Fixed income managers hanging hat on quality
Focusing on high-quality asset classes, countries and sectors paid off in 2015 due to elevated levels of volatility across global financial markets. For Dan Janis and Tom Goggins, Boston- based portfolio managers at Manulife Asset Management, that isn’t expected to change much in 2016.
The recent winners of Morningstar’s Fixed Income Manager of the Year award are part of an eight- person team that has $ 33 billion in assets under management. That includes five funds and one pool available to Canadian retail investors, one of which is the Manulife Strategic Income Fund, which generated a 6.89-per-cent annualized return over the past 10 years — a milestone the fund reached in late November.
“Whenever the Fed increases rates or goes from accommodative to tighter monetary policy, there is a lot of volatility,” Goggins said during a visit to Toronto this week. “It’s not just fixed income, but equities, currencies and commodities.”
Nobody has been disappointed with the volatility this year. While this forecast prompted the portfolio managers to reduce their high yield bond exposure sharply coming into 2014, as well as exit the energy, metals and mining sectors early in the year, they are still finding plenty of attractive opportunities.
It’s not that they don’t like high yield. L Brands Inc. (formerly Limited Brands), for example, is a core high- yield holding that Goggins noted offers terrific value.
“Amazon. com is killing all the retailers, so you need a niche,” he said. “Women who go to Victoria’s Secret stores can’t find those items on Amazon, so its unique product lines means it doesn’t get hit.”
Hospital Corp. of America is another core high-yield position that doesn’t want to be rated investment grade.
Goggins noted that a lot of health care providers have benefited from ObamaCare and other related reforms in the U. S. But he pointed out that national providers like HCA have been some of the biggest beneficiaries, partly because many companies prefer to use only one provider.
“Where else can you get six per cent yield, and all the transparency that comes with things like quarterly reporting, as well as good management?”
Their multi- asset strategy has also allowed for investments in taxable municipal bonds from the likes of the University of North Carolina.
It’s an area few know much about, but this 15- year bond offers a yield of 3.75 per cent, which compares favourably to the 1.4 per cent investors get from a 10-year Canadian government bond, and both are AAA rated.
“A lot of insurance companies buy taxable munis because they don’t need to put up as much capital due to risk-based capital requirements like Basel III,” Goggins said. “Insurance companies always have cash flow to invest, so there’s always a bid there.”
Another thing the managers continue to focus on is the fiscal state of various countries. This has resulted in a shift toward high-quality, investment-grade bonds from Mexico, Singapore, Korea and the Philippines.
They’ve stayed away from countries with current account deficits like Turkey and South Africa, along with oil exporters such as Indonesia and Malaysia.
As for their outlook on Canada, it was pretty negative for the past two-and-a-half years or so, resulting in an underweight position in the portfolio.
However, Janis noted that when the loonie hit their target of 74 to 77 cents U.S., it was time to boost the fund’s exposure to Canada. Now roughly 95 per cent of the portfolio ( outside of some holdings in Asia) is hedged back to the Canadian dollar.
“The new government is going to spend some money,” Janis said. “That fiscal policy, in addition to low interest rates — one of the few G7 countries doing both — could be a nice tailwind.”
Canada’s proximity to the United States, which is one of the only developed countries showing strong growth, should also provide a boost. As a result, the managers expect the loonie will outperform currencies from places like Australia and New Zealand.
If oil prices start to recover, the managers have many ways to play the trend, beyond buying the bonds of energy companies.
They can buy oil exporters such as Colombia and Malaysia (in U.S. dollars or local currencies). They can also take a long position in Canada or Norway against other markets, or go down the cap structure and buy convertible bonds, preferred shares or common stocks.