This article was featured in Wealth Professional.
‘There’s a reason boring bond guys are excited right now,” laughs Chris Chapman, a Senior Portfolio Manager at Manulife Investment Management. In a boon for fixed income managers, the opportunity set for yield has broadened and become more compelling after central banks’ cycle of interest rate hikes turned the previous low-yield environment on its head. In fact, he believes you have to go back a decade to find these types of opportunities.
Chapman is the lead manager of the Manulife Strategic Income Fund with a mandate to deliver attractive risk-adjusted returns across all areas of fixed income. He said: “We’re finding opportunities and pockets of either global geographic areas or sectors where yields now look more compelling than they have for a long time, and you don't have to worry about taking on [extra] credit risk or liquidity risk to find return.
“For us, this is probably the most broadly diversified across geographies and sectors that we've been in a while. There is a lot you want to put in the portfolio; the trick at this point is almost trying to come up with parts of the portfolio you want to reduce.”
For Chapman and the Global Multi-Sector Fixed Income team, inflation remains the main story. The expectation is these pressures should decelerate over the rest of the year, but it won’t be a straight line and there will be further dislocations in the market. The fund is, therefore, cautious about just relying on corporate risk and keeps a firm eye on central banks’ impact on liquidity. While the market is keen – some say overkeen – on pricing in rate cuts, reality suggests the last thing the Federal Reserve or the Bank of Canada want to do is pivot too quickly.
Chapman said this informs the Manulife Strategic Income Fund’s longer-term strategy that with yields looking attractive, some duration risk is appropriate. From a short-term practical view, however, the speed with which markets have moved out the gate, and the way they’ve pushed back against the Fed, mean the fund has trimmed back portfolio duration slightly.
But while Chapman generally leans toward positive duration, there are pockets of the world where he remains cautious. China’s reopening from lockdown restrictions is a positive, albeit uncertain, step forward but upward inflation pressures remain. Europe already seems to be skirting through a recession better than some expected but its quantitative easing unwinding means a lot of debt issuance. Japan, meanwhile, remains the big red flag after the central bank surprised observers with adjustments to its monetary policy.
With regards to emerging markets, Chapman added: “The emerging market landscape requires being very focused on the idiosyncratic risks and not just embracing it collectively as an asset class. Within EM, we are still more biased to what we would consider higher quality pockets of the market, like South Korea, and still avoiding some of the riskier spots.”
But with 2022 in the rearview mirror, and rates having already risen, that gives the portfolio added cushion to absorb more hikes and still generate income. Countries like New Zealand went through a quantitative easing environment, with low yields, which was uninteresting to investors. Now, however, New Zealand offers a triple A credit quality and the five-year part of the curve can get you 5% to 5.5%1.
While this opportunity set expands, throughout this decision-making process the team maintains its laser-focus on risk management. This is integrated into all facets of managing the portfolio and the team focuses on four key areas of risks: interest rate, credit, foreign currency, and liquidity.
To do this, the fund leverage’s Manulife Investment Management’s global expertise and ability to invest anywhere in the world. It is under constant vigilance 24 hours a day six days a week, with the company’s supporting traders, research analysts and risk managers on the ground in Boston and Hong Kong.
Risk managers first, the fund’s managers focus on those key risks while adhering to a disciplined investment approach that combines fundamental top-down and bottom-up analysis. The fund is flexible and dynamic in nature, taking advantage of changing credit and currency markets.
Factored in the risk-assessment process is Manulife Investment Management’s dedicated ESG team, which determines, like any other analysis within the fund, whether it is getting paid fairly for the risks it screens. If the answer is no, or the company in question is not open to engagement regarding addressing those issues, those positions are eliminated from the fund.
This added layer of analysis only adds to the positivity around the new opportunities Chapman has explained. Attractive yield is now available at no extra risk and the Manulife Strategic Income Fund has its highest portfolio credit quality for several years. Chapman is optimistic he stands at the start of a multi year landscape where fixed income is going to look compelling, especially if central banks hold rates fairly stable throughout this year.
He said: “You've got a landscape where you're going to generate income, so the income piece is very attractive. But you also have the potential for total return driven by either some yields coming down a little bit or if you look at a product like ours going global, currencies relative to the Canadian dollar give you an additional opportunity set. That return potential in aggregate, we think is compelling from here.”
1 Bloomberg, as of September 16, 2022
Sponsored by Manulife Investment Management, as of February 2023.
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