Active management can help navigate an environment of anticipated market volatility, Fed policies, inflation, and the war in Ukraine, according to Matthew Bartolini, head of SPDR research at State Street Global Advisors. It can particularly help with investors’ fixed income allocation.
“Active management works well within fixed income, particularly in this given market environment,” said Bartolini at Exchange: An ETF Experience 2022. “In 2021 we saw 86% of intermediate core plus managers beat their benchmark. And so far, the results in 2022 have been pointing upwards as well.”
Speaking with NYSE’s Judy Shaw for ETF Leaders, powered by the New York Stock Exchange, Bartolini explained that “bond portfolios right now are really challenged.” At the time of the discussion (April), the Bloomberg Aggregate Bond Index “was down roughly 8%,” which was “worse than the three worst years combined.”
The yield on passive index core aggregate structures was also well below expected inflation over the next four to five years, so according to Bartolini, an active fixed income manager can help. With an active manager, an investor can change their duration profile, go into different sectors, and “utilize different structures like senior loans that have a yield above 4.5%, but also have a duration of only .25 years, because they’re adjusting and they’re floating.”
A Holistic View of Portfolio Construction
When constructing portfolios, Bartolini believes that financial advisors should not only “take a holistic view on both the equity and fixed income side,” but they should also “incorporate some alternatives.”
“We are witnessing a higher stock and bond correlation right now and alternative assets can help mitigate some of that and actually improve the diversification profile,” Bartolini said.
Within equities, Bartolini thinks advisors should “still have a bit of a defensive bias but not go risk off.” They should “trim beta exposure down a little bit,” while focusing on quality and value stocks. Within fixed income, advisors should be mindful of their duration profile.
The one sector State Street has “the most conviction on right now is senior loans, just given their floating rate profile, seniority, [and] capital structure.” There’s also that 4.5% yield, which Bartolini said is “above the expected inflation rate over the next four to five years.”
“That’s something you can’t say within traditional core bonds,” Bartolini added.
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