In a changing global investment landscape, Principal Global Investors (The Principal) highlights the need for flexibility and a fresh approach when it comes to fixed income strategy. Applying new ideas is key to understanding the changing market and achieving high yield returns with investment grade risk.
“In a post-GFC world, investors have cash to invest but are wary of risk. This is especially the case in an environment of volatile equities and the decreasing returns from cash. We believe that an appropriate fixed income strategy offers very real opportunities. And, given that the local market offers very limited fixed income opportunities, a global approach is the solution,” said Darryl Trunnel, Co Portfolio Manager of The Principal Global Strategic Income Fund (the Fund).
Mr Trunnel, who is based in the United States, was in Australia to take investor groups through some of the key features of the revamped Fund. Since the revamp, the Fund has outperformed the Barclays Global Aggregate Corporate Index (the Index) by 2% calendar year to date, after fees.
Shunning the typical allocation parameters of many local and global fixed income strategies, Mr Trunnel maintains that a new world order now applies.
“Rather than sticking to investment strategies inherited from another era, we are closely attuned to global economic shifts that can have a profound effect on risk and return. It means we need to be more open about weighting and allocation of portfolios,” said Mr Trunnel.
According to Mr Trunnel, the traditional view of emerging markets is a case in point. Factors such as track record, improved accounting practices and growing demand in their own markets leading to significant growth, mean that certain companies in emerging countries no longer fit the old “emerging” profile. They are therefore considered more in line with a developed-world company.
So, while The Principal may have a 12% allocation to emerging markets in the Fund, its stake in a company such as PetroBras, which while based in an emerging market has all the hallmarks and features of a first world organisation, will not be included within that emerging allocation.
Mr Trunnel said such flexibility enables swift identification and uptake of opportunities. It also requires very active management and a high level of liquidity – neither of which are typical features of old world fixed income portfolios.
Widespread deleveraging post-GFC is another prime example of fixed income opportunity that, unless closely monitored, may go begging.
“Unless we stay in tune with improving balance sheets we may miss out – again because we fail to recognise the investment implications of our rapidly shifting environment. With deleveraging and returns to stronger performance we see companies making a transition that is, in effect, from high yield to investment grade. Ford Motor Company is a prime example of an organisation poised to make that shift. If you’re not open to that possibility, you miss out.”
This more flexible and dynamic approach also entails a strict and considered approach to risk.
“Treatment of risk in the new world order must and does assume priority”. Just one of many controls we have in place at The Principal is a 5% volatility hedge. We also closely manage risk by providing more realistic durations. Our longer term 3 year duration cycle enables us to manage flexibly and assists if any bumps arise – for example should issues continue or worsen in the EU or occur elsewhere around the globe.
“Combining these new ideas in the Fund is already delivering results. Remaining open to change and clear-eyed about the true features of investments is essential in today’s investment environment.”