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.