FINDING VALUE IN FIXED INCOME
It’s not easy being a fixedincome manager these days. The macro environment is shifting quickly, central bank transparency is becoming an issue, and trading is now much more correlated with the economic outlook. As a result, it’s increasingly difficult to find one-off, valueadded opportunities to take meaningful positions in.
“You are really an allocator of capital in the fixed-income space, rather than a traditional security picker as in equity portfolios,” said Christine Horoyski, head of fixed income at Aurion Capital Management. “It’s about getting the trends right, recognizing the shifts in momentum, and repositioning your portfolio very tactically — that’s what adds a lot of value.”
For example, macro drivers such as the European Central Bank’s quantitative-easing program and its purchases of corporate bonds create a demand for high-quality corporates that spills outside the eurozone and into U.S. markets.
Horoyski noted that having such a massive buyer enter the market should tighten credit spreads throughout the highquality, investment-grade sector. And that’s exactly what has occurred in the past month or so.
“Some of it is due to the commodity scare easing a bit, but a lot of it is macro, such as the ECB taking corporate product out of the market,” she said.
The Toronto-based portfolio manager noted that higher correlations are evident in credit spreads, which widen on liquidity and flight-to-quality fears (as was the case during the decline in commodity prices), and then uniformly tighten as buyers come in to pick up cheap opportunities.
Horoyski, who is responsible for almost $3 billion in fixedincome mandates for both institutional and retail investors, is positioning her portfolios, including the Dynamic Aurion Total Return Bond Fund and the Aurion Income Opportunities Fund, against several broad themes.
One such theme is monetary policy divergence, as countries such as the U.S. and potentially the U.K. move to tighten overnight rates, while others actively engage in easing through non-conventional monetary programs like QE by both Japan and the ECB. Meanwhile, some European countries and Canada are trying traditional tools and simply lowering overnight rates.
As Canadian bond yields have dipped significantly below U.S. yields on expectations for more rate cuts from the Bank of Canada, Horoyski has been selling into this strength and reducing her domestic bond exposure. She currently doesn’t have any Canadian government bonds in her portfolios, and is reducing exposure to corporates.
“We’ve eliminated a lot of interest rate risk by making a lot of sales in recent months,” she noted, adding that her portfolios yield about 2.25% due to their roughly 35% foreign content, while the Canadian benchmark index yield is near 1.75%.
Some of that capital is being deployed into U.S. bonds, which she likes from both a yield and currency perspective. However, her caution on the rate environment has resulted in buying shorter durations.
Horoyski targets high-quality names that provide sector diversification, including U.S. consumer discretionary companies and pharma companies such as Eli Lilly and Co., Gilead Sciences Inc. and Merck & Co. Inc.
“They are well-positioned for the demographic trends that are emerging with the aging population and increased health-care demand, have high-quality ratings, and offer spreads that compare favourably to where Canadian corporates trade,” she said.
Horoyski has also been reducing the funds’ high-yield exposure quite dramatically, noting that not a lot of value is left in that sector following a recent rally. However, she owns names that are expected to be part of the upgrade cycle, including Sirius XM Canada Holdings Inc. and Quebecor Inc.
Aside from policy divergence, investors should also watch for currency volatility as a potential non-correlated source of value add. She noted that the divergent economic outlook for the major economies as well as monetary policies will lead to tremendous currency volatility.
“It’s not just about yield differentials and monetary policy, currency is becoming a bigger part of your decision-making,” she said.
Her primary foreign exposures are in unhedged U.S. dollars, since she thinks the currency has more room to run, and hedged Australian dollars as she thinks that country’s economy will further weaken, leading to more rate cuts that will drive the currency even lower.
Horoyski’s portfolios also include Australian corporate bonds — financials and the country’s main pipeline company, as well as 10-year bonds from New South Wales and Queensland — the country’s two biggest states.