Allianz Global Investors, one of the world’s leading active asset managers, announced today the appointment of Matt Christensen as Global Head of Sustainable and Impact Investing. In this role, he will accelerate the growth of Impact Investing as part of the company’s growing private markets platform; lead the continued integration of ESG factors across AllianzGI’s existing range of public markets products, including stewardship activities; and support the development of new SRI products.
Investors who need income and return potential should consider an active, balanced, global approach. Consider pairing high-quality investment-grade corporates, Treasuries and select securitised assets with infrastructure debt and higher-quality US, European and Asian high-yield bonds.
Faced with low or even negative bond yields, many investors are looking to preserve income and return potential – and an active, holistic approach could help
We see opportunities in the securitised fixed-income market and higher-quality corporate bonds, though investors should be cautious and selective with BBB exposure
For additional income potential, look to higher-quality US high-yield bonds, select global high-yield bonds (particularly from Europe and Asia) and infrastructure debt
Using these securities in a “barbell” approach can help investors take selective risks while providing the potential for favourable yields and returns
With global growth slowing and inflation still low, most major central banks have paused their plans for raising rates – and in some cases have even begun cutting them. This has pushed bond yields lower around the world. In fact, the amount of negative-yielding US dollar-denominated debt has risen to more than USD 10 trillion globally, as the chart below shows.
A record amount of debt now has negative yields
Bloomberg Barclays Global Aggregate Bond Index negative-yielding debt
Source: Bloomberg. Data as at 31 March 2019.
As a result, many investors once again are looking to preserve income and meet return expectations. We suggest taking a holistic, active approach to building fixed-income portfolios using a “barbell” approach – taking selective risks for higher income potential while using more defensive positions to balance overall risk. On one end of the barbell could be high-quality investment-grade corporates, Treasuries and select securitised assets. On the other could be BB rated US high-yield bonds, European and Asian high-yield bonds, and infrastructure debt.
In the investment-grade universe, look to higher-quality bonds
Among investment-grade securities, we see opportunities in higher-quality corporate bonds and the securitised fixed-income market.
1. Look to higher-quality corporate bonds.
The US investment-grade bond market has doubled in size since the 2008 financial crisis, but overall credit quality has deteriorated. The landscape is increasingly dominated by assets with BBB ratings, as shown below; these are on the low end of the range that qualifies as investment-grade. As US economic growth slows and corporate earnings moderate, we suggest repositioning towards higher-rated securities, such as bonds rated A.
More investment-grade bonds have lower BBB ratings
Ratings of the US non-financial corporate-debt market
Source: Bloomberg. Data as at 31 December 2018. Calculated using ICE (Intercontinental Exchange) investment-grade and high-yield bond indexes, excluding the issues of financial firms, as at 31 December for each year shown.
Although there are specific areas of the BBB marketplace that look attractive, we believe investors should become increasingly selective and active in this space. The US economic cycle is now in a more mature phase, and low rates are once again tempting corporations to take on more debt. Consider focusing on issuers with:
Credible plans to reduce their debt burdens (known as “de-leveraging”).
Consistent free cash-flow levels, which can often be found in monopoly-like businesses with the ability to take on debt.
Attractive subordinated-debt issues, which are riskier but can offer more attractive terms; look for issues from high-quality banks and utilities.
2. Consider securitised fixed-income assets. One area of the investment-grade bond universe that offers attractive diversification opportunities is the securitised fixed-income market. These are pools of assets with cash flows that are divided and sold to investors, and they tend to be tied to what we view as more resilient economic sectors: consumers, residential housing and commercial real-estate. Among the more attractive opportunities are:
High-quality asset-backed securities (ABS), such as AAA rated credit cards and prime auto, which tend to be liquid and can complement Treasury or cash holdings.
More specialised areas of the ABS market such as franchise ABS, single-asset commercial mortgage-backed securities and non-agency mortgage bonds. These can help investors diversify their investment-grade bond holdings, and can be good alternatives to BBB rated corporate bonds.
For enhanced income potential, look for higher yields with higher quality
For investors in search of additional income and yield, we see opportunities in higher-quality US high-yield bonds, select global high-yield bonds and infrastructure debt.
1. Go higher quality in US high yield. Within what Moody’s estimates to be a USD 1.2 trillion US high-yield marketplace, the highest-quality BB rated segment remains relatively attractive. These issuers have better credit profiles, tend to offer shorter-duration bonds and have higher yields than investment-grade securities. Our focus remains on companies with visible earnings streams and no imminent refinancing risks. As the economic cycle matures, US high-yield investors may have an opportunity to invest in “fallen angels” – BBB rated assets that have been downgraded to high-yield status. These corporations could improve their debt profiles and once again become investment-grade assets.
2. Explore high-yield issues in Europe and Asia. To diversify holdings and enhance yield potential, consider investing in global high-yield issues – particularly from Europe and Asia. Europe’s substantial economic slowdown has made these bonds less expensive, and they are generally more conservatively positioned: nearly 73% of the market is BB rated versus 46% in the US, according to ICE. This has helped lower the default rates for European versus US high-yield issues, particularly during downturns. Asian high-yield bonds – especially US dollar-denominated ones – may also provide higher yields than their US counterparts. The Asian high-yield market is primarily dominated by Chinese companies, and we believe China’s economic outlook is good thanks to its stabilising economy and the potential for a resolution to the US-China trade dispute.
3. Diversify with infrastructure debt. Infrastructure-debt investments – which are privately financed projects such as airports and water pipelines – are often highly regulated and can have predictable cash flows, longer maturities and lower loss rates than corporate bonds. While there may be liquidity constraints, their additional yield potential and lower correlations with equity and traditional fixed income can provide a valuable source of diversification. In addition, ESG (environmental, social and governance) investors can find synergies in infrastructure debt, since many of these projects focus on renewable energy, social infrastructure (such as universities, hospitals and schools), and conventional energy and utilities (such as waste- and water-treatment facilities).
Build your bond portfolio with a “barbell” approach
Although investors are facing low yields from government bonds globally, we see opportunities to invest actively across the fixed-income spectrum – particularly with a “barbell” approach that balances safer with riskier investments. On one end of the barbell could be high-quality investment-grade corporates, Treasuries and select securitised assets. On the other could be BB rated US high-yield bonds, European and Asian high-yield bonds, and infrastructure debt. Combined, this approach may be able to help investors take selective risks while providing the potential for favourable yields and returns.
This is part of an ongoing series on the importance of income, featuring insights from our strategists, economists, CIOs and portfolio managers. Explore the links below for more:
Mona is the US investment strategist and a director with Allianz Global Investors, which she joined in 2017. As a member of the Global Economics and Strategy team, she is responsible for providing US retail and institutional clients with differentiated investment thought leadership.
Higher yield potential and added diversification aren’t the only qualities attracting fixed-income investors to Asia. The region’s bond markets are large and growing, and reform-minded governments are providing the necessary policy support to maintain growth.
Economic growth in Asia is supported by China’s stabilising demand and the efforts of Asian central banks
Asian bonds offer attractive yield potential, particularly compared with the typically low to negative yields of bonds from more developed nations
Asian credit fundamentals remain broadly stable: companies generally have lower debt levels and are maintaining adequate cash levels on their balance sheets
Our medium-term outlook for China’s bond market remains positive thanks to policymakers’ efforts to balance growth and stability, and the trend towards more open, integrated markets
Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. [*] Past performance is not indicative of future performance. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security.
The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication. Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the data is not guaranteed and no liability is assumed for any direct or consequential losses arising from their use. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted.
This material has not been reviewed by any regulatory authorities. In mainland China, it is used only as supporting material to the offshore investment products offered by commercial banks under the Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations. This document does not constitute a public offer by virtue of Act Number 26.831 of the Argentine Republic and General Resolution No. 622/2013 of the NSC. This communication's sole purpose is to inform and does not under any circumstance constitute promotion or publicity of Allianz Global Investors products and/or services in Colombia or to Colombian residents pursuant to part 4 of Decree 2555 of 2010. This communication does not in any way aim to directly or indirectly initiate the purchase of a product or the provision of a service offered by Allianz Global Investors. Via reception of his document, each resident in Colombia acknowledges and accepts to have contacted Allianz Global Investors via their own initiative and that the communication under no circumstances does not arise from any promotional or marketing activities carried out by Allianz Global Investors. Colombian residents accept that accessing any type of social network page of Allianz Global Investors is done under their own responsibility and initiative and are aware that they may access specific information on the products and services of Allianz Global Investors. This communication is strictly private and confidential and may not be reproduced. This communication does not constitute a public offer of securities in Colombia pursuant to the public offer regulation set forth in Decree 2555 of 2010. This communication and the information provided herein should not be considered a solicitation or an offer by Allianz Global Investors or its affiliates to provide any financial products in Brazil, Panama, Peru, and Uruguay. In Australia, this material is presented by Allianz Global Investors Asia Pacific Limited (“AllianzGI AP”) and is intended for the use of investment consultants and other institutional/professional investors only, and is not directed to the public or individual retail investors. AllianzGI AP is not licensed to provide financial services to retail clients in Australia. AllianzGI AP (Australian Registered Body Number 160 464 200) is exempt from the requirement to hold an Australian Foreign Financial Service License under the Corporations Act 2001 (Cth) pursuant to ASIC Class Order (CO 03/1103) with respect to the provision of financial services to wholesale clients only. AllianzGI AP is licensed and regulated by Hong Kong Securities and Futures Commission under Hong Kong laws, which differ from Australian laws.
This document is being distributed by the following Allianz Global Investors companies: Allianz Global Investors U.S. LLC, an investment adviser registered with the U.S. Securities and Exchange Commission; Allianz Global Investors Distributors LLC, distributor registered with FINRA, is affiliated with Allianz Global Investors U.S. LLC; Allianz Global Investors GmbH, an investment company in Germany, authorized by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Allianz Global Investors (Schweiz) AG; Allianz Global Investors Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; Allianz Global Investors Singapore Ltd., regulated by the Monetary Authority of Singapore [Company Registration No. 199907169Z]; Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator [Registered No. The Director of Kanto Local Finance Bureau (Financial Instruments Business Operator), No. 424, Member of Japan Investment Advisers Association and Investment Trust Association, Japan]; and Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan.
[*Subject to change – depends on the content of the material which may mention certain investment instruments that involve particular risk]