Debt key factor for investors
Lower growth prospects and volatility impacting portfolios
As the deleveraging process continues to be the dominant theme characterizing capital markets, high and unsustainable debt levels in both the public and private sector is creating concern among investors. The quality of both household and government debt is being questioned, as is the ability to generate sufficient revenue to service that debt.
“The reason that concern is becoming more prominent is because debt deleveraging has inherently downward pressure on growth,” says Michael Mchugh, who leads the fixed income team at Dynamic Funds.
In addition to creating a lower return environment, these returns are more volatile in response to a shift in sentiment and expectations. Mchugh notes that they are also more vulnerable to external shocks.
“The political developments within Europe are a very good example of that,” he says. “Those actions impact investor perceptions and valuations in the marketplace, but are not readily predictable.”
The income theme is also dominating the market as investors have migrated to fixed income and balanced funds, notes portfolio manager Domenic Bellissimo.
“They are willing to accept a more stable return and want to earn it without the volatility. In other words, have it both ways,” he says.
Bellissimo notes that while be tter economic ne ws has emerged out of the U. S. recently, there will likely be times in the second half of 2012 or earlier where it will feel like things are coming unglued again.
The fixed income team at Dynamic, which also includes Bill Kim and Daniel Yungblut, oversees more than $ 6.5- billion in assets. Their mandates include the Dynamic Canadian Bond Fund, Dynamic Strategic Global Bond Fund, Marquis Institutional Bond Portfolio, Dynamic Short- Term Bond Fund and the fixed income portion of the firm’s balanced funds.
With capital preservation a key focus within their strategies, the team focuses on maintaining a steady asset base to generate income. As a result, they actively manage risks such as interest rates by both selling long duration bonds and shorting bond futures in the portfolio.
Coming out of the credit crisis, the team realized things would be a lot different for some time to come. As a result, they are focusing on investments that don’t risk an impairment of capital and have also been implementing some credit hedging.
T he managers have also broadened their exposure to the U. S. market, where they can access healthy valuations, companies and industries that you can’t find in Canada, non- North American issuers, as well as U. S.denominated issues from Canadian companies.
The portfolio is currently positioned defensively with a short duration of an average of about 4.5 years. This is due to the fact that the managers see near- term positives for the equity markets ( and negatives for debt markets) such as stronger relative economic performance, improved investor sentiment, and some signs that governments are addressing their fiscal challenges.