Marty Margolis: We are primarily focused on investment-grade sectors, and in that area we think there is still some value in credit, but it's selective. We would be cautious of companies subject to business-cycle factors, as well as companies subject to M&A. We tend to be more comfortable with financial services companies, particularly in banking, for lots of reasons around their financial condition and the improved regulatory framework, at least to-date.
Away from credit, we think asset-backed securities have some value — particularly mortgage-backed securities, again issue-specific, where relative value is growing. We would rather use our risk budget more for interest rate risk embedded in mortgage-backed and agency mortgage-backed issues than for speculative kinds of credit.
In terms of the curve, the place to be is relatively short. The problem is that no part of the curve reflects a market outlook for multiple Fed rate increases over the next 18 months. So investors have to find the least bad shelter in kind of a rough sea, if you will. In other words, I don't see real value in big curve bets these days.
Thomas C. Goggins: We look at opportunities in the context of four major risks — interest rate, credit, FX and liquidity. Given our expectations with major central banks normalizing interest rates, there's just no value in being long duration, so overall all of our portfolios are short duration.
In terms of credit risk, we do not see any cheap sectors, but individually we are finding cheap bonds. However, we have been reducing investment-grade corporates more recently. Our only investment-grade exposure would be floating-rate structures in corporate bonds, or bonds issued by companies that give us the ability to have the greater of fixed or floating rate — again taking advantage of a rising rate environment.
Given the strong domestic backdrop, we have a small allocation to preferreds, just for absolute yield, some selected convertible bonds, given the strength in the equity markets, and a decent allocation to high yield, with a focus on double B and single B issuers.
Today, selectivity is important in global fixed-income markets. In emerging markets especially, that means not lumping all EM into a single basket. For example, we are avoiding Turkey, South Africa and Argentina, while preferring Mexico and Indonesia. In developed markets, such as Europe, that may mean avoiding Greece and Italy while preferring Hungary, Portugal and Ireland. In all three of those latter countries you can pick up positive yield.
And in foreign exchange, we're being more tactical, which we believe offers a lot of return potential over the next year, as we see more volatility as a result of global trade tensions and country-specific political events.
Don Sheridan: We are seeing opportunity away from U.S. core — not abandoning U.S. core, but certainly looking to capitalize at the margin in areas like emerging market debt and private credit. We find those opportunities extremely interesting. Private credit, with its first lien position, or senior-secured-type propositions, we like the net internal rate-of-return projected story there.
As for other sectors, we're pretty neutral across the board. The challenge is to find the right skill set to avoid idiosyncratic risk and to find the right blend of assets, particularly in the below-investment-grade space. Within structured credit, as the consumer spends more, areas of asset-backed securities become more appealing — that is a structural component in a lot of bar-belled portfolios. Other areas, like collateralized loan obligations, present interesting opportunities in structured credit as well.
We continue to advocate for moving away from core at the margin, recognizing that ultimately you want to have a high-quality fixed-income portfolio. We continue to encourage our clients to be thoughtful about their willingness and ability to take risks. Don't become complacent. ■