LGIM Active Fixed Income Roundtable

Every challenge is a potential opportunity

Active Fixed Income

Tackling the fixed income market with an active mindset for long-term outcomes

Nowhere to hide

In our view, investing in fixed income is anything but smooth sailing right now, but as long as bondholders stay on their toes, there are potential opportunities available. That’s according to our roundtable participants, who sat down to shine a light on the importance of staying flexible at a time of high market volatility.

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Caution remains the name of the game

Navigating fixed income markets can be a tad tricky at the moment. But with the right approach and a healthy degree of caution, we believe it’s possible to master one of the toughest investment environments we’ve seen in decades.

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Panellists

Yvan Roduit

Yvan Roduit is a senior investment specialist at Raiffeisen Switzerland. He is an investment professional with over 20 years’ experience across all asset classes including alternative investments. Yvan holds a masters of Science in Finance from the University of Geneva and is a Certified International Wealth Manager as well as a CFA charterholder.

What do you think?

We asked expert portfolio managers for their views on the current state of the fixed income market. Here’s what they had to say.

The past few months haven’t been easy for bondholders. 2022 has seen unprecedented volatility in fixed income assets in addition to other headwinds like rising interest rates and spiking inflation. But there are bright spots – you just need to know where to find them. Our panellists discuss where they are finding some of their best potential opportunities.

Caution remains the name of the game

Gallery

“Given where valuations are and how cloudy the outlook is, I tend to focus more on active management.”

LGIM’s Marc Rovers delves into the joys and woes of European credit markets.

A case of bears and bulls

Raiffeisen Switzerland Senior Investment Specialist

Antonio del Vaso

Volksbank Banca Popolare dell'Alto Adige Head of Investment Center

Antonio del Vaso has been head of investment services at Volksbank – Banca Popolare dell’Alto Adige since June 2020. Before that he accepted the position of project manager for the restructuring of wealth management and, since 2014, has worked for major business consulting firms. He has managed high-impact change management projects and graduated in Banking and Finance.

Thomas Mugele

Merck Finck Privatbankiers Senior Portfolio Manager

Thomas Mugele is fixed income strategist at Merck Finck Privatbankiers. He has 25 years of experience in investment management and investment strategy and holds a bachelor’s degree in Banking and Finance from Cooperative State University Stuttgart. In 2011, he graduated as “Certified European Financial Analyst” (CEFA) at the German Association for Financial Analysis and Asset Management (DVFA) in Frankfurt. Thomas Mugele joined Merck Finck in 2019 and is now based in Stuttgart, Germany. Previously, from 1998 until 2019, he served as senior portfolio manager and head of fixed income strategy at Südwestbank there (1998-2019).

Marc Rovers

LGIM Head of Euro Credit

Marc is head of the Euro credit portfolio management team. He joined LGIM in May 2012 as a portfolio manager in the Pan European Credit team. Marc previously spent 12 years at Blackrock, first as a senior portfolio manager within Philips Investment Management in Eindhoven and then as Director, Investment Manager in London, where he was responsible for the non-financials management of investment grade portfolios and was a portfolio manager for two Asian credit portfolios. Marc started in the industry in 1995 as a portfolio manager at ABP investments (now APG). He graduated from Tilburg University, Netherlands with an MSc in Economics and is a Certified European Financial Analyst (CEFA).

Caution remains the name of the game

What do you think?

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Marc Rovers, Head of Euro Credit at LGIM

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Tackling the fixed income market with an active mindset

Investors are positioning themselves for a two-way market, stressing liquidity and looking for potential opportunity in investment grade credit, in our view.

Fixed income is experiencing a fundamental shift. As the world recovers from the pandemic, long-dormant inflation has come back into focus. We believe the legacy of monetary and fiscal policy responses to COVID-19 requires new thinking about how fixed income can be deployed in a portfolio. We believe global fixed income strategies that actively manage duration, sectors, credit and yield curve positioning are more important than ever given the current low yield environment, where sitting passively can lead to missed opportunities and potential losses.

If a company doesn’t manage its ESG profile properly, that obviously constitutes a potential risk going forward. Marc Rovers, Head of Euro Credit at LGIM

Opportunities abound Flexibility and a multi-sector approach are essential parts of a fixed income portfolio. In our view they are important in navigating the crosscurrents of the present market environment. Today, fixed income markets are being questioned around the impact of shifting policy and whether it could move into negative territory, with widening credit spreads occurring even as rates rise. Marc Rovers, Head of Euro Credit at LGIM, says, ‘This year has been a turbulent year for credit markets. Today’s dynamic market is very interesting from a value point of view, and spreads have widened to the point where credit is an opportunity.’ Raiffeisen Switzerland’s Senior Investment Specialist Yvan Roduit adds: ‘Current credit levels could present opportunities for investors. Increasing our allocation to investment grade bonds with a bit of cash has given a decent yield for a lower amount of risk.’ This is a boon for active investors, with increased volatility potentially meaning increased opportunity.

ESG consideration We believe, integrating ESG into fixed income can reduce portfolio risk and improve portfolio performance by seeking to help investors avoid assets that may be prone to credit rating downgrades, widening credit spreads and price volatility. According to Rovers, ESG is definitely a potential source of alpha but governance has been a key issue. ‘Environmental and social considerations have become a key part and at LGIM we take it into account in different ways. Our analysts use ESG criteria as one of the key inputs in their credit assessment. ‘For LGIM, it’s one of the business risks. If a company doesn’t manage its ESG profile properly, that obviously constitutes a potential risk going forward. We manage and we monitor our portfolios on an overall basis, and we also monitor most of them for ESG characteristics.’ Merck Finck’s Senior Portfolio Manager Thomas Mugele says: ‘Merck Finck has switched to a more sustainable approach of all core offerings two years back. We focus on ESG criteria, where we use an external partner for screening, but we also have an internal process where we have additional research and exclusion lists where we have a specific view on sectors. ‘We go a little deeper in our research and have even some more exclusions to avoid risks.’

Risk of recession Credit spreads are wider than the historical average and, particularly in the hybrid space, these spreads look to mitigate against the risk of a significant economic downturn. Antonio del Vaso, Head of Investment Centre at Volksbank, says, ‘When the market changes its view [and] the geopolitics and the central banks’ economic policy changes the actual situation, the government bonds get the advantage.’ Rovers adds: ‘The market is, as always, well ahead of it. It tends to price in a recession half a year or so before it actually happens and we can never be a hundred percent sure it’s actually going to happen – but what we can say is we believe a lot is priced in at the moment.’

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in association with

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ITA

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