Chris Chapman, Senior Portfolio Manager at Manulife Investment Management, explains fund's approach and currency differentiator
The article was produced in partnership with Manulife Investment Management.
There’s a big world of investment opportunities out there, something the team behind the Manulife Strategic Income Fund has been exploring with aplomb during its 15-plus years. And after a challenging 2022 so far for fixed income, Chris Chapman, Senior Portfolio Manager, Co-Head of Global Multi-Sector Fixed Income at Manulife Investment Management, believes the market is looking more attractive for a “go-anywhere” fund like his.
With a flexible mandate and investment grade average rating – although within individual opportunities it can go across the credit spectrum – the fund seeks to generate an attractive risk-adjusted return over a full market cycle. It aims to outpace high-quality global bond benchmarks but with a similar risk profile.
“We're not simply maxing out risk to try to generate returns,” Chapman said. “It's really about being thoughtful about the incremental return for each incremental unit of risk that we're taking.”
The fund, which is typically used as a core fixed income position within portfolios, took that approach into 2022, which has given investors nowhere to hide given the correlation between equity and bond markets. With central banks trying to normalize policy from ultra-accommodative pandemic levels, inflation soaring, and the Russian conflict in Ukraine and China’s COVID policy affecting supply chains, markets have been hit.
However, Chapman believes dislocation in certain parts of fixed income has created interesting opportunities in areas of the world like Australia and New Zealand where government or supranational issuers’ five-year bonds are yielding about 4% compared to a year ago when yield was around 1.5%1.
Chapman said: “Triple A-rated type paper is not really taking a lot of interest-rate risk in the five-year space. If you take our view that inflationary pressures will decelerate as we go forward, there's definitely value there.
“If we think back, in the fixed income landscape for quite a while the story has been the search for yield. Now, that yield is on offer and you don't have to take a lot of risk to get it, whereas in the past you were pushed, somewhat by design from central banks, further out on the risk spectrum to try to find that yield.”
Other opportunities identified by the fund include allocations to credit risk transfers, which is US agency debt and not guaranteed. However, it’s different from corporate risk, where you're taking more U.S. consumer and housing market risks. Emerging markets, too, have attractive pockets but requires investors to tread carefully. Chapman believes they have been disproportionately hit where a global business resides in a young country. “They’ve seen a little bit of additional dislocation, over and above where they should be,” he added.
The fund increased its portfolio duration from 2.5 a year ago to 4 to 4.25 after the recent sell-off and the U.S. 10-year pushed towards 3.2% yield.
He explained: “That was a pretty attractive area to add some duration in the portfolio. Given the combination of weighing the central bank verbiage with the market's reaction to it, we think the market may be getting a little bit over its skis in one direction. It moves quickly, so we have to stay on top of that, but that's where the opportunities can present themselves.”
The fund’s asset mix has also changed to capitalize on the new environment, increasing its exposure to investment grade corporates as a result of high yield names getting upgraded. The fund has also transitioned some of its high yield holdings into bank loans, with research showing loans outperform high yield through the entirety of the hiking cycle.
Chapman is also a huge believer of Canadian dollar strength and believes it’s an area where the fund stands apart from many of its rivals.
He said: “The global component is important but even more important is the foreign currency component of that. If you simply just hedge that currency risk, you effectively give away a lot of that global diversification benefit. And for us, this is where we've been able to resonate over the past 15-plus years in that we have an active currency component.
“We are always thinking about the investment opportunity set from the perspective of a Canadian investor. When we look at positions outside Canadian dollar in the portfolio, we ask, ‘do we like that risk?’ In some instances, that's a big part of the total-return attractiveness to some of those opportunities. That currency piece is not just about risk mitigation; it's historically also been an alpha generator for us. That's a pretty big differentiator for us.”
The fund has a reputation built around the consistency of its philosophy. It’s a strength Chapman believes results in a compelling value proposition for advisors and investors, along with a flexible mandate that opens the door to global opportunities.
Chapman said: “This allows us to not just find areas of the markets that are attractive but also, if we do our jobs right, to avoid parts of the market that are less compelling.”
1 www.marketwatch.com | Australia 5 year government bond and New Zealand 5 year government bond
Sponsored by Manulife Investment Management, as of June 2022.
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