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Text on screen: Kimberley Stafford, Global Head of Product Strategy
Kimberley Stafford: If clients are thinking about their broader asset allocation, take us for your broad views on asset classes and sectors that they should be mindful of.
Text on screen: Daniel J. Ivascyn, Group Chief Investment Officer
Dan Ivascyn: Sure. So let me maybe in somewhat rapid fire mode, I'll go through general thoughts, at least start first within the fixed income opportunity set in credit. You're going to have to be careful with credit. More technological innovation could lead to better productivity, which could lead to better economic growth. But a lot of what we describe is quite disruptive the green or the brown to the green energy transition is probably the best example. The brown companies carry a lot of the debt. The green firms tend not to.
Text on screen: TITLE – Investment implications: BULLETS – Defensive and selective in credit, Positive on structured products, Select areas of emerging markets look attractive, Lower return on equities, Opportunities in the private sector
So within our fixed income portfolio, we need to be sufficiently defensive sufficiently selective in the credit arena because this era of transformation will lead to winners and losers.
Secondly, let's look at structured products. We really like structured products in this environment. A lot of the post global financial crisis regulations have continued to make it hard to take excessive risks within that opportunity, set mortgages, asset backs, other areas of that marketplace. In a world of considerable uncertainty, it's great to have a hard assets in pretty good documentation. So whether it's the public or the private side of the opportunity set, we really, really liked that asset class.
Emerging markets on the fixed income side, we find it intriguing consistent with the idea of expanding your opportunities set to generate additional returns. Longer term valuations across the various sub segments of that emerging market opportunities set look attractive from a top down perspective. The challenge is that when you start looking from a bottoms-up perspective to put together a portfolio, you notice a lot of uncertainty, political uncertainty, uncertainty around this ongoing tension with China and implications for emerging markets from that perspective. So we look from a bottoms up perspective. We think you have to be again, patient and selective in that area of the opportunity set, but we do think it's a good diversifier. We can pick up some incremental return, again within the public and the private opportunity set.
Real briefly on equities, we think equity returns are going to be lower than we've gotten used to. I don't think I'm extending myself too much in terms of that general forecast, at least over the next five years. You do see disruptive companies or disruptors in terms of the equity opportunity set.
Then finally, just touching on the private opportunity set. I mentioned earlier we think it's important to shift one's mindset in think about opportunities in those areas of the market. All of this policy stimulus we've seen directed at sectors during this COVID shock have found their way into the easiest to own segments of the marketplace; generic credit, rate markets, mortgage backed securities with agency guarantees. The money hasn't floated directly to these private opportunities.
They're crowded in some areas of course, but we think by expanding into these areas over the next five years, you'll be able to seize liquidity premium, complexity premium, obtain the type of control that you typically can't get within the public arena and generate attractive returns in the context of a broad asset allocation. So again, one of our higher conviction themes for the next five years.
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Please note that the following contains the opinions of the manager as of the date noted, and may not have been updated to reflect real time market developments. All opinions are subject to change without notice.
All investments contain risk and may lose value. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and low interest rate environments increase this risk. Reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Equities may decline in value due to both real and perceived general market, economic and industry conditions. Investing in foreign-denominated and/or -domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. Mortgage- and asset-backed securities may be sensitive to changes in interest rates, subject to early repayment risk, and while generally supported by a government, government-agency or private guarantor, there is no assurance that the guarantor will meet its obligations. Diversification does not ensure against loss.
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