The past year was a whirlwind for fixed-income investors, with central banks around the world bringing interest rates to near zero or into negative territory. The road ahead may have more twists and turns, which could make finding quality investments a challenge.
Brian Giuliano, vice-president, portfolio management, with Philadelphia-based Brandywine Global Investment Management LLC and part of the team that manages the Renaissance Global Bond Fund, said he found opportunities in corporate bonds at the beginning of the pandemic last year.
Giuliano and his team introduced “sizable investment-grade corporate bond exposure” to the Renaissance fund after yield spreads widened last spring. The team then turned to “more pro-cyclical names” in the industrials and energy sectors once corporate bond spreads narrowed, taking “profits on many of the higher-quality corporates we purchased in the spring.”
The Renaissance fund, which invests in medium- and high-quality bonds with an average duration of five to 10 years, held $245.5 million in assets under management (AUM) as of Feb. 5, according to Morningstar Inc. The fund returned 4.58% for the year ended Jan. 31, outperforming the Morningstar Gbl Core Bd GR CAD index, which returned 2.91% over the same period.
For decades, the Renaissance fund has used the FTSE world government bond index as a benchmark, although the fund’s holdings have veered away considerably from the index. “We have never looked less like our index in 25 years,” Giuliano said. “That tells you what we think of certain areas of the market, such as high-quality sovereign duration.”
As of Dec. 31, the Renaissance fund was exposed mainly to North America (54.5%), followed by Latin America (19.2%), Asia (15.5%) and Europe (6.2%). Its highest allocation was to government bonds (68.5%), with corporate bonds making up 24.2% of the portfolio. There also was a small allocation to mortgage-backed securities, cash and other investments.
The Renaissance fund’s top 10 holdings as of Dec. 31 were U.S. Treasury notes (21.5%), followed by two types of Mexican government bonds (5.1% and 2.6%) and Government of Canada bonds (5%). Also included in the mix were bonds issued by the Indonesian, Polish and Brazilian governments (all around 3%) and New York-based Goldman Sachs Group Inc. (2.2%).
The Renaissance fund has “a very large underweighting to safe-haven government bond duration,” Giuliano said. “We still like the higher-yielding, commodity-producing emerging markets.”
While countries such as Brazil, Indonesia, Mexico and South Africa “have fundamental challenges,” they also offer nominal, inflation-adjusted returns that are attractive due to “depressed valuations and sentiment, and the idea that we’re heading toward a reopening of trade and a supportive [economic] backdrop,” he said.
The Renaissance fund’s portfolio managers also look for “local currency positions [in foreign markets] where we like yield and duration, and where we want the bond exposure,” Giuliano said. While 15% of the portfolio was in Canadian dollars in early January, the balance was in emerging-market currencies and European currencies such as the Polish zloty and Czech koruna.
Giuliano said he holds “a cautiously optimistic view of the global economy” for 2021. “In all likelihood, we’re going to be opening the economy at some point this year and you still have tremendously supportive policy.”
Due in part to pent-up consumer demand, the Brandywine team has become “increasingly concerned about cyclical growth and an inflationary impulse,” Giuliano said. “While that should be good for one segment [of the portfolio] — such as emerging-market debt, where we do have overweightings — at the other end of the spectrum are high-quality government bonds,” which are expected to have “episodic value,” he said.
Daniel Janis, senior portfolio manager and head of global multi-sector fixed income with Manulife Investment Management, said he’s encouraged by the potential for positive Covid vaccine news to boost consumer and corporate confidence and the global economy overall.
Janis is one of four portfolio managers of the Manulife Strategic Income Fund. The advisor series of the Manulife fund held $11.2 billion in AUM as of Feb. 5, according to Morningstar. The fund returned 4.22% for the year ended Jan. 31, compared with the 2.91% returned by the Morningstar Gbl Core Bd GR CAD index.
As of Dec. 31, the Manulife fund’s average credit quality was BBB, average duration was 3.7 years and average yield was 3.4%.
The Manulife team’s investment process is based on in-depth credit research, and volatility and liquidity risk management. The team also frequently reviews its three- to six-month outlook. “It’s not always easy and we’re not always right,” Janis said, adding that his team combines internal and external research to stay on top of trends.
As of Nov. 30, the Manulife fund was heavily weighted toward the U.S. and Canada (71.9%), followed by small allocations to many countries in Europe and Asia. The fund had large exposures to U.S. high-yield bonds (22.12%) and investment-grade bonds (18.55%) in November, followed by international government bonds (16.31%) and U.S. government bonds (9.45%). (December figures were not available at press time.)
The Manulife fund’s top 10 holdings as of Dec. 31 were led by various U.S. Treasuries and notes (the highest weighting was 1.44%), Japanese government bonds (0.81%), Canadian government bonds (0.74%) and Indonesian government bonds (0.70%). The fund also had notable allocations to corporate bonds issued by Nashville-based HCA Healthcare (0.77%) and Laval, Que.-based Bausch Health Companies Inc. (0.67%).
Janis said he’ll be keeping an eye on U.S. policy under the Biden administration in the year ahead. “We have to manage money around [U.S. government] policies,” he said, noting he’ll be watching for potential tax changes that could affect corporates, as well as for fiscal stimulus such as Biden’s proposed US$1.9-trillion Covid-19 relief plan.
Janis noted that emerging markets are key to the Manulife fund. Bonds from developed countries act as “quality placeholders,” he said, but countries such as Indonesia, Malaysia, Singapore, South Korea and the Philippines offer currency plays and strong investment-grade options, with yields between 4% and 6%.
In Latin America, a region Janis avoided at the beginning of last year, yields have reached 2%–6% in Mexico and Brazil, and potentially will in Colombia as well, he said.