Demand for multi-strategy fixed income held up amid a challenging time for fixed income in the last six months, according to Alex Johnson, head of multi-strategy for fixed income at BNP Paribas Asset Management.
He said the US 10-year yields ratcheting up to the 3% mark has been unforgiving to fixed income indices, and portfolios benchmarked to these indices have experienced a similarly turbulent ride.
Johnson told Citywire Asia that multi-strategy absolute return fixed income products, the subset not benchmarked to indices, have relatively held their own during this time.
He said the best performing multi-strategy absolute return fixed income managers during this period have been the ones that are nimble, which typically have liquid, highly diversified portfolios.
In terms of macro trends and the outlook, Johnson said: ‘We are of the earnest opinion that global growth being synchronous, central bank policy normalization is likely upon us.’
‘With that, global yields should tend higher, and it quite likely that this path to rate normalization will be paved with more bouts of elevated volatility.
‘We think the ability to manage this rise in volatility and the ability of profit from rising rates will be critical to performance.’
Many fixed income indices have turned negative in recent month, in what could be a systemic turn, as central bankers globally ponder over the timing and pace of policy normalization, Johnson said.
However, fixed income investors are seeking to distance their portfolios from the performance of fixed income indices.
Meanwhile, the secular decline in yields globally has also meant that it is a challenging environment for generating income and many multi-strategy fixed income portfolios have come to rely on credit sectors, lower down the capital structure, to compensate for the income erosion.
The reliance on credit sectors not only elevates the risk profile of multi-strategy fixed income portfolios but also renders it further correlated to equities and other risk sectors.