Key takeaways:
- AI and quantitative analysis are creating new ways to identify opportunities and potentially enhance returns across an increasingly complex fixed income investment landscape.
- The return of the cost of capital is increasing dispersion, making active management and disciplined security selection more important in seeking attractive client outcomes.
- As public and private credit markets converge, broader mandates may give investors access to additional sources of yield and a more diverse opportunity set.
Definitions
Active investing: An investment management approach where a fund manager actively aims to outperform a specific index or benchmark through research, analysis and investment choices.
Basis point (bp): One-hundredth of a percentage point. One basis point equals 0.01%, while 100 basis points equal 1%.
Credit: An agreement between a lender and a borrower. The term is often used to describe corporate borrowing, which can take the form of corporate bonds, loans or other fixed-interest asset classes.
Diversification: A way of spreading risk by mixing different types of assets or asset classes in a portfolio, based on the assumption that these assets will behave differently in a given scenario.
Dispersion: The extent to which a distribution of data points is spread out. In investing, higher dispersion may create opportunities to outperform by selecting stronger-performing securities and avoiding weaker ones.
Duration: A measure of how long it takes for an investor to be repaid a bond’s price through its cash flows. It can also measure the sensitivity of a bond or fixed-income portfolio’s price to changes in interest rates.
Emerging market: The economy of a developing country that is becoming more integrated into the global economy, including through greater access to bond and equity markets and the development of financial and regulatory institutions.
Exchange traded fund (ETF): A security that tracks an index, sector, commodity or pool of assets. ETFs trade like equities on a stock exchange and experience price changes as the underlying assets move in value.
High-yield bond: A bond with a lower credit rating than an investment-grade bond, also known as a sub-investment-grade or “junk” bond. These bonds generally carry greater default risk and therefore typically offer a higher interest rate.
Investment-grade: A bond typically issued by a government or company perceived to have a relatively low risk of default, as reflected in a higher rating from credit-rating agencies.
Private credit: Non-bank lending where the debt is not issued or traded on public markets.
Securitisation: The process through which certain types of assets are pooled and repackaged into interest-bearing securities. Interest and principal payments from the assets are passed through to purchasers of the securities.
Security selection: Strategically analysing and selecting investments that align with investment objectives and the amount of risk an investor is willing to take.
Volatility: The rate and extent at which the price of a portfolio, security or index moves up and down. Larger price movements indicate higher volatility and greater investment risk.
Yield: The level of income from a security over a set period, typically expressed as a percentage. For a bond, in its simplest form, it can be calculated by dividing the coupon payment by the current bond price.
View transcript
Jessica Leoncini: Welcome to the Janus Henderson Investment Summit in Rome. I’m Jessica Leoncini, Head of Fixed Income Client Portfolio Management. And I’m delighted to be joined here today with Alex Veroude, our Head of Fixed Income, and Tom Ross, Head of High Yield and Credit Strategy. Alex/Tom, you’ve been talking with our audience today about the future of fixed income. What are some of the key messages you’ve been sharing?
Alex Veroude: So two things really. First thing has been the impact of AI and particularly quantitative technologies on the investment spectrum and fixed income. We’ve had a couple of interesting things to share with the audience. We had some interesting questions come back, and we think there will be plenty of opportunity to enhance returns with those techniques in the future.
Leoncini: Great. What about you, Tom?
Tom Ross: So we’ve also been talking about the return of cost of capital, meaning that there’s more dispersion within the market. So it really means that active management is going to be hugely important, especially in an uncertain world, and really focusing on areas like security selection, where together with AI and quantitative analysis, we can really benefit clients’ outcomes.
Leoncini: Absolutely. Always important. Especially important today. – Yeah – Another topic that’s come up is the convergence of public and private assets. Alex, what are your thoughts on that?
Veroude: We see more and more deals that would have, like five or six years ago, would have been fully public deals done by two or three investment banks. We now see them come in private format, some really, really large. And we are encouraging clients to consider broadening their mandates if they haven’t already. Many clients have already done this to include those opportunities because they are very attractive sometimes, you know, 80, 100, 200 basis points of extra yield for what we think is sometimes even lower risk. So fantastic opportunity for clients.
Leoncini: And Tom here at Janus Henderson we’re guided by perspective driven by innovation. What do you think are some of the key things needed to really be an architect of fixed income solutions?
Ross: So we need to have the right ingredients. So if we take the successes we’ve had in things like securitization and our ETF platform, we are the third largest active ETF manager globally by AUM. So we have some of those right ingredients. And then actually we need to be broad as well in terms of the expertise that we have across emerging markets, high yield, investment grade, across short duration, multi-sector strategies that then bring all of that together. And when we have 40 years of experience and 135 investment professionals that can bring all of that together, that’s how we really believe we can be architects to provide better solutions for clients.
Leoncini: That’s great. And to wrap it up, what’s one thing you leave our audience with today Alex?
Veroude: Yeah. For me, it’s really one thing. It’s that change is actually a good thing. Our clients often like to hear that nothing has changed over the last 30 years. But, you know, some of the things that are presenting themselves now are fantastic opportunities. And really, clients should consider and have an opinion about them.
Leoncini: What about you, Tom?
Ross: And for me, I’d say it’s making portfolios work harder for you. It’s finding the opportunities. In an uncertain world, so with that return of cost of capital, that opportunity to really be focusing on areas like security selection in order to drive returns as opposed to big bets on duration based upon what tweets going to come out next?
Leoncini: Absolutely. Well, thank you both so much for your insights today. And thank you, everyone for listening.
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