The remaining 15% to 20% of Huber’s portfolio is in emerging markets—a combination of dollar emerging market debt, emerging market sovereigns, emerging market corporate bonds and emerging market local debt.
Seeking Credit
Peter Palfrey, a member of the fixed-income group at Loomis, Sayles & Company (which oversees approximately $200 billion in fixed-income assets) and co-manager of the Loomis Sayles Core Plus Strategy, took the recent rate hike in stride. “We had been expecting a Q4 liftoff of the Fed tightening process for really the better part of the last year,” he says.
Palfrey and his colleagues expect the Fed to raise rates three times in 2016, initially late in the second quarter and again around September and December. The hikes, each projected to be 25 basis points, will be very data-dependent, he says.
He anticipates front-end yields will likely rise faster than longer-term yields. “The net of it is that we don’t think investors from a total-return standpoint are going to find much value in the government market,” he says.
During the third quarter of 2015, when fear of slow global growth triggered a huge pullback in the risk markets, “Investors flocked to the government market and that caused us to underperform very severely,” he says. “But since then we’ve started to see stabilization in some of these risk markets, and we think going forward it’ll be all about not looking like the Barclays Agg, not looking to the government market for return and really going to other markets which we think are quite cheap.
“We think in a low-yield environment like this, and a backstop of improving economic activity in the U.S. and other major developed markets, we will be compensated by being in higher-yielding credit-oriented securities, or securities with some kind of spread over governments,” Palfrey says.
He and co-manager Rick Raczkowski have allocated 30% of the Loomis Sayles Core Plus Bond Fund to government securities, well below the 70% weighting in the Barclays U.S. Aggregate Bond Index benchmark. They’ve increased exposure to Treasury Inflation-Protected Securities (TIPS), which Palfrey says are priced more attractively than Treasurys. He also thinks long-dated TIPS (10- to 30-year) are underpriced because they’re pricing in inflation expectations that he believes are too low.
The Loomis Sayles Core Plus Bond Fund also has approximate allocations of 35% in investment-grade credit, 10% in investment-grade securitized debt, 20% in high-yield securities, 3% in non-U.S.-dollar markets, and 2% in cash and other securities.
“We think there’s an extraordinary opportunity to be involved in high-yield securities—fixed-rate high yield, as well as bank loans, as well as emerging-market securities which have gotten very, very beaten up here,” says Palfrey. His allocation to the non-U.S.-dollar market is in emerging market currency, which he says also offers great opportunities given its recent sell-off.