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Recently, there is renewed optimism around high-yield bonds following the Fed’s announcement of measures to help keep the market functioning. Sarah Riopelle, Vice President and Senior Portfolio Manager, Investment Solutions, breaks down how she and her team are taking advantage of these opportunities to help position portfolios for long-term success.


Hello and welcome to the download. I’m your host, Dave Richardson, and I’m joined again on Mondays by Sarah Riopelle, who at RBC Global Asset Management manages a large suite of portfolio solutions across various risk levels for different types of investors. And what I thought I’d get into with Sarah today: a lot of attention on the stock markets in terms of media coverage of what’s going on around Covid-19 and the relationship with markets and the global economy, but I wanted to focus on fixed income and some of the ways portfolio managers can maneuver around different types of fixed income to position portfolios for long-term success. So, Sarah, welcome today. And what have you been thinking about and doing around fixed income in the portfolios that you’re looking at?

Thanks Dave. Well, we work very closely with Dagmara, who’s our head of fixed income and our fixed income team when we’re managing the fixed income component of all of the portfolios. I wanted to focus my comments today on high yield specifically, because we have been making some changes in that part of the portfolio and we’ve been concerned about value valuations in some areas of fixed income for quite some time, including high-yield and emerging market bonds. The way we measure valuations is to look at spreads relative to the comparable government bonds, the yield difference between a high-yield bond, as an example, and a government bond. So when spreads are tight — that means there’s a small difference between those two yields, — high-yield investors are not being well compensated for the extra risk that they are taking to own those investments. And that’s not a good time to be adding to high-yield positions. So for over the last couple of years, spreads have been quite tight. So we haven’t been particularly positive on high yield as an investment. But when spreads are wide and investors in high yield are receiving a lot of extra yields over the comparable government bond, they’re being rewarded for the risk that they’re taking on by holding those instruments, and we think that’s a good time to buy high yield. And so if you look at the current period, the stock market peaked on February 19th. High-yield spreads at that time were 427 basis points. But by the time the stock market bottomed on March 23rd, those spreads had widened to over a thousand basis points. So this is a pretty attractive entry point compared to history because the long-term average spread for high yield is about 500 basis points, if you look back a couple of decades. So we began adding to our high-yield positions in mid-March as spreads were widening to those levels and we continue to incrementally add to those high-yield positions for the next few weeks. Today, spreads are down to about 800 basis points for high yields or they’re down considerably from the peak, but they are still much wider than they were pre market crash. A lot of the improvement that we’ve seen has happened after the Fed announced a number of new programs to keep the market functioning. So among the moves, it was an open ended commitment to continue to buy assets, including investment grade government bonds for the first time. They announced that a couple of weeks ago. And the Fed has also made it clear that they would be buying some high-yield assets like fallen angels. Those are bonds that are downgraded from investment grade to more high-yield status because of the crisis. And those are assets that the Fed has said they will go into the market and buy, and try to support that market.

And I think one of the things that investors should take away — and I am very careful to use that term, investors, because when you’re seeing spreads move around as they have, there are opportunities to trade, there are opportunities to speculate, but what you’re really doing in managing a portfolio as an investor is you’re trying to position your portfolio for success over longer periods of time. This is not about getting this right over the next one, three, five days. It’s getting it right over the next one, three, five years, correct?

Yes absolutely. And what we’re trying to do is take advantage of opportunities as they present themselves. So for example, the valuations in high yield have become a little more attractive so that we can build positions to prepare the portfolio for the recovery and for the next one, three, five years. So we think that we’re well positioned to produce strong return over the medium to long term. But as we are building those positions over the near term, given the risks and the unknown over the next two, three, four or five weeks there, it could create a little bit of additional volatility right now. But we’re willing to take that on because we think that we are really positioning the portfolio for strong returns over the long term.

And it could even create some new additional opportunities for you as well?

Absolutely. Which is why we’re incrementally adding to positions. We’re not doing all at one time. We want to add little pieces here and there as the opportunities present themselves.

Investing is about being smart. Sarah, thank you very much for your time today. Very insightful!

Great. Thank you.


Recorded April 27, 2020

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