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Three reasons why investors need to generate income efficiently – ShareCafe

By on August 9, 2021 0

by Brian Resnick, CFA – Director and Senior Investment Strategist for Alternatives and Multi-Assets

Investors naturally turn to higher income segments when traditional core bond yields are low. But many US fixed income investors have limited their choices to a few aisles of the income supermarket, focusing primarily on exposure to US high yield bonds. We believe that a better approach is to stock the cart with more variety, not all of them are in the domestic aisles.

A global multisectoral approach can offer much more than just international diversification. If investors are willing to broaden their horizons, in our opinion, they have a much better chance of achieving their investment goals. Here are three compelling reasons to go global and multisectoral.

1. More Credit Segments — A Wider Net for Income Opportunities

A global approach to multisectoral credit can tap a wide range of segments, including international and US high yield bonds, emerging market debt (EM) denominated in local currency and dollars, mortgage-backed securities and loans. leveraged. The U.S. high yield index is close to $ 1.6 trillion, but it pales in comparison to a larger global multi-industry universe that exceeds $ 8 trillion.

That’s a pretty wide net for income opportunities: bank lending, securitized debt, sovereign and corporate credit in emerging markets, and high yielding companies in developed markets. With such a large universe, bond managers can target areas that offer the best income and the best value at any given time. It also means more opportunities to be flexible in exhibitions, to seek alpha opportunities even when an area may be out of favor.

2. You never know which sector will win

No fixed income sector can dominate year after year. Ever-changing global economic and market conditions mean that each category has the chance to be the best or worst performer in any given year.

For example, in 2020, US high yield corporate bonds and emerging market corporate bonds each returned 7.1%, leading the credit market. But in 2019, European high yield outperformed US high yield, falling to 14.7% compared to 14.3% in the United States. And while emerging-market high-yield bonds were among the top two sectors from 2015 to 2017, they have lagged in the past three years.

A quilt chart shows how each sector has performed in each of the 12 years, and how there is no model for which sector will do the best.

Since no one can know which sector will perform better in any given year, we think it makes sense for investors to spread their money into a diverse basket, as each sector has its own merits. Emerging market debt, for example, particularly bonds denominated in major developed market currencies or “hard” currencies, today offer exceptional value. In fact, emerging hard currency debt trades at historically high spread premiums relative to US high yield.

Securitized debt also offers interesting opportunities. Credit risk transfer securities in particular are supported by a strong real estate market, strong consumer balance sheets and tighter lending standards. Finally, traditional high yield BB rated corporate bonds have strong valuations and a large pool of potential rising stars. When credits move to investment grade, the yield spread decreases, on average, by more than 80 basis points. It is a great source of alpha if an investor can quickly identify improving credit.

3. Portfolio Alchemy creates a more efficient package

A diversified global multisectoral credit allocation can offer high returns, robust total returns, and a higher degree of income efficiency. These characteristics have helped the global multi-sector index outperform high yielding US corporate bonds over the long term and over 80% of three-year periods, with similar levels of risk.

A line chart shows that the global multi-sector has outperformed the US high yield 82% of the time over the past 12 years.

For U.S. investors looking for income in what appears to be a broad, low return environment, we believe it makes sense to invest across borders and market borders, exploiting a set of global opportunities. . Designed effectively, a diversified global multi-sector credit strategy can enhance return potential and increase portfolio efficiency while broadening the scope of alpha opportunities.

Actively adjusting a portfolio’s exposures to focus on the most attractive opportunities throughout the cycle can be a very effective way to navigate changing markets. Additionally, a global multi-sector credit strategy can combine with other building blocks to form any number of Efficient IncomeSM portfolios anywhere on the income-risk continuum.