Even with lower interest rates and market returns, there are opportunities for both yield and total return in non-traditional investment approaches, according to a panel of fixed-income specialists at Financial Advisor’s 2019 Inside Alternatives conference in Philadelphia yesterday, 

It’s becoming more difficult to generate returns from fixed-income—not just because of low interest rates, but because technology is changing the way bonds are researched and traded, said Mark Landis, managing partner and co-founder of Wavelength Capital Management in New York.

“Markets are so much more efficient—someone tweets and markets move,” said Landis, adding that the internet has made it easier to research fixed-income opportunities and frequently updated price data.

Though information is moving more efficiently, certain fixed-income assets will remain illiquid, which creates opportunities for nimble managers, said Christian Wilson, senior client portfolio manager of fixed income at Voya Investment Management.

Through periods of low interest rates, investors may find additional yield by accessing more illiquid areas of the market, said Jeffrey Lapin, partner and lead portfolio manager for Lord Abbett’s bank loan strategy.

“To capture those, you have to stay invested through the period where that investment matures,” said Lapin.

Daily liquidity vehicles like traditional mutual funds and ETFs are not appropriate for many such investments, he said, but today many investors demand at least partial liquidity. Thus, Lord Abbett offers strategies in an interval fund structure.

Interval funds offer quarterly liquidity to investors, usually capping withdrawals. In Lord Abbett’s case, outflows are capped at 5% of the fund’s assets each quarter. Doing so allows Lapin to target smaller-sized bank loans that yield “hundreds of basis points higher, and will offer returns hundreds of basis points higher,” he said. Lapin’s fund currently yields about 7.5% per year, and he targets a high-single-digit to 10% total return.

Landis, on the other hand, uses quantitative ETF strategies to offer the benefits of diversified fixed-income exposure and daily liquidity.

“To me liquidity ... is the scariest part of the fixed-income market,” said Landis.

Landis says that since managers can’t reliably predict the direction of interest rates,  Wavelength’s strategies hedge away macroeconomic risk to attempt to provide returns that are uncorrelated with traditional fixed income. He balances out expectations for growth and inflation to avoid making bets on the rate and credit cycles.
 
Wilson, on the other hand, runs a more opportunistic, unconstrained and fundamental fixed-income strategy for Voya.

Wilson said he is concerned about negative rates globally, but does not believe that they will come to the U.S.

“It’s a negative tax on savings, and we don’t want them,” said Wilson. “European banks are going to charge you negative rates, and they’re robbing disposable income from European savers. The intention [of low and negative interest rate policy] was to spur credit creation, but to a certain degree it’s hollowed out the financial system.”

Despite low interest rates, slowing growth and difficulty in generating returns, Lapin said that there are still good reasons to feel optimistic about the opportunities in fixed income.

“I don’t think the fixed-income market is broken. I think it’s just responding to what the economic environment is,” said Lapin. “You’re still getting a pick-up relative to the risk-free rate. The question becomes, are you pricing the added risks appropriately or not?”

With about 2% growth, steady but low inflation and an accommodative Federal Reserve, it’s a “pretty good” environment for fixed income, said Lapin.