portfolios to make a positive social and environmental impact without sacrificing potential returns. Our answer is always the same: Consider making a dedicated allocation to water as an investible theme.
The societal benefits of investing in water are clear. One-in-three people globally lack access to safe drinking water, a shortfall contributing to the avoidable deaths of nearly 1,000 children daily. Along with this human toll is a costly economic drag: The millions of lost hours spent seeking potable water could instead be used for education and other productive activities that could lift countless people out of poverty. Our water crisis is so severe that the United Nations lists “Ensuring access to water and sanitation for all” as one of its 17 Sustainable Development Goals. However, achieving that goal requires a massive buildout of infrastructure driven by a massive marshaling of investment capital.
The need for water-related investment is not limited to the developing world. Over the next decade, billions of dollars will be spent on water infrastructure in Europe and the US, where demand for water outpaces supply, driven by population growth, the expansion of agriculture and more water-intensive consumption as living standards continue to rise. Factors such as industrial growth, the increasing number of data centers or the electrification of transport will inevitably result in more water needed for power generation needs. Already in the US, power generation makes up 40% of total freshwater withdrawals, on par with water used for irrigation in farming.
As the world industrializes, electrifies and grows in population, water consumption has increased by more than 150% in the past five decades while supply—mainly from rainwater—remains static, and unevenly distributed, leaving locals with few choices to address water shortages.
The most obvious two choices are to proactively address this imbalance by protecting existing freshwater resources from misuse and wastage, or by making water use more efficient. Various technology and product solutions are available, but both approaches require initial capital outlays in addition to the billions of dollars that will be required simply to maintain existing water infrastructure in countries like the US, where much of the existing infrastructure is more than 100 years old. The environmental benefit to investing in water resources preservation is also obvious, given its essential nature and the fact that no substitute exists.
Our water challenges are exacerbated by climate change, which is resulting in more severe weather patterns including prolonged droughts, flooding and unseasonal temperatures. As a result, places that once had adequate water might now require significant infrastructure upgrades to weather storms and meet individual and industrial needs. The good news is that we can fix these problems if we apportion enough public and private capital to build out and improve water infrastructure globally. As such, investors can help meet this need for capital by investing in the long-term structural growth of the water sector while helping fix one of our most pressing environmental problems.
So, how can investors deploy capital? We see three areas where investors can become part of the solution while also benefitting from the upcoming investments to address water shortages:
Increasing access to water: Companies that distribute water to growing populations, improve water storage capacity or help to covert salt or wastewater into useable water
Improving water efficiency: Companies with products that allow customers to reduce their water footprint without loss in productivity, i.e. by reducing wastage or fixing leakages.
Enhancing water quality: Companies that help to manage wastewater, often by recovering some of the huge amount of water flushed down drains or toilets, or companies which help to ensure our drinking water is and stays safe for consumption.
By targeting these areas, investors can access a potential source of long-term growth at risk levels that have historically been lower than other types of growth stocks. Unlike many other growth areas such as tech innovators, companies in the water segment tend to offer already well-established and cash-generating business models with strong client relationships that are not easily disrupted, given that the reliance on sufficient and safe drinking water creates high barriers to entry.
Of course, like all investments, water-related companies carry their own asset-specific, idiosyncratic risks. For that reason, investors should stick to fundamentals and diversify their holdings across companies, regions and sectors. There are over one hundred companies globally across these categories, offering enough options to construct a diversified portfolio of pure play water holdings.
These characteristics make water-related companies an ideal target for investors looking to incorporate sustainability into their portfolios. However, investors looking to capitalize on this opportunity should move quickly. Infrastructure is at the center of the political agenda in the US, where the Biden administration is planning a $2 trillion infrastructure investment. Europe, China and other locations are increasing investment, too. This spending has the potential to trigger a flood of projects aimed at replacing old, hazardous lead pipes and upgrading water infrastructure from its current old economy brick-and-mortar state to a more automated, smart, digital, 21st-century iteration.
There is an even more compelling reason for investors to act now. As a society, we are long overdue to address the problem of water access. We know how to solve it; all we need is the will and the capital. Investors can help with both. By stepping up now, investors can reap the potential financial rewards while also driving positive impact in an area where it is needed most.
A column by Andreas Fruschki, CFA, Head of Thematic Equity at Allianz Global Investors; and Alexandra Russo, member of the Thematic Equity team at AllianzGI, based in New York.
Foto cedidaSandro Pierri, CEO de BNP Paribas AM.. BNP Paribas AM nombra a Sandro Pierri CEO
BNP Paribas Asset Management has announced in a press release the appointment of Sandro Pierri as CEO, with effect from July 1st 2021. Based in Paris, he will report to Renaud Dumora, future Deputy Chief Operating Officer of the group, in charge of the Investment & Protection Services Division, which includes BNP Paribas AM, BNP Paribas Cardif, BNP Paribas Wealth Management and BNP Paribas Real Estate.
Pierri succeeds Frédéric Janbon, who will become Special Advisor to Dumora, to ensure the transition, before leaving the Group at the end of the year to pursue other professional opportunities.
“I would like to sincerely thank Frédéric Janbon for his overall contribution to the BNP Paribas Group, in which he spent most of his professional career. During his tenure at the head of Fixed Income and up until 2014, he successfully built and ran a powerful and recognized fixed income and debt capital market franchise. Since 2015, he has refocused and transformed our asset management activities into a fully integrated platform delivering solid investment performance to our clients. Under his leadership, BNP Paribas AM has become a global leader in sustainable investment”, said Jean-Laurent Bonnafé, CEO of BNP Paribas Group.
Meanwhile, Dumora believes that the appointment of Pierri, who has more than 30 years of experience in the asset management industry and has been Deputy CEO for BNP Paribas AM since January, demonstrates the capacity of their asset management business to organise “a seamless succession plan which will ensure consistency” with the strategy developed by Janbon.
He also pointed out that Pierri has transformed BNP Paribas AM’s Global Client Group into a client-centric distribution platform to support the growth strategy of the business. “This has proved successful with positive results in 2020, despite the impact of the pandemic”, he commented.
Lastly, he highlighted that, as CEO, Pierri “will uphold the strategy, philosophy and values of the firm within the framework of the Group business development plan and will reinforce the leadership of BNP Paribas AM in sustainable investment”.
Pixabay CC0 Public Domain. Los activos en fondos ESG alcanzan los 2 billones de dólares apoyados por los fuertes flujos de entrada en Europa
ESG investing continues to grow. According to the latest report by Morningstar, the global sustainable universe attracted 185.3 billion dollars in net inflows in the first quarter of 2021, up 17% from 158.3 billion in the previous quarter. Specially supported by strong inflows in Europe, global assets neared the 2 trillion mark, up 17.8% from the last quarter.
The universe of the Global Sustainable Fund Flows review encompasses open-end funds and exchange-traded funds that claim to have a sustainability objective and/or use binding ESG criteria for their investment selection. The report divides it into three segments by domicile: Europe, United States, and Rest of World.
Thus, it shows that Europe took in the bulk of the flows during the first quarter of the year (79.2%), while the U.S. accounted for 11.6% of them. In the rest of the world, they were considerably higher than in previous quarters, clocking in at 17.1 billion dollars for Canada, Australia and New Zealand, Japan, and Asia. This is compared with 13 billion in the fourth quarter of 2020, a spike that can be largely attributed to an uptick in flows in Japan and China combined.
Europe accounts for 83% of global assets, followed by the United States with 12%. The past three years have seen a steady increase in assets in sustainable funds globally. “With currently 4,523 sustainable funds available and many more that now formally consider ESG factors in a nonconstraining way to better manage risks and improve returns, Europe is by far the most developed and diverse ESG market“, highlights the report.
Furthermore, product launches globally remained strong in the first quarter, with 169 new ones entering the market. This is down from the all-time record set in fourth-quarter 2020 with 215 launches but up from the first quarter of 2020. Morningstar explains that product development always slows down in the first quarter relative to the fourth one. The majority of the launches (65.6%) took place in Europe, while Canada and Asia ex-Japan both saw new 17 products, followed by Japan with 13 and U.S. with 11.
U.S. market
The analysis shows that, once again, sustainable funds in the United States attracted an all-time record level of flows in the first three months of 2021. In that period, U.S. sustainable funds saw nearly 21.5 billion dollars in net inflows. That’s slightly more than the previous record, USD 20.5 billion, set in the fourth quarter of 2020, and more than double the 10.4 billion seen one year ago, in the first quarter of 2020. It was also about 5 times greater than first-quarter flows in 2019.
Also, sustainable passive funds dominated their active peers in attracting flows. During the first quarter, passive funds claimed nearly 15 billion dollars, or 70% of all U.S. sustainable flows. In this sense, the five funds attracting the most flows in the first quarter of 2021 were all passive equity funds.
Meanwhile, assets in U.S. sustainable funds have stayed on “a steady growth trajectory”, says Morningstar. As of March 2021, assets totaled nearly 266 billion dollars. That’s a 12% increase over the previous quarter and a 123% increase year over year. Active funds retained the majority (60%) of assets, but their market share is shrinking because, as the report highlights, three years ago, they held 82% of all U.S. sustainable assets.
European market
Europe was the key to the good figures registered in the first quarter of 2021. European sustainable funds attracted inflows of 120 billion euros in the first quarter of 2021. This is 18% higher than in the previous quarter, and it represents 51% of overall European fund flows. Besides, sustainable fund assets increased by 17.5% over the quarter, reaching a record high of 1.3 trillion euros.
The report also shows that index funds and ETFs garnered 36.5 billion euros in sustainable fund flows, accounting for 30% of first quarter flows, up from 32.8 billion euros in the previous quarter.
As for product development, in the first quarter of 2021 it remained high in Europe, with 111 new sustainable fund launches identified by Morningstar. The firm expects this high level of sustainable product development to continue to be spurred by the Sustainable Finance Action Plan of the European.
Foto cedidaBhaven Patel, responsable global de ETF Capital Markets de HSBC AM.. HSBC AM nombra a Bhaven Patel responsable global de ETF Capital Markets
HSBC Asset Management continues to reinforce its team with the appointment of Bhaven Patel as Global Head of ETF Capital Markets. Patel, who joined the firm on April 6, will be based in London reporting to Carmen Gonzalez-Calatayud, Head of ETF Capability.
In his new role, he will be responsible for running the firm’s ETF Capital Markets function and driving the liquidity strategy for its ETF platform. The asset manager explained in a press release that Patel will work closely with the ETF sales team to help clients with their ETF trading and execution requirements, and with the ETF operations and product development teams to help design best-in-class primary market infrastructure to support the firm’s existing product range.
Commenting on the appointment, Carmen Gonzalez-Calatayud said that Patel’s experience in designing and launching asset class-specific ETF platforms will enable them to continue expanding their “growing range of ETF products and capabilities”.
Patel highlighted that HSBC Asset Management’s ETF business has seen “momentous growth” over the past year and it is “an exciting time” to join the firm. “I am looking forward to helping the company bring innovative products to the market”, he added.
Patel brings over 16 years’ experience within the ETF industry in managing the primary and secondary ETF markets and also an ETF trader. He joins from DWS Xtrackers where he was Director, ETF Capital Markets for six years. Prior to that, he was part of the iShares ETF Capital Markets team and also worked for the ETF and delta one trading teams at Credit Suisse and Morgan Stanley.
In 2020, HSBC AM set out its strategy to re-position the business as a core solutions and specialist emerging markets, Asia and alternatives focused asset manager, with client centricity, investment excellence and sustainable investing as key enablers. Growing its ETF range, particularly in areas such as ESG, Asia and fixed income, is one of the firms’ strategic growth initiatives. HSBC AM currently manages USD93.9 billion in passive and systematic strategies and USD 15.5 billion in ETF strategies.
Allfunds, the leading independent wealthtech and fund distribution platform, has developed Allsolutions, a new platform that aims to provide fund of fund and discretionary portfolio managers with a different set of building blocks to optimize their portfolios. It will open its operations during the course of May.
The firm revealed in a press release that Allsolutions will give banks and wealth managers “a solution for running their open architecture programs through mandates”. They also pointed out that, true to their business model, this is a B2B solution not available to a final investor offering.
Allfunds will onboard the first iteration of strategies for its B2B sub-advisory platform following approval from the Luxembourg regulator (CSSF). The offer will initially consist of twelve mandates covering the primary asset classes and managed by some of the largest fund houses. Seven of these strategies will have an ESG focus, which is consistent with the firm’s commitment to sustainability which includes adhering the Principles for Responsibility Investing, a United Nations initiative to foster the development of a more sustainable global financial system.
Following the initial launch, Allfunds will introduce 18 complementary strategies to the platform in the third quarter of 2021. Of these strategies, a further 14 will also focus strongly on sustainability. Their introduction will bring the total number of available strategies to 30.
“We are pleased to extend our services, offering clients access to a selection of exclusive mandates expertly managed by some of the world’s largest fund houses. Through Allsolutions, our aim is to continue to evolve the Allfunds infrastructure allowing for efficient access to open architecture whilst sticking to our B2B business model and never selling to end clients”, Juan Alcaraz, CEO, said.
Pixabay CC0 Public Domain. NN Group revisa su estrategia en búsqueda de alternativas de crecimiento para su negocio de gestión de activos
As part of its periodic assessments, NN Group has announced this week that it is reviewing strategic options for its asset management business. The firm is evaluating a broad range of options including a merger, joint venture, or (partial) divestment.
The group explained in a press release that the process is part of its “regular and thorough” assessment of its individual businesses, in line with their aim to pursue “long-term value creation that is beneficial to all stakeholders”.
The current review is aimed at assessing the opportunities to create a broader platform that enables NN Investment Partners (NN IP) to accelerate its growth. “In considering different strategic alternatives, particular focus will be given to how NN IP can continue to provide the best investment offering and service to NN’s insurance business and asset management clients in a rapidly evolving industry”, they added.
With around 300 billion euros (362 billion dollars) of assets under management, NN IP is a leader in responsible investing and has strong capabilities in fixed income, private debt, equity and multi asset solutions.
Pixabay CC0 Public DomainOportunidades en renta fija. Oportunidades en renta fija
Fixed Income can still provide protection on the downside and some benefits on the upside, but it is notably harder of late. You have to be opportunistic. You have to be nimble and you have to be solutions oriented.
In our view as active managers, the benchmark is not a starting place for asset allocation, but a proxy for risk. It’s how much risk a manager should be taking in order to achieve whatever solution is mandated. Ultimately, the first thing is to give active management a range around that benchmark. The aim doesn’t always have to be perfectly neutral. In times like COVID, you want your fixed income managers to be taking on a little bit more risk, and in periods perhaps like today or in a period where the manager doesn’t believe the risk is well-compensated, you want less.
The risk/reward isn’t skewed in an investor’s favor today. Becoming more defensive in building a portfolio that has a lower potential volatility and looking forward to areas of the market that may not sell off is important to protect against downside potential.
Risk and Reward: How to Play Defense
1) Be cautious on duration
Our advice is to remain cautious on duration. We continue to look for opportunities to take down credit duration given the move in spreads over the last 12 months. The investment grade spreads are now tighter than early 2020 (pre-COVID sell off) despite corporate leverage having increased over 2020 from already high levels. Fiscal and monetary stimulus should continue to support the economy and ultimately corporate earnings and cash flows. Therefore, we aren’t concerned about the exposure; however, prices do seem to already reflect a lot of the economic healing. As always, we search for interesting opportunities no matter what the market environment. Recently these have been higher quality in the 2- to 5-year maturity range.
2) Move up the capital stack to securitized assets where possible
The reality is that sometimes markets are mispriced across silos, and one of those mispricings was actually global airlines pre-COVID where the corporate unsecured debt and a secured position in that exact same corporate airline were priced on top of each other. Going through COVID they diverged rather significantly. One of them went down 70 percent, and another went down around 40 percent, so 30 cents on the dollar versus 60 cents on the dollar. Today, it’s actually relatively easy to make those gift trades when you give up 1, 2, 3, 4 or 5 basis points of yield, but you take on a lot of protection by moving back up the capital stack spectrum and to securitized assets.
Secured credit is another area where we can do that, by just taking out credit duration, through both defensive posturing within individual assets, but also pulling back and being more defensive across the board.
Some agency mortgage-backed securities (MBS) continue to look reasonably attractive, especially relative to high-quality corporates. There are specific stories such as low coupon and low loan balance mortgages that have reasonably stable payment profiles such that we believe we are getting paid to take on the convexity risk (i.e., prepayment/extension).
3) The consumer story still resonates and has more runway
We still believe in the consumer story given the long-term improving job market and stimulus payments. Consumers entered the COVID recession in good financial shape, and while the immediate impact of the recession was quite harsh, direct stimulus payment and the overall economic rebound have allowed them to regain/maintain a good financial profile.
The places where investors should be looking today are where central banks have intervened notably less, and that is the world of securitized products.
While spreads in senior tranches of Asset-Backed Securities (ABS) and non-agency Residential Mortgage-Backed Securities (RMBS) have tightened along with corporates, we continue to think some asset types and programs remain interesting. Senior ABS are particularly interesting because spreads are relatively attractive, and the durations are short. Additionally, most of those bonds are amortizing so we get cash flow each month.
The non-agency RMBS market remains attractive because of the consumer financials as well as the strong housing market which provide collateral for these bonds (underwriting remains quite good with income/asset documentation requirements, low Loan-to-Values (LTVs), no low rate promo periods where there could be payment shocks, etc).
Structuring Portfolios for Economic Shifts, Volatility and New Opportunities
In some of our portfolios, we are moving toward a more conservative position. Spread compensation has decreased notably over last 12 months. Fiscal and monetary stimulus provide good economic support for credit (much already reflected in prices), but it also provides a basis for potential inflationary and policy rate move scares which could create volatility along the yield curve and in credit spreads. We want to be positioned to take advantage of those opportunities. Thus, we continue to preserve liquidity in the form of cash, Treasuries, agency mortgages, monthly amortizing ABS and short, high quality corporates.
Coming out of the global financial crisis a decade ago, there were structural shifts as to how the global economy was going to work. Central banks around the world shifted the regulatory environment. They became almost commoditized utilities, and to be fair, that’s being tested now with the winddown of a hedge fund in Asia that we all read about recently.
Coming out of the COVID crisis, we are seeing structural shifts again. There has been a shakeout of some of the levered players. To move up in quality as measured by rating agency grades, investors need to look across silos for relative value.
In sum, as active fixed income managers, we take risks when it makes sense to take risks, and we focus on downside protection when our view is that the markets aren’t well suited to reward risk-taking. In fixed income we are playing defense roughly 80 percent of the time, and that’s certainly true today.
Important Information
The views expressed are subject to change and do not necessarily reflect the views of Thornburg Investment Management, Inc. This information should not be relied upon as a recommendation or investment advice and is not intended to predict the performance of any investment or market.
This is not a solicitation or offer for any product or service. Nor is it a complete analysis of every material fact concerning any market, industry, or investment. Data has been obtained from sources considered reliable, but Thornburg makes no representations as to the completeness or accuracy of such information and has no obligation to provide updates or changes. Thornburg does not accept any responsibility and cannot be held liable for any person’s use of or reliance on the information and opinions contained herein.
Unless otherwise noted, source of all data, charts, tables and graphs is Thornburg Investment Management, Inc.
High yield bonds may offer higher yields in return for more risk exposure.
Any securities, sectors, or countries mentioned are for illustration purposes only. Holdings are subject to change. Under no circumstances does the information contained within represent a recommendation to buy or sell any security.
Investments carry risks, including possible loss of principal.
Outside the United States
This is directed to INVESTMENT PROFESSIONALS AND INSTITUTIONAL INVESTORS ONLY and is not intended for use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to the laws or regulations applicable to their place of citizenship, domicile or residence.
Thornburg is regulated by the U.S. Securities and Exchange Commission under U.S. laws which may differ materially from laws in other jurisdictions. Any entity or person forwarding this to other parties takes full responsibility for ensuring compliance with applicable securities laws in connection with its distribution.
Founded in 1982, Thornburg Investment Management is a privately-owned global investment firm that offers a range of multi-strategy solutions for institutions and financial advisors around the world. A recognized leader in fixed income, equity, and alternatives investing, the firm oversees US$45 billion ($43.3 billion in assets under management and $1.8 billion in assets under advisement) as of 31 December 2020 across mutual funds, institutional accounts, separate accounts for high-net-worth investors, and UCITS funds for non-U.S. investors. Thornburg is headquartered in Santa Fe, New Mexico, USA, with additional offices in London, Hong Kong and Shanghai.
