Sponsored by Thornburg Investment Management
Discuss the recent performance of the fixed income market and the market’s macro drivers.
I think the Fed is a major one, but there have been three important drivers: the Fed, US-China trade negotiations and general economic uncertainty. These three have resulted in an alternating risk-on, risk-off market. In my view, that's the way we'll continue through the end of the year, with volatility being the only certainty.
There have been concerns about slowing global growth, and when growth slows down, economies become more susceptible to any kind of shock. That's where we are at now. While the shock could have been any number of things, it ended up being the collapse of US-China trade talks.
Because of that, we're in the middle of a risk-off event but overall, we’re in a jumpy market that is swinging from risk-on to risk-off due to the various factors that I mentioned, and I suspect we'll continue to see that till the end of year.
Tell me more about the risks you see.
One risk that may take a little more time to play out: how will the fixed income market respond to the large increase in U.S. government and corporate indebtedness. That certainly limits the ability of U.S. companies and the government to navigate difficult times, and there is a question as to whether investors are being compensated for that risk. With a change in risk sentiment, particularly toward corporate debt, we could see a notable repricing
At Thornburg, we've have taken some of that risk off, and we've responded by keeping the duration of our credit holdings on the shorter side to try to limit the volatility should it occur.
Where do you see opportunities?
There are always opportunities, even in sectors that appear more challenged than others. This is where the power of active management really comes in.
You need a manager that can do the analytical work and be highly selective in this type of environment. It’s best to not be married to an index in any way because that might force the manager to take some risk that investors don't or shouldn’t want.
We're seeing the best relative value opportunities for our portfolios in asset-backed and mortgage-backed securities because these loans are to consumers, who are in better financial shape overall in contrast to governments and corporates.
We believe consumers have pretty solid balance sheets overall and remain financially healthy. The way we have been investing in these asset-backed securities is through senior tranches because they are very well credit-enhanced. They tend to have short maturities and duration and they amortize so we get our money back along the way so we do not face significant refinancing risk.
So how would you characterize Thornburg’s fixed income management style?
For more than 30 years, Thornburg has managed a variety of fixed income strategies with a highly active, high conviction and benchmark agnostic process.
Investors are looking for their fixed income solutions to work harder than an index fund will so that they can get differentiated, superior performance. We believe you need a highly active, high conviction and benchmark agnostic process to deliver that; however, creating a process that successfully uses those three attributes takes decades to create. For example, it involves creating a highly collaborative research culture and a disciplined and repeatable portfolio construction process.
Thornburg’s management style lends itself to a multisector fixed income strategy. What are the advantages of a multisector strategy in this market?
I think the main advantage of a multisector strategy is its flexibility to invest in a much larger pond of investment opportunities. There are always opportunities. You just need to have the team structure, the expertise and the right approach to go find them.
At Thornburg, we don't have any obligation to own a specific bond, a specific sector or any particular security at all. We are free to look anywhere in the global fixed income market that will help drive the differentiated, superior performance that our clients are seeking. One noteworthy guardrail that we have for the sake of our investors is that we don’t use any leverage or derivatives. Our portfolios are cash-only and transparent. We only take risk when we believe we are being compensated for it.
Why does a flexible team structure have an edge over a traditional team structure, particularly with multisector strategies?
Most managers of core bond strategies tend to have teams that are structured to approximate benchmark returns, so the team structure has a rigidity to ensure that. These are very traditional, siloed research structures that limit a team’s ability to execute on a multi-sector strategy.
As mentioned, the advantage of a multisector strategy is that it has the ability to uncover and deliver value from a variety of fixed income sectors. We believe traditional siloed structures put up barriers that inhibit a team's ability to really communicate and compare opportunities across sectors. Whether it's an analyst-to-analyst or analyst-to-portfolio manager communication, it just doesn't happen as seamlessly.
The benefit of a flexible team structure, like Thornburg’s, is that it really breaks down these barriers. Each team member conducts research across asset classes, sectors, and credit ratings, such that each person is doing both the fundamental and the valuation analyses throughout the entire process. And by doing this, each member builds up a broad knowledge base that helps set the table for a rigorous and thorough team discussion around relative value for a given opportunity set. A flexible structure leads to better decision making on an individual idea and portfolio basis and ultimately better risk-adjusted outcomes for multisector strategies, and frankly, most fixed income strategies.
What does Thornburg’s team structure look like and how does it provide an advantage to the client?
Our team approach very much has the flexibility that I described. In fact, our structure really blurs the line between portfolio managers, analysts and traders. Everyone on our team is expected to act like an analyst. I have a PM title, but my main job is to bring good ideas to the group just like everyone else.
We all sit within about 10 feet of each other for about 12 plus hours a day. In essence, the investment committee is always in session. We're always sharing our views on where the compelling valuations are as well as the hidden risks. Because those conversations are constant, we can make real-time decisions. and be highly responsive to the market.
There isn't really an information gap or a time lag. That’s not the case with the traditional team structure. It especially doesn't work in very attractive market conditions where opportunities are popping up and you need to react quickly. So, our flexibility, or our ability to be responsive and nimble is a competitive advantage for our team.
The views expressed are subject to change and do not necessarily reflect the views of Thornburg Investment Management, Inc. This information should not be relied upon as a recommendation or investment advice and is not intended to predict the performance of any investment or market.
Investments carry risks, including possible loss of principal. Additional risks may be associated with investments outside the United States, especially in emerging markets, including currency fluctuations, illiquidity, volatility, and political and economic risks. Investments in small- and mid-capitalization companies may increase the risk of greater price fluctuations. Portfolios investing in bonds have the same interest rate, inflation, and credit risks that are associated with the underlying bonds. The value of bonds will fluctuate relative to changes in interest rates, decreasing when interest rates rise. This effect is more pronounced for longer-term bonds. Unlike bonds, bond funds have ongoing fees and expenses.
Investments in mortgage-backed securities (MBS) may bear additional risk. Investments in lower rated and unrated bonds may be more sensitive to default, downgrades, and market volatility; these investments may also be less liquid than higher rated bonds. Investments in derivatives are subject to the risks associated with the securities or other assets underlying the pool of securities, including illiquidity and difficulty in valuation. Investments in the Funds are not FDIC insured, nor are they bank deposits or guaranteed by a bank or any other entity.
Asset-backed Security (ABS) – A security whose value and income payments are derived from and collateralized (or "backed") by a specified pool of underlying assets. The pool of assets is typically a group of small and illiquid assets that are unable to be sold individually. Pooling the assets into financial instruments allows them to be sold to general investors, a process called securitization, and allows the risk of investing in the underlying assets to be diversified because each security will represent a fraction of the total value of the diverse pool of underlying assets.
Duration – A bond’s sensitivity to interest rates. Bonds with longer durations experience greater price volatility than bonds with shorter durations.
Tranche – A piece, portion or slice of a deal or structured financing. This portion is one of several related securities that are offered at the same time but have different risks, rewards and/or maturities.
Before investing, carefully consider the Fund’s investment goals, risks, charges, and expenses. For a prospectus or summary prospectus containing this and other information, contact your financial advisor or visit thornburg.com. Read them carefully before investing.
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