(Adam)
So today we are here to talk to you about multi-sector income, whether it is as an asset class from my perspective or as a strategy that Seth helps manage. So from my side, on a product agnostic portfolio strategy team, multi-sector income comes up often, fixed-income even more broadly as in every conversation we are having. And the simple question about where do we go today with our fixed-income portfolios just can’t be simply answered without taking a step back and thinking about this, because there are a few different important dimensions, the first of which is just what do today’s fixed-income portfolios look like as a starting point. And we can answer that a couple of ways, one way is we have got a database from our day-to-day work with financial advisors across the country of about 7,000 different advisor models. And these are all models that we have worked with hands on, pretty high-quality dataset. And that tells us that the average fixedincome portfolio has been moved about half to be outside the core. In other words, a 60/40 benchmark for a portfolio, 60 equities, 40 fixed income, 40 fixed income usually is a government fixed-income benchmark. But of that 40% fixed income on average, about 20% of it is in multisector, non-traditional high-yield type bond strategies. We also did a webinar a few days ago with a few hundred attendees and we asked them just how many of you are using multi-sector strategies and three-quarters said yes, they used multi-sector strategies in some shape or form. So this is a really popular piece of the fixed-income environment and from a risk-based perspective, this has huge implications. It means almost half of the portfolio is acting vastly different than government fixed income for better or worse. The returns-base argument is it has been for better for about a decade. From our view the risk-based argument can be partially informed by just this last August. We did a post-mortem on returns during August where we saw some cracks in the surface in equity and fixed-income portfolios. And on the fixed-income side within the multi-sector and nontraditional categories, the range of volatility was huge with the most volatile fixed-income strategies running 15 to 20% standard deviation on an annualized basis. That means fixed income is running at equity-like levels of volatility, at least the most volatile managers were. The return dispersions were about a double-digit gap from best to worst and that is within fixed income. So all this diversification has huge implications in terms of client expectations, clients’ reality in terms of what they are experiencing in their portfolios. So it is really important to think about how do we define specifically in those categories what we would like in a multi-sector strategy. So in our view, a good multi-sector strategy should have a lot or most of the yield of a high-yield strategy, but from a risk perspective, be situated nicely between government core fixed-income risks and high-yield risks and sort of live in the middle between those two worlds.
(Seth)
Yeah, and as we think about the categories on its own, the multi-sector categories are very diversified, different types of strategies within the actual category itself. So we couldn’t agree more with the way Adam was describing where you should fit within the multi-sector category. I think within this category, it is now surprising why financial advisors or investors are looking for this type of product. If you think back to the problem that we are now encountering, a core plus bond fund 20 years ago used to do, to provide you with a decent amount of yield while not taking enough, a lot of duration. The problem today is the indices have extended in duration and yields have gone lower. So it creates an issue where financial advisors and others need to seek elsewhere to get income. We think that a product that actually lives within that core plus bond fund of today in a high-yield portfolio is really the way to manage multi-sector money. It is well defined, your risk outcomes are well defined and your return outcomes hopefully are just as well defined. So seeking about 80% of the yield of the high-yield index with 50% of the volatility or something along those lines is something that we are trying to achieve within the multi-sector income portfolio here at Janus Henderson. So the way we think about the category going forward is really balancing, more appropriately balancing your core and your plus. So traditionally in the financial advisor world or even in money management as a whole on the fixed-income side, the core plus bond manager is usually limited to about 20% high yield. We think that that flexibility or frankly the hindrance to actually go higher is what is preventing you from finding the best risk-adjusted returns within the market. So the way we think about balancing the core and the plus is really taking a more flexible approach to allow us to really dial up and dial down that plus. In addition to that, the way we think about those two categories is just a little different than the traditional core plus category. Generally, the core within our portfolio is really there to dampen volatility. The idea of those names within that category are really to provide a more stable outcome in periods like Q4 of last year or even August of this year, where spread product widens and you still have that core to dampen that volatility. That is the idea of our core. The plus is really our yield enhancers. These are names that are really going to get us the yield that we are trying to achieve to solve the problem of too little yield and too much duration. That is the idea of balancing these two within the portfolio. Whenever you buy a bond portfolio, you are really subjecting yourself to two main risks, as we all know, credit and interest rate. Those two mean you are not taking currency risk, which we are not in this portfolio. Balancing those two risks more appropriately going forward is really the way you hit your yield targets and dampen volatility. We believe that a well-defined process in this category of achieving a state of total return goal, dampening volatility is really the way to manage it in this sector itself. You don’t want your bond fund to not perform like a bond fund when you need it, which is one of the reasons that we think balancing interest rate risk and credit risk is really the way to dampen volatility going forward.
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