While the European bond market was setting records last week, the US market has also begun 2020 with a flurry of transactions backed up by record inflows.
Why invest?
Diversification
Exposure to niche and less liquid asset classes inappropriate for open-ended funds.
Performance
The higher yields typically associated with, less liquid assets can deliver higher returns.
Income
Earnings are distributed to shareholders through dividends at regular intervals.
Liquidity
Investors can trade shares on the open market.
Why invest?
- Our research has shown that with the right combination of positive and negative screening, stated sustainability criteria don’t detract from returns
- TwentyFour’s ESG framework puts the onus on the team’s own credit work, rather than relying on third party analysts or data providers
- A focus on more nuanced factors such as controversies, engagement and momentum in ESG analysis can potentially deliver higher returns
- Regulatory initiatives are increasingly pushing asset owners into more sustainable strategies, and we expect companies seen as running sustainable businesses to benefit from increased capital flows in the coming years
Why invest?
Attractive returns
Target attractive returns through steady, repeatable income and capital gain opportunities
Easy to understand
Funds are predominantly long-only, unlevered, and simple to understand, with sparing use of hedging tools in response to specific macro events
Capital preservation
A strong focus on the unwritten rule of fixed income - capital preservation at all times
Relative value
Unconstrained strategy allows managers to tactically shift portfolio weightings, helping them to capture relative value opportunities as economic and market conditions change
Stock selection
Added value through both 'bottom-up' stock selection as well as 'top-down' macro calls
Why invest?
More liquid
Investment grade bonds are widely held by institutional investors, so they tend to be more liquid and less volatile than lower rated bonds.
Higher yields
They offer higher yields compared to investment grade government bonds.
Low default risk
Relatively low default risk means investors can have greater certainty on expected returns.
Diversification
The investment grade bond universe offers extensive diversification, with virtually every corporate sector represented in the global market.
Steady income
Investment grade bonds have the potential to provide steady income
What are closed-ended funds?
Closed-ended funds are professionally managed investment companies whose shares are publicly traded via an exchange.
Like regular open-ended investment funds, closed-ended funds invest in a portfolio of assets on behalf of investors.
In contrast to open-ended funds, closed-ended funds raise capital at launch via an initial public offering (IPO) of shares, which can then be traded by market participants on the open market without the direct involvement of the investment firm managing the fund.
This means capital does not flow directly in or out of the closed-ended fund when investors buy or sell the shares, giving the fund a more stable asset base that can be more appropriate for investing in less liquid markets and securities.
Closed-ended funds themselves do not issue or redeem shares on a daily or regular basis. They can only increase capital through portfolio performance, issuing debt, or conducting additional share offerings.
What is Sustainable Investing?
ESG issues can be a risk to fixed income returns like any other, and at TwentyFour we have embedded the assessment of these issues in our existing investment process and relative value models across the firm, with an integrated ESG framework used daily by portfolio managers for all strategies.
However, in recent years many investors have begun to consider sustainability a key element of their own investment objectives, and have sought products that specifically avoid investing in companies perceived to operate in an unsustainable way, either for their own business or wider society and eco system.
Unfortunately, especially within fixed income where ESG data availability can be poor compared to publically quoted equities, there are a range of definitions for and approaches to sustainable investing, and it is clear to us that many of these may not work for investors in the way they should.
What is Multi-Sector?
There are some $51 trillion of fixed income bonds outstanding worldwide, comprising multiple geographies, currencies, sectors and types of security.
Multi-Sector funds should be able to control risk and harness reward through both ‘top-down’ macro calls and ‘bottom-up’ stock selection.
At TwentyFour, we believe the biggest advantage of a Multi-Sector strategy for our clients is the outsourcing of these ‘big picture’ decisions to the portfolio managers, who will shift positioning quickly in response to continually evolving macro and market views.
What are Investment Grade bonds?
Investment grade bonds are fixed income securities issued by companies with a medium or high credit rating from a recognised credit rating agency, which are considered to be at lower risk from default than those issued by companies with lower ratings.
Bond investors face ‘asymmetric risk’ when making investments, in that the expected loss associated with a company defaulting on a bond is typically greater than the expected return on the security should the company repay the debt as planned.
Investment grade bonds are those rated BBB- or higher by at least two recognised credit ratings agencies, the biggest three of which are Moody’s, Standard & Poor’s and Fitch (bonds rated lower than BBB- is considered ‘speculative grade’). IG bonds achieve higher ratings because they are deemed to be at lower risk of default, meaning investors are typically prepared to accept lower yields for holding this debt than for lower rated bonds from riskier companies.
As such, strategies that keep a core allocation to investment grade securities can expect a smoother risk and return profile than those focused on the potentially higher capital gains associated with lower rated bonds.
It is important to note that TwentyFour does not rely on the judgment of external ratings agencies to determine whether one bond is riskier than another. Portfolio managers conduct their own rigorous credit analysis on every potential investment, regardless of the company or bond’s rating.
TwentyFour’s investment grade strategies are designed to be held as a core fixed income allocation that can deliver steady, repeatable returns throughout the economic cycle.