The active management advantage

Craig Altholz:

Matt, you manage a number of strategies, from corporate bond to core to core, plus to short term bond. These all broadly fall under the investment grade credit or investment grade bond universe. That's a pretty mature universe. There's a lot of good competitors out there, a lot of peers. How do you think clients should be thinking about selecting a manager from the available options?

Matt Brill:

Yeah, so what we're trying to do as portfolio managers is really take a deep research approach. Try to be very active and agile in what we're doing on a day-to-day basis with longer term views in mind. But then at the end of the day, it's all about having a risk adjusted framework. So those are the key things that we're looking at in order to come up with top quartile performance each and every year.

That's our goal. We don't necessarily want to be the number one fund any one particular year, but we want to be in the top quartile. And then in bad years for credit, bad years for the equity market, bad years, potentially for the rates markets. We want to be more towards the middle of the pack, treading water and waiting for better opportunities to come back and really be more aggressive in any of those periods of time.

So we think about the bond market is up about over 90% of the time. So we don't want to have the sky is falling mentality. But at the end of the day, you know there are bad things that happen. And from a risk adjusted standpoint, we want to make sure we protect for that. So avoid the downside as best as possible and then get the upside through credit spread as well as structured credit markets when the times are better.

CA:

So you mentioned active investing. And obviously the fixed income market is one where I think investors have actually done well to select an active manager. Could you talk a little bit about the active versus passive decision for clients?

MB:

Yeah. So I think a lot of times it comes down to fees. And people might sometimes say, well the fees are lower with passive I'm going to go with that. And generally we've we've concluded that active management really does work at fixed income. So having deep credit research matters, being able to be agile and adjust the portfolio from a security selection as well as from an asset class standpoint, in the sector standpoint, really can make a difference. Just because you have a lot of debt doesn't mean that we want to buy you, which is generally the way that indices are constructed.

So it's kind of a failed indices policy in many ways. So we want to be really tactical and really thoughtful about what we put into the portfolio. The other thing what we can do is we can really diversify the portfolio from an asset allocation standpoint. A lot of people just think of bonds as ten-year treasuries or the fed funds rate, but there's so much more to that.

We can own agency mortgages, we can own investment grade corporates, high yield, possibly emerging markets, we can unstructured securities, etc.. So from our standpoint, we want to have the resources and the expertise in all these different asset classes and then really be able to use them from a tactical standpoint and a risk adjusted standpoint, which can differentiate us versus some of our competitors.

CA:

You know, when you talk about that, clients obviously think about diversification when they think about their portfolios, but they don't necessarily think about diversifying managers as much. And in an asset class like investment grade, where bonds can be highly correlated, maybe the dispersion between managers might not be that high in a given year. But do you think it's important to consider how each manager gets there and diversify your your underlying managers?

MB:

Yeah, absolutely. So I think there are certainly biases that exist within within the fund landscape. And you look at some competitors, they certainly are going to be more macro in their approach or some may be, a little bit more credit oriented or mortgage oriented. You know, I think these are going to matter.

And you want to pair certain managers with others because there are going to be periods of time where the market will be more favorable for some asset classes or some manager biases than others. But diversification within your, within your, within your different manager sources is certainly key. And then understanding why one would zig zag what compliments a particular product versus another manager, I think is also important.

And overall we're looking to do well on all different markets. But there might be some other competitors, we think, that are a little more skewed towards a, a more granular silo, than what we would be looking to, to do with our portfolio.    

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Investment risks

Fixed-income investments are subject to credit risk of the issuer and the effects of changing interest rates. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. An issuer may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer’s credit rating.

Non-investment grade bonds, also called high yield bonds or junk bonds, pay higher yields but also carry more risk and a lower credit rating than an investment grade bond.

The risks of investing in securities of foreign issuers, including emerging market issuers, can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.

The performance of an investment concentrated in issuers of a certain region or country is expected to be closely tied to conditions within that region and to be more volatile than more geographically diversified investments.

The opinions expressed are that of Invesco Fixed Income and may differ from the opinions of other Invesco investment professionals. Opinions are based upon current market conditions, and are subject to change without notice. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Asset management services are provided by Invesco in accordance with appropriate local legislation and regulations.

Diversification and asset allocation do not guarantee a profit or eliminate the risk of loss.

Basis Point: A basis point is a unit that is equal to one one-hundredth of a percent.

Credit Spread: is the difference in yield between bonds of similar maturity but with different credit quality.

For US audiences:
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Publication date: Dec 6, 2024
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