Fixed income strategy:
Aim to offer compelling yields with high credit quality amid changing macro environment
Broad range of preferreds could help investors to navigate the changing environment. During periods of slower economic growth, an active portfolio could increase exposure to baby bonds (senior debt). These are higher up in the capital structure relative to preferreds, which should provide some protection against spread-widening amid an economic slowdown.
Navigating the changing environment1
With global growth to slow through 2023, and continued concerns about inflation and interest rate hikes, investors would not only look for higher yielding asset classes but also focus on higher asset quality to seek more stable and sustainable income. Preferred securities, with an average investment grade rating, were historically offering around 7.7% yield, the highest level in the past decade2.
During the period of higher inflation over the past 20 years, preferred securities generally held up well historically, with positive returns above US IG corporate bonds and US Treasuries. This is primarily driven by the credit spread that offset the inflation risk.
Yield of major fixed income assets(%)3
In terms of sector allocation, we differ greatly from our peers and the preferred market, as we have smaller allocations in financials, and higher allocation in electric utilities where most operators have a regulated rate of return. This can help provide highly stable and predictable stream of earnings that are secured by a lack of competition and low sensitivity from commodity prices and the economic cycle.
Sector Allocation (%)4
1. For illustration purposes only.
2. As of 31 December 2022. Preferred securities are represented by ICE BofA
3. Bloomberg, as of 31 December 2022. US HY corp bonds are represented by ICE BofA US High Yield Index; Preferred securities are represented by ICE BofA US All Capital Securities Index; US IG Corp bonds are represented by ICE BofA US Corporate Index, US treasuries are represented by ICE BofA US Treasury & Agency Index. A positive distribution yield does not imply a positive return. For illustrative purposes only. Past performance is not indicative of future performance. Average credit rating based on Standard & Poor’s. It is not possible to invest directly in an index.
4. Bloomberg, as of 31 December 2022. Preferred securities measured by ICE BofAML US All Capital Securities Index. Performance is for reference only. Sector breakdown by Bloomberg Barclay level 2-3 classification. Portfolio holdings and characteristics are subject to change at any time. Information about the asset allocation is historical and is not an indication of the future composition. The securities described are for illustrative purpose only and do not constitute any investment recommendation or advice. It should not be assumed that an investment in these securities or equities was or will be profitable. Due to rounding, the total may not be equal to 100%.