LQDB - Core Multi-Sector: Premium On Flexibility
2023-04-05 05:00:00 ET
Summary
- Finding an effective way to address reinvestment opportunities will be crucial.
- Multi-sector should be more tactical, with the return objective generally expected to be positive in absolute terms over a cycle.
- The available sectors can be similar, although likely with less emphasis on securitized markets where cash flows vary.
By Jason Pratt
Insurers may benefit from adaptability across sectors, quality, and - importantly - duration in the current environment.
With higher yields across fixed income in both home currencies and abroad, insurers have more options to consider while taking advantage of a strong fundamental backdrop in credit. That said, their ability to transition portfolios quickly into higher yields could be meaningfully constrained by unrealized losses. Finding an effective way to address reinvestment opportunities will be crucial.
For traditional core portfolios that tend to be credit-focused in Europe and the U.K., rather than stay the course, we think cash flows should be reinvested considering the options available across the spectrum of short-duration markets. Utilizing short-duration markets across high grade, high yield, and emerging markets debt, in our view, offers compelling yield across the curve and more effectively insulates from credit concerns, given the balance-sheet runway that remains for issuers.
Within core strategies, other tools can be leveraged in combination with short-duration credit, including agency residential mortgage-backed securities, where the market trades near par or even at a discount with attractive yield, high quality, and a better convexity profile. Municipals are another interesting option for diversification with quality and can make up for the lack of duration in shorter-tenor markets.
Multi-sector portfolios can mean different things to investors but, importantly, shouldn't imply a carte blanche approach. Multi-sector should be more tactical, with the return objective generally expected to be positive in absolute terms over a cycle. Multi-sector allows more flexibility not only across sectors and quality but also, importantly, duration. Including a mix of sectors such as EMD, collateralized loan obligations, non-agency RMBS, commercial mortgage-backed securities, currencies, private placements, and municipal finance provides a much larger toolbox within a well-defined risk budget. The total return objective means the approach will be more tactical for insurers looking to build the value of assets in their balance sheet.
Multi-sector can also work in buy-and-maintain portfolios where the focus is on yield and capital efficiency and where duration needs for liabilities must be managed. The available sectors can be similar, although likely with less emphasis on securitized markets where cash flows vary. Diversification of yield is really the underlying objective here in order to facilitate a more reliable and, ideally, more robust outcome for the liquidity trade-offs that may be taken.
In our view, rethinking core and the use of multi-sector fixed income should be a priority for 2023, to take advantage of unique markets in the front end of the curve where yields remain most compelling with high quality and potentially reduced volatility.
This material is provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice. This material is general in nature and is not directed to any category of investors and should not be regarded as individualized, a recommendation, investment advice or a suggestion to engage in or refrain from any investment-related course of action. Investment decisions and the appropriateness of this material should be made based on an investor's individual objectives and circumstances and in consultation with his or her advisors. Information is obtained from sources deemed reliable, but there is no representation or warranty as to its accuracy, completeness or reliability. All information is current as of the date of this material and is subject to change without notice. The firm, its employees and advisory accounts may hold positions of any companies discussed. Any views or opinions expressed may not reflect those of the firm as a whole. Neuberger Berman products and services may not be available in all jurisdictions or to all client types. This material may include estimates, outlooks, projections and other "forward-looking statements." Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed.
Investing entails risks, including possible loss of principal. Investments in hedge funds and private equity are speculative and involve a higher degree of risk than more traditional investments. Investments in hedge funds and private equity are intended for sophisticated investors only. Indexes are unmanaged and are not available for direct investment. Past performance is no guarantee of future results.
This material is being issued on a limited basis through various global subsidiaries and affiliates of Neuberger Berman Group LLC. Please visit www.nb.com/disclosure-global-communications for the specific entities and jurisdictional limitations and restrictions.
The "Neuberger Berman" name and logo are registered service marks of Neuberger Berman Group LLC.
© 2009-2023 Neuberger Berman Group LLC. All rights reserved.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
For further details see:
Core Multi-Sector: Premium On Flexibility