In a painting by Van Gogh, distortion is interesting. In the world of fixed income, a rearranged landscape is unsettling—especially when the interplay of policy and markets keeps changing the picture.
Today’s alternative investment universe should be a fertile environment for portfolio construction. Investors seeking to build or grow an allocation to alternatives can select from an array of strategies offering a wide range of potential benefits such as return enhancement, high current income, better diversification, tail-risk hedging and inflation protection.
Last year, corporate bond issuance in Canada exceeded $100 billion for the first time. On the surface, this milestone would appear to signal the initial phase of crowding out by corporate issuers at this stage of the economic cycle. As an expansion becomes anchored, corporate issuance will dominate the capital markets as businesses look to fund capital expenditures in anticipation of growing demand.
Investors looking for an opportunity to increase yield while rates remain historically low, and simultaneously position their portfolios for potentially rising rates, may want to take a closer look at floating rate loans. Floating rate loans are liquid, shorter-term assets that carry a floating rate coupon and can provide compelling income with zero duration risk.
Fixed income investors are faced with something of a catch-22. On the one hand, interest rates remain relatively low despite some recent increases, and when market prognosticators predict a change, continuing anemic economics seem to extend the low-rate environment. On the other hand, most agree that rates must go up sometime, and the threat of a rising rate environment makes many investors wary of taking on any fixed income which comes with significant duration risk.
Persistently low interest rates, combined with the threat of a rising rate environment in the not-too-distant future, are causing investors to cast a wider net when constructing fixed income portfolios. But that doesn’t have to mean indiscriminately reaching for yield or taking on unwarranted duration risk.
Last month, I wrote about the expanding equity index universe and the case for investing in frontier markets. Another equity index development that is gaining traction with investors is low or minimum volatility indexes. Some early adopters have expanded their own equity investment space and enhanced their equity portfolios’ risk-adjusted returns by utilizing low-volatility index strategies.
Just as our cosmos is continuously expanding, so it seems is the equity index universe and the tools for targeting desired exposures. One recent development that is gaining traction with investors is frontier or “pre-emerging” markets. Some early adopters have expanded their own equity investment space and enhanced their equity portfolios’ risk-adjusted returns by diversifying into frontier markets.
As emerging markets mature, investors should consider a more holistic approach
The financial turbulence of the last decade didn’t just damage portfolio performance; it dealt a blow to longstanding approaches about how to manage it, forcing a re-evaluation of traditional approaches to asset allocation and risk management. Institutional investors have entered a new world of higher volatility, higher correlations and rock-bottom yields, with danger looming when rates finally do rise.