For an overview of fixed income opportunities at the end of 2017 and a perspective on what’s ahead in 2018, watch our latest video shorts with Matt Freund, Co-CIO and head of Fixed Income Strategies. They’re part of our new Ask the Portfolio Manager series.
Highlights of the interviews follow.
The interesting opportunities, according to Freund, include out-of-favor areas such as retail, pharmaceutical and communications—“these are areas which are very, very dicey, where risk management is crucial but where we think there could be some nice long-term opportunities.” And the team likes “parts of the structured product and loan markets along with parts of the convertible markets, as well.”
Freund comments on several concerns—some of which may not materialize—but, he says, nonetheless require devising strategies in an effort to protect shareholders.
- High debt levels around the world. “When you have high levels of debt, it means you have a much smaller margin of safety that a policy mistake or a disruption can amplify.”
- Inflation. A return of inflation would “force central banks’ hands in a lot of ways and force them to raise rates even though the economies around the world might not be strong enough to do so.”
- Non-U.S. developments including global central bank policy. “If central banks around the world were to tighten aggressively, we think we would feel it here.”
- Liquidity. “Whether it’s momentum strategies, whether it’s risk parity strategies, whether it’s some of the short volatility strategies, they all depend upon a buyer being there when they need it and that’s not assured.”
“What impacts the front end of the curve—two or three years—is very different than the long end of the curve out from 10 to 30 years,” Freund explains.
“While the front end of the curve is impacted by Fed policy, the longer end of the curve is dominated by the outlook for inflation and long-term growth expectations, GDP growth…until we see inflation become a problem or growth really achieve its escape velocity, we think the back end of the curve will be surprisingly well behaved,” he says.
Freund lists three differences between Calamos’ active management of fixed income funds and passive funds:
- Risk. “When we manage portfolios at Calamos, we really focus on the risk we’re taking on our clients’ behalf and we want to make sure we’re well paid for the risks. If you’re a passive investor, you are going to be getting securities because they’re in the index whether they’re risky or not, whether you’ve paid for the risk or not.”
- The composition of the indices. “On the equity side, most equity indices are capitalization-weighted—the larger the companies, the larger the share of the index. So large successful companies, very competitive, world-class companies have a greater share of the index. On the fixed income side, it’s the opposite. You have the most exposure to the most irresponsible borrowers, the ones that are in the market all the time.”
- The changing nature of the indices. Indices change over time. “I’ve been in the business since the late 1980s,” says Freund. “Back then, [government bonds] and agencies were less than half of the broad indices. Now they’re just under 70%. I’m not sure that you should change your outlook and your criteria just because the underlining index changes.”
The bond market isn’t “one single monolithic homogenous sort of market,” Freund says. Investors have a choice between maturities, currencies, structures, rates and options, among other differences.
“There are three broad types of fixed income managers,” according to Freund. “There are the very low tracking error—the closet indexers of the world. There are the bigger macro players, that’s the second group. And then there’s the third group and that’s us where we really focus on understanding risks, doing fundamental research, and building portfolios one security at a time.”
Freund describes the team’s contrarian approach. “You can be early to a trade or you can be late…What you’ll see us do is once we’ve identified themes and companies and securities that we like, we will generally lag into them slowly but we will be buying on the way down and sometimes it’s painful.
“But, what we found is that leads to strong returns over time,” says Freund.
Financial advisors, for more information about our approach to fixed income or about Calamos Total Return Bond Fund or Calamos High Income Opportunities Fund, talk to a Calamos Investment Consultant at 888-571-2567 or email firstname.lastname@example.org.