Fixed income investors might feel buffeted by the winds of uncertainty as of late, and that turbulence isn’t likely to abate in the foreseeable future. The team at the helm of Invesco’s Active Multi-Sector Credit Strategy oversees a strategy specifically designed to provide high-yield-like returns with a lower volatility profile over the full course of the credit and rate cycle. As Jennifer Hartviksen (below left), Senior Portfolio Manager, Head of Global High Yield, puts it, “Any time in the cycle is good time for multi-sector credit.”
II recently spoke with Hartviksen, Joe Portera (above center), CIO, High Yield and Multi-Sector Credit, Invesco Fixed Income, and Ken Hill (right), Senior Portfolio Manager, Invesco Fixed Income Multi-Sector, to get their thoughts on where we are in the economic cycle, and why that might be driving demand for the global strategy they manage.
There’s a lot of talk about nearing the end of the cycle. What is your perspective?
Joe Portera: To use a baseball analogy, I’d say we’re in extra innings. The Fed, even though they haven’t officially said it, seems to have moved to a regime-change scenario where they’re unlikely to become very aggressive at tightening monetary conditions until they actually see higher inflation ahead. I think the Fed views itself as the only legitimate institution left in the western hemisphere that market participants trust. In that context, it has behooved them to try and extend the cycle as much as they can.
Compared to any other economic cycle in the post-war era, this is certainly the longest expansion, but it hasn’t been a V-shaped recovery – with rare exceptions the US economy hasn’t been able to sustain greater than 2% growth. We think it’s probably set to continue, although there are obviously headwinds out here, mainly exogenous, that make the Fed’s job very difficult.
What do these extra innings mean for investors?
Portera: It means valuations are tight, fundamentals remain constructive, and that’s pretty much going to follow credit across all asset classes, especially the four major pillars of our Active Multi-Sector Credit Strategy: global high yield, bank loans, emerging market debt, and global investment grade.
We remain cautiously optimistic due to the global nature of the strategy, but we’re not just sitting around hoping for the best. We have taken some steps to insulate, protect, and preserve capital over the next six to nine months.
What’s your risk headline so far for 2019?
Jennifer Hartviksen: We haven’t necessarily been avoiding risk – it’s been a tale of two parts this year. At the beginning of the year we were actually increasing our risk to add value, given where valuations were at the time. We’ve been managing that risk down over the course of the year.
Portera: We definitely entered 2019 viewing the Fed as a tailwind for risk, and we did increase our risk pretty dramatically. Mainly two-fold, somewhat barbelled, especially in the opportunistic bucket. We were long BBBs, but there were a couple of those BBBs that had levered their balance sheets to make acquisitions so their pure credit metrics looked more like BB credits. The rating agencies were giving them the benefit of the doubt because they planned to reduce the leverage over time, and consequently they were trading relatively cheap. So, we bought a basket of those BBB names, and against that we were also long CCCs. The BBBs worked well for us, the CCCs not so much. Some names have done quite well. Other names in the energy sector have languished a bit, and that really was a macro call. We thought energy prices had bottomed, so we bought a basket of names, mainly in the Permian Basin, where we think the assets are the best. In short, it has been a mixed bag so far in 2019.
Ken Hill: And that corresponds with a big theme as we were going into 2019, namely that the Fed had gone too far, too fast. So, we weren’t afraid of BBBs, BBs, and credit bonds that traditionally have more duration exposure. We thought there was good value there, and those bonds have done extremely well year to date.
What other themes have you been working with?
Portera: The Internet of Things, and TMT – the convergence of telephones, media, and technology – have been pervasive in the portfolio, even within sectors. There have been some big mergers in that space. So, the “rise of the machines” has been a prevalent part of the portfolio as well, within the opportunistic bucket, high yield and IG. We’ve been overweight those types of names, and that’s also done quite well. It’s a theme that we’ll probably continue to stick with for quite some time.
Hartviksen: We took bank loans down in the third quarter last year because the spread between bank loans and high yield had narrowed. Even though the Fed had been raising rates, bank loans weren’t getting a lot of love because of outflows, especially at the retail level. The only thing propping up bank loans was the CLO [collateralized loan obligation] market, so we took the strategy’s bank loan exposure down by 10% by selling cash loans in early October. It worked out, because the 4th quarter was a bit of a disaster for bank loans. Since the crisis, bank loans have actually performed nicely, certainly on a risk-adjusted basis, but versus the other three asset classes, they have woefully underperformed.
Having said that, we entered 2019 a little more optimistic regarding bank loans. We didn’t really expect outflows to continue, although they have on the retail side. But the CLO market has remained rather robust, so we did tactically add bank loans back into the portfolio through derivatives for part of the period. We’ve been very active in tactically adjusting the bank loan exposure– taking it off in the middle of the 2nd quarter, and recently starting to layer it back on.
Hill: We tend to look at the bank loan/high yield relationship very closely. There are a lot of crossover investors in those types of asset classes. We believe high yield is fully valued, and with rates as low as they are, we think a lot of good news is priced in regarding Fed cuts. Even though rates have fallen, we think at this point bank loans will at least be on-par with or perhaps even outperform high yield over the next two to three quarters.
Are you seeing demand for the strategy increase?
Hartviksen: We have seen demand for the strategy increase exponentially. There are a lot of assets moving out of traditional asset classes. We’re seeing a lot of money across the marketplace move out of high yield and into multi-sector credit, so it’s not being counted in high yield dollars. Investors are realizing they cannot, in a practical way, move between the asset classes quickly enough to take advantage of market changes, so they’re turning over their assets to multi-asset managers who are able to achieve these swift tactical shifts.
Portera: We’re seeing the demand not only in the DB plan space, but in the DC market as well, and that’s a global trend. We’ve seen a lot of interest from Japanese pension plans, from European insurers, and wealth managers at large banks, and, of course, U.S.-domiciled pensions. We’re also seeing some success in Canada where we’ve launched a retail product in the multi-sector space.
What are you hearing from investors regarding what they like about the strategy?
Hartviksen: When we meet with investors, prospective or existing, there’s a strong desire for something that will give them a fixed-income coupon with capital preservation. Our strategy provides that.We have clients of all sizes, and many small to mid-size strategies just don’t have the resources to establish asset allocations for themselves. Some mid- to large-size clients will use us almost as a second opinion to see what we’re doing with our four asset classes, but I think that a lot of treasurers and time- and resource-constrained investors are realizing that they don’t have the capabilities to do it themselves – they don’t want to end up in a situation where they personally are going to be liable or get in trouble because they’re not moving the assets around properly.
Hill: That we’re not taking a lot of duration risk is a positive for a lot of our prospective clients. It’s a pure credit product, not an absolute return product. It’s very rare that we’re going to move outside of credit to gain value through currency or rates. We do have drawdowns, but the structure of our strategy and the way we manage it helps to minimize them, especially this late in cycle. There is a place in just about every institutional investor’s asset allocation for a strategy like this. It gives them access to all the major asset classes, it gives them a sense of how we can take advantage of market opportunities, and it’s a very efficient way to invest globally.
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