Michael Salvay of investment manager Payden & Rygel recently pointed out “it used to be easy to understand bonds – you know, just coupons and maturity”.
However, fixed income investing has changed and grown enormously over the last decade, particularly as a result of the upheaval of the global financial crisis. For many investors, it has always been a complicated asset class; today, it may seem that it is even more complex. But it is one that shouldn’t be overlooked or put in the “too hard” basket.
According to Michael, there are three key points to keep in mind about fixed income investing.
- There is no “one size fits all” approach. Investors in fixed interest can achieve different outcomes depending on the mix of securities they invest in, and the level of risk they are willing to take on. Some investors are keen to lock in 30 year yields through US Treasuries while others are interested in taking on a little more risk, perhaps through emerging market debt or defaulted securities, in order to achieve a better return.
- While bonds have gone through a period of growth and upheaval, they aren’t having an identity crisis, despite the current low yields. They still operate in the same way, and perform the same role in a portfolio that they always have.
- People need to adapt to the current economic and investment environment, with low interest rates and low inflation, and find a way to use bonds smartly.
Michael says that one area he is currently focusing on is how to protect against rising interest rates and still generate returns.
“Yield spreads are certainly much lower today than compared to the last couple of years, but they are not down to the lows that we saw in the 2005-2007 period.
“Credit fundamentals remain very strong today and we are comfortable with a variety of higher yielding security types, such as high yield bonds, syndicated loans, emerging markets debt, and structured asset backed securities.”
These fixed income components tend to bring higher risk, which means some investors are wary of them. However, by building any losses into the amount they are willing to pay for these securities, Payden & Rygel seeks to neutralise the effect on the overall portfolio.
“We are comfortable with an approach of ‘controlled risk’ that allows us to generate alpha-like returns for investors in the current low-yielding environment,” Michael says.
“Managing risk is paramount to our process while at the same time allowing us to create a ‘best ideas’ portfolio that reflects the most promising risk-adjusted opportunities around the globe.”
Damien McIntyre is director and head of distribution with Grant Samuel Funds Management and the distributor of the Payden Global Income Opportunities Fund in Australia.
