Most core fixed income strategies have corporate bond exposure. However, there may be an attractive opportunity to be overweight in the corporate bond sector.
Credit markets will perform well in 2024, creating interesting investment opportunities. In particular, spreads have tightened and corporate profitability remains very strong.
“Overall, we’ve seen strong returns throughout the year,” Jay Small, portfolio manager at Fidelity Investments, said at the Bettafi symposium on Oct. 24. “There were almost no downgrades from rating agencies.” Therefore, creditworthiness remains good. ”
“The one-year return in the corporate bond market is actually about 13%,” Craig Altholz, a client portfolio manager at Invesco, said at the symposium.
Additionally, many portfolios are likely to be underweight in bonds due to the high returns that stocks have generated through 2024.
“If you have a balanced portfolio, say a typical 60/40 type portfolio, stocks will grow, and if that 60% gets above 60%, you sell stocks and buy more bonds. So it’s also a tailwind (for corporate bonds),” Small said.
Corporate bond ETFs to consider
The Invesco Total Return Bond ETF (GTO) invests in companies as well as U.S. Treasuries and other fixed income securities. However, the Invesco ETF is structurally overweight in corporate stocks compared to its benchmark.
To generate alpha in this type of asset class, Altorz said, you need to think about how to capture upside.
Invesco envisions achieving this in two ways. First, GTO never aimed to be the best performing fund in its category. That increases the risk that, at some point, the fund will become the worst fund in its category, Altolz said.
“What we’re trying to do is consistently be in the top quartile in a rising market by achieving single wins and double wins. …And then kind of stuck going towards the median in a down market. That’s about a 10% chance,” Altorz said. “If you can do that consistently, over time you’ll get a strategy that’s in the top quartile to top 10 for both total return and risk-adjusted return. That’s really what we’re looking for. This is something we were able to accomplish.”
The Fidelity Corporate Bond ETF (FCOR) focuses on corporate bonds. Like GTO, FCOR is actively managed.
“The core of what we do is bottom-up fundamental analysis,” Small said. “Craig’s point about singles and doubles really resonates with me. That’s what we strive for every day. We are trying to generate alpha through operations.”
Advantages of active management in fixed income
Altolz said he encourages all investors to look at active management of fixed income.
“In many parts of the market, such as the core, even the median active manager can increase value through active management,” he said.
Helmed by an experienced portfolio management team, GTO is well suited as a set-it-and-forget strategy for use in your portfolio.
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