A number of firms are expanding their fixed-income product lines or increasing their exposure to the investments to seize advantage of growing interest in the asset class.
The fixed-income asset class has experienced a turbulent couple of years as the Federal Reserve's rate increases have impacted yields and made equity products more volatile. In addition, actively managed fixed-income mutual funds experienced one of their worst years last year when it came to outflows.
This year, the demand for fixed income investments appears to be gaining momentum and several firms are already positioning themselves to take advantage of the trrend.
As one example, Boston-based Putnam Investments will be rolling out its first ever Core Bond Fund next week.
The fund relies on the structure of the Putnam Core bond strategy that came out in the early 1990s, according to Carlo Forcione, head of product and strategy at Putnam.
“This is a long and distinguished track record that we’re bringing to the marketplace that gives us significant confidence in delivering the investment capabilities to advisors and their clients,” he said.
The Putnam Core Bond Fund will complement Putnam’s risk-return ribbon of funds as it fits in between Putnam’s Short Duration Bond Fund and the Putnam Income Fund, Forcione said. The move comes about a month after the firm rolled out a trio of fixed-income exchange-traded funds: Putnam ESG Ultra Short ETF, Putnam ESG Core Bond ETF, and Putnam ESG High Yield ETF.
“Although the ultra-short fixed-income product category has had strong net outflows, we do see that reversing as short end of the curve rates have risen significantly and yield in the ultra-short funds are beginning to catch up to shorter duration Treasury yields,” Forcione said.
In addition, Putnam will launch a fixed-income separately managed account product sometime before the end of June.
Chuck Failla, founder and CEO of Sovereign Financial Group in Stamford, Conn, said that as yields remain attractive in fixed-income products, particularly those in the alternative space, his firm will invest in them.
“Right now, we’re looking at fixed income more than we have in the past and we’ll continue to do so and ramp up our exposure to fixed income, especially in the alternative space, in the coming quarters,” he said.
The firm breaks down its clients' investments into five categories based on timeframe of when a client needs access to capital. The most aggressive options are for savings that are six to 10 years out and more than 10 years out. Those are the portfolios that Sovereign plans to modify over the summer.
“We’re making a longer-term tactical shift from equities to alternative income investments almost exclusively in six to 10 year and our more than 10 year portfolios,” Failla said.
The timing for the change will coincide with when the firm anticipates that the Fed will reach its target or terminal rate of 5% or more. That will likely then cause further disruption in the private credit and private real estate markets, resulting in opportunity in that space, according to Failla.
“If what we believe happens takes place, which we feel strongly about, we think it will be a good opportunity to move some of those longer-term equity type assets into longer-term private credit and private real estate assets to take advantage of what should be a more attractive risk/return profile,” he said.
New York-based BlackRock has also been rolling out new products to meet the demand for fixed income. In January, the firm launched the BlackRock AAA CLO ETF, which has amassed more than $30 million in assets as of Feb. 21. Last year, it launched a first-of-its kind series of fixed-income ETFs designed to provide access to buy-write investment strategies on baskets of fixed-income securities, according to the firm.
“The theme here is building out different tools for investors to navigate the environment so you continue to see this floating rate theme across the credit spectrum,” said Steve Laipply, U.S. head of iShares Fixed Income at BlackRock.
The firm is eyeing additional products in the future, although Laipply did not go into specifics. However, he said generally the industry will begin to get more creative when it comes to rolling out new products in the fixed-income space.
"I think there are a lot of [traditional products] that have been done so you're likely to see products that are a little more … involved than just your standard index products,” he said. “I think you're going to see these more precise exposures coming out along with active exposures.”
Laipply referenced the trend toward more actively managed products as well as the buy-write investments, which is an attractive option for investors looking to tailor their portfolio.
Advisors are looking at this year as a bounce back for fixed income and looking to modify their clients' portfolios to capitalize on the growing numbers for these funds.
“Advisors are very savvy in understanding that 2022 was an aberrant year in fixed income given the performance drawdown and highly negative return profile that investors saw in the space,” Forcione said. “Advisors understand the power of mean reversion in the financial markets and understand the importance of rebalancing client portfolios and looking opportunistically at the fixed income marketplace.”