Going active with fixed income - Independent Thought Roundtable

By Jayson Forrest

IMAP Independent Thought Investment Roundtable Fixed Income

In a macro environment of rising risk and uncertainty, Amy Xie Patrick - Pendal Group believes that by being defensive, patient, but active, advisers can provide investors with the type of protection and growth they are seeking in their portfolios.

 

There’s no denying that we are living in very uncertain times, as a range of geopolitical issues and a structurally higher inflationary world continue to affect the macro environment, creating greater economic volatility.

Speaking at an IMAP Independent Thought Roundtable, Amy Xie Patrick — Head of Income Strategies at Pendal Group — believes the current environment makes it ideal for advisers to consider taking up a more active approach with their fixed income allocation within their portfolios.

Against this backdrop of market uncertainty and heightened volatility, Pendal has taken a defensive, patient, but very active approach with the positioning of its portfolios. This includes how it allocates to bonds, credit, equities, and FX, as part of its portfolio management process.

Bonds

According to Amy, investors are now facing many risks that compared to 2022, are more aligned this year, as inflation peaks and growth slows.

“When you’re facing into all these risks, bonds are a good risk reward. You should at least be thinking about being neutral in your portfolios,” she says. “We like bonds now and we’re getting ready to really love them later in the year.”

Credit

Investment grade credit is often touted as being the safer side of credit. However, with the likelihood of a recession over the next 12 months — at least for the U.S., and possibly even Australia — then in a recessionary environment, Amy suggests credit spreads aren’t defensive. Credit is positively correlated to equities and in this scenario, both won’t do very well.

“Don’t count on investment grade to behave like government bonds in a recession,” she says. “That’s why we stay highly defensive with our credit portfolios. We prioritise quality and we also value liquidity in our portfolios.”

Amy explains that as fixed income instruments go, even high grade credit becomes incredibly illiquid. “Therefore, if you value your liquidity, you’ll stay away as much as possible from that illiquidity risk. If you have chosen to go into less liquid assets, at least know the illiquidity (and volatility) that you are likely to suffer, which should be adequately compensated for.”

Equities

Amy concedes that being patient in credit can sometimes be painful for investors, which means, when taking liquidity into account, Pendal also positions its portfolios into equities.   

“We have portfolios where we use an allocation into equities very tactfully and opportunistically. That’s because unlike high yield bonds, if you allocate equities to beta in your portfolio, they’re actually very liquid, and equity markets don’t tend to price in a recession until it’s too obvious,” she says. “This approach allows us to be more patient in our credit portfolios.”

Foreign Exchange

In a recession, the U.S. dollar is generally counter-cyclical and does well, so Amy advises investors to buy the U.S. dollar. However, she adds that within pockets of emerging markets there are usually opportunities where investors may still get value.

Amy Xie Patrick — Head of Income Strategies at Pendal Group
Amy Xie Patrick - Pendal Group

We have portfolios where we use an allocation into equities very tactfully and opportunistically. That’s because unlike high yield bonds, if you allocate equities to beta in your portfolio, they’re actually very liquid, and equity markets don’t tend to price in a recession until it’s too obvious. This approach allows us to be more patient in our credit portfolios

Amy Xie Patrick

Recessions happen suddenly

In its approach to asset allocation, Pendal is factoring in the likelihood of a recession — at least in the U.S. — within the next 12 months.

With the unemployment rate in the United States sitting at about 3.4 per cent (April 2023), Amy draws upon industry research to reject any suggestion that a recession in the U.S. won’t be severe because the labour market is so strong.

“Many people will look at the slew of data coming out of the U.S. and say the American economy isn’t struggling. They look at the data and say the economy is strong, consumers are still spending, and the unemployment rate is too low for there to be a recession.

“But recessions don’t happen in a linear way. They happen very suddenly. If the established view is that the unemployment rate is too low in the U.S. to cause a recession, I would argue that the unemployment rate is so low that it’s predictive of a recession,” says Amy. “And by our estimates, that will happen within the next 12 months.”

Recessions don’t happen in a linear way. They happen very suddenly. If the established view is that the unemployment rate is too low in the U.S. to cause a recession, I would argue that the unemployment rate is so low that it’s predictive of a recession. And by our estimates, that will happen within the next 12 months

Amy Xie Patrick

A higher inflationary world

Unlike the previous 30-40 years, as markets move to a structurally higher inflationary world, Amy is adamant advisers need to prioritise and get active with their fixed income allocation.

“It means when you locate an active bond manager, you need to ensure the manager is not just active by one or two years around the benchmark, but they’re able to neutralise all the duration in the benchmark or even double it. That’s the type of active you should be looking for when it comes to your portfolios,” Amy says.

“At a time when investors are facing recession, disinflation, and rising financial fragility — as we’ve seen with recent bank failures in the U.S. — you need to get active with your fixed income allocation. This means having the right amount and type of liquidity in your portfolio. By doing so, instead of being punished by volatility, investors can take advantage of the more volatile environment we’re heading into.”

At a time when investors are facing recession, disinflation, and rising financial fragility — as we’ve seen with recent bank failures in the U.S. — you need to get active with your fixed income allocation. This means having the right amount and type of liquidity in your portfolio

Amy Xie Patrick

About

Amy Xie Patrick is Head of Income Strategies at Pendal Group.

Speaking at an IMAP Independent Thought Roundtable, Amy spoke on the use of fixed income when positioning portfolios in an environment of rising risk and uncertainty.

Next Events

IMAP's 2024 Advice in Action Conference

In 2024 this IMAP Advice in Action Conference puts the use of technology and digitisation in the spotlight for Advisers & Clients

Reaching "best practice" level in a digitalised advice business is a challenge to every advice practice.. our speakers will help you get on the right page by exploring

  • Getting centred on platforms' roles in helping your busienss to grow
  • How to go paperless for new & emerging clients, and provide relevant service to existing clients
  • Helping the next generation be safer for their financial future
  • Making the most of multi-generational relationships with families and more...

WHEN & WHERE

23rd July 2023 - Melbourne CBD - "Zinc"
25th July 2023 - Sydney CBD - "Amora on Jamieson

REGISTER USING THE LINK BELOW FOR EARLY BIRD RATES BEFORE 30 JUNE 2024

IMAP's 2024 Advice in Action Conference

‍The IMAP Retirement Masterclass is held in the mid afternoon following the Sydney IMAP Advice in Action Conference

‍The IMAP Retirement Masterclass is hosted by BlackRock and addresses all the issues that are important to understanding how to serve this critical market:

Seats are limited to 40 people

  • Portfolio construction for income stream portfolios
  • What are retirees’ key emotional issues? 
  • How will the Industry Funds look to dominate this critical segment
  • How can practices develop effective strategies to address this market?
  • What are the true multiples of capital they need? 4 times, 10 times or 25 times?
  • How should you engage with retirees so they understand how you can help? 

Hear from leading experts who can help you shape your strategy to meet the needs of the retiree market.

James Kingston – Head of Retirement, BlackRock on what they are doing to assist advisers in  this market here and globally

Ashley Owen – former CIO Standford Brown and leading writer on how to help clients determine their personal spending capacity and the impact of changing life expectancy 

Ben Hillier – Director Retirement AMP, on what retirees think about wealth transfer and the regulatory changes you need to understand

Jonathan Scholes – Head of Advice Findex on the reality of serving this market every day, in person, at scale  

WHEN & WHERE

2.30pm 25th July 2023 - Sydney CBD - The Hart Room level 1 "Amora on Jamieson"

REGISTER USING THE LINK BELOW

IMAP's Managed Account Awards 2024 are here.

Optimising Clients' Portfolios in 2024

The IMAP 2024 Managed Account Awards provide our industry the opportunity to recognising best in class for Managed Account Licensees, Boutique Licensees, Innovators, and Investment Asset providers plus Responsible Investing Portfolios.

The Awards have showcased a wide range of providers who are recognised for their work and accomplishments. (see IMAP Past events for more details)

Entries are now closed and judging is commencing - the finalists in each category will be announced on 1st August 2024

IMAP wishes everyone the best and please ask the Awards team how we can help

IMAP's Managed Accounts Central  exhibition is at the FAAA Congress 2024 in Brisbane

IMAP's Managed Accounts Zone exhibition is at the FAAA Congress 2024 in Brisbane

IMAP's Managed Account Zone enables advisers to talk with a selection of managed account service providers to ask questions and find out how effective implementation of managed accounts may be of benefit to your advice practice.

The FAAA 2024 Congress is being held in Brisbane from Wednesday 27th to 29th November 2024, and this year we welcome the following managed account providers exhibiting at the Managed Account Zone

The 2024 Managed Account Central features

Contact us

Email
This email address is being protected from spambots. You need JavaScript enabled to view it.

 

Phone
0414 443 236