Following the decade of low yields since the Great Recession, investors now look at their fixed-income investments to not only protect against volatility and risk, but also to deliver higher returns.
“A lot of times, the market conditions are the catalyst,” said Randall Parrish, Voya Investment Management’s head of credit. “It’s the plan that has a high return hurdle, and they come to us and say ‘How am I going to get there? I can buy equities, but I’ve got to have some fixed income. What role does that play?’”
Traditionally, investors in that position have either looked to riskier credit products or extended the duration of their fixed income portfolio, but today they are just as likely to consider more innovative credit products with a broader opportunity set. Often, that means investing in some combination of multisector credit or an unconstrained fixed income strategy. Both exhibit relatively low correlation to interest rates, but unconstrained strategies can also offer lower correlation to equity markets and have the potential to deliver some protection against a broad risk sell-off. That’s particularly important at this point so late in the market cycle.
“The way that you construct a product and the right fit for a given client depends on what their return target is and how much volatility they are willing to take,” Parrish said. “There’s quite a bit of flexibility around a mandate for any given opportunity.”
Multisector credit typically includes a blend of high-yield bonds and bank loans that look and act like credit investments but gives managers the flexibility to react to changing market conditions. Unconstrained fixed income employs a broader set of investment opportunities that involves additional asset classes.
The right mix of multisector credit and unconstrained fixed income will depend on an individual client’s needs. One might prefer a multisector credit investment that has a high beta to credit markets. That might include high yield and bank loans as well as emerging market corporate and a few other asset classes as well.
Multisector credit is easier than unconstrained fixed income for clients to understand, Parrish said, since it behaves like credit, is easier to benchmark and includes asset classes with which they typically have experience.
By comparison, an investor interested in more of an absolute return approach might be more interested in an unconstrained product that’s more complex and might bring less liquidity in exchange for the prospect of higher returns.