When Bory thinks about how to position bonds, he said three factors come to mind. First, the bond market is very well supported by tight monetary policy, slowing growth and declining inflation.
“Those are the three most important factors that any bond investor wants to see,” he said. “It’s a little bit more challenging for the equity folks, but for bond investors, these are good times.”
Second, real yields remain strongly positive. “As bond investors, it’s your job to beat inflation over time. And you can do that today without taking a huge amount of risk,” he said. “It doesn't matter if you're a muni investor, a U.S. corporate bond investor, or a global bond investor. You can do that today much more easily than you could just a couple of years ago.”
And third, while liquidity in bonds can be challenging at times, that in itself creates a risk premium that’s exploitable through time, he said. “Technicals matter in our market. When we look across the bond market, we see good fundamentals, we see attractive valuations, and we see a technical backdrop. That's going to be challenging, but not impossible if you're a diligent investor with tight risk controls and can navigate your way through.”
From Bory’s perspective, 2024 could offer some excitement. Even though rate cuts are expected, most likely in the second half of the year, monetary policy should remain tight, he said. And volatility will remain in the picture, though Bory said he expects it will decrease.
“We have three simple strategies for 2024 when we think about a road map,” he said.
First, diversify duration, he said. While it’s comfortable to earn yields of 5.5% for cash right now, duration will provide yield over longer periods of time, plus provide the upside of capital appreciation.
“That's where we get total returns from. When you think about a 6% portfolio for an average market duration, if yields drop by just 50 basis points, you're looking at a 9.5% return. That's pretty juicy,” he said. “If yields go up 50 basis points, you're looking at a positive 2.5% return.”
Second, prioritize flexibility. With two ongoing wars, massive social upheaval and elections next year in the U.S. and elsewhere, investors need to make sure a portfolio is set up to manage that volatility, he said.
“Bonds give steady streams of income. When you set that up, you can navigate and weather a lot of volatility in the market,” he said. “That means being very specific with your portfolio.”
Third, be intentional with risk, he said. “When volatility is high and dispersion is wide, you want to be very specific in the bonds that you hold in your portfolio,” he said. “You do not want unintended risks, and that's what you inherit when you buy the broad market. When you curate the portfolio, it becomes very specific.”
In the emerging markets arena, Alison Shimada, senior portfolio manager, said the lacking performance of the asset class over the last 13 years is poised for a rebound, mostly because emerging markets are key enablers of AI technology.
“Artificial intelligence is a very big driver in emerging markets. It's the driver of particularly North Asia, South Korea, and Taiwan,” she said. “Components, producers, semiconductor producers, a lot of other things, those are found in emerging markets. You just don't hear about it very often.”
And Bryant VanCronkhite, senior portfolio manager for the global equity team, wrapped up the meeting by saying equity managers have benefited from a Federal Reserve that for 40 years continuously lowered interest rates.
“We have two generations of investors that know only this,” he said, adding that as companies have to refinance their debt, the higher interest rates are paid out of their growth potential. “As companies roll their debt, it consumes capital, leaving less capital left for productive growth.”
As such, VanCronkhite said he looks for companies that have cash-generating power throughout the business cycle and strong balance sheets to play offense with.