Most core bond strategies have corporate bond exposure. However, there may be a compelling opportunity to overweight the corporate bond sector.
The credit market has performed well in 2024, creating an interesting investment opportunity. Notably, spreads have tightened and corporate profitability remains very strong.
“We’ve seen strong earnings in general over the course of the year,” said Jay Small, portfolio manager at Fidelity Investments, during VettaFi’s symposium on Oct. 24. “We’ve also seen very few downgrades from rating agencies. So credit quality has remained strong.”
“The one-year return for corporate bond markets is actually about 13%,” said Craig Altholz, client portfolio manager at Invesco, during the symposium.
Additionally, many portfolios may be underweight fixed income due to the strong returns generated by equities in 2024 to date.
“As equities increase, if you’re in a balanced portfolio, say, your typical 60/40 type portfolio. If that 60% moves higher than 60%, you have to sell those equities to then buy more bonds. So that’s been a tailwind as well [for corporate bonds],” Small said.
Corporate Bond ETFs to Consider
The Invesco Total Return Bond ETF (GTO ) invests in more than just corporates, including Treasurys and other fixed income securities. However, the Invesco ETF is structurally overweight corporates compared to the benchmark.
To generate alpha in that type of an asset class, one has to be thinking about how to capture the upside, Altholz said.
Invesco thinks about doing that in two ways. First, GTO never aims to be the best-performing fund in the category, because that increases the risk that at some point the fund will also be the worst one in the category, Altholz said.
“What we’re trying to do is be top quartile consistently in up markets by hitting singles and doubles. … Then kind of tread water, be towards the median, in down markets, which is about 10% of the time,” Altholz said. “If you can do that consistently, then over time what you’ll have is a strategy that is top quartile to top decile on both total return and risk-adjusted return. That’s really what we’ve been able to do.”
The Fidelity Corporate Bond ETF (FCOR) has more of a concentrated focus on corporate bonds. Like GTO, FCOR is also actively managed.
“The core of what we’re doing is bottom up fundamental analysis,” Small said. “Craig’s point on singles and doubles really resonates. That’s what we’re trying to do every day. We’re trying to do the fundamental credit analysis, grind out the small returns here and there, and generate alpha through that active management over time.”
Advantages of Active Management in Fixed Income
Altholz said he would encourage all investors to look at active management in fixed income.
“In a lot of parts of the market, like core, even the median active manager is able to add value through active management,” he noted.
GTO, with an experienced portfolio management team at the helm, can fit as a set-it-and-forget-it strategy to use in portfolios.
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