While equity investors have been taking comfort in the economic rebound as governments ease COVID-19 restrictions, fixed income investors have been weighing what impact the rapid economic recovery could have on inflation. Should rising prices prove to be anything but transitory, long-term interest rates might continue to creep up.
As the economy reopens, the rise in bond yields is mostly happening for longer-maturity issues, while shorter-term rates are moving less. “An active fixed income portfolio may offer some protection if rates move higher,” says Jean-Francois Giroux, portfolio manager at Manulife Investment Management.
Giroux helps manage the Manulife Smart Short-Term Bond ETF (TSX: TERM), which has a duration of approximately three years and may be attractive for investors who are concerned about inflation resulting in higher long-term interest rates. Up-to-date portfolio data can be found here.
A two-step approach founded on quantitative models and active management
Ten investment professionals, with a blend of quantitative and fundamental backgrounds, incorporate a two-step approach that combines proprietary quantitative models with traditional active management. “We initially run our systematic modeling tool to give us the first portfolio model,” he explains. “That’s going to play with yield curve positioning and sector allocations, which is a step that is more quantitative in nature.”
From there, Giroux says, the team starts to build the actual portfolio. Security selection is based on fundamental credit analysis, while filtering out illiquid securities and leveraging the work of Manulife’s research team. “Having the right credit selection in this environment is going to be what, in the end, is expected to deliver improved yield compared to the benchmark,” Giroux explains.
Credit research is an integral part of Manulife’s active approach to fixed income investing because it helps inform whether a bond is purchased or sold. With Manulife’s extensive credit research team, Giroux selects bonds that can help deliver the desired outcome: a similar risk profile to the benchmark, but with an enhanced yield profile.
Find yield in a low-interest-rate world, while guarding against rising inflation
In a low-interest-rate world, the challenge for investors is how to find attractive yields. At the same time, investors need to guard against the possibility that interest rates will rise from their very low levels. TERM offers crucial insulation from rising interest rates if widespread fears about inflation prove justified.
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