Risk and reward

Category: Asia, Global

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Terry Moore, fixed-income portfolio specialist, T. Rowe Price, tells Asia Asset Management how the US fund manager’s Global Multi-Sector strategy can provide institutions with both diversification and yield.

Asia Asset Management: Given the ongoing low interest environment in developed markets such as the US, Europe and Japan, how vital is a substantial emerging markets weighting to a yield-seeking fixed-income portfolio?

Terry Moore: We still see the opportunities in emerging markets. Spreads have tightened year-to-date so far in 2014, but we think spreads could continue tightening. If you look at them relative to either US investment-grade or US high-yield, or even euro, they’re still wide compared to the long-term averages.

Mexico is one of our favourites, basically because it’s tied to US growth, and also the energy advantage that the US has is good for Mexico. The reforms that the new president has been pushing for, covering everything from banking to telecoms, to education to energy, make it a great opportunity. Brazil is interesting at the moment, mainly due to valuation. The country still has issues with low-growth and high-inflation that they’re dealing with, but the valuation levels just became so attractive last year that we rotated in.

How does the investment philosophy of T. Rowe Price’s Global Multi-Sector strategy allow you to take advantage of such opportunities?

The first thing that’s very important to us is that we have a global research platform that is comprised of 47 credit analysts based across the globe in Baltimore, London and Hong Kong. We work very closely with the 126 equity analysts that we have based across the world as well. We believe that research platform gives us the best bottom-up ideas that go into every portfolio.

In the Global Multi-Sector area, what we want to do is combine those great bottom-up ideas that we’re getting from the analysts with a top-down macro view, and bring it all into one portfolio. It’s also diversified, in which I mean across geographies, capital structure and across 12 fixed-income sectors.

From the top-down side, we want to be able to allocate tactically between fixed income sectors, where we see relative value opportunities. Last year, for example, the great relative value opportunity was emerging markets, as they significantly underperformed after the so-called ‘Fed Taper Tantrum’. In our Global Multi-Sector portfolio we’ve been maintaining a decent weight in our liquidity bucket as we were waiting for an opportunity like that to take place. So in the latter half of 2013 we rotated into emerging markets, which has been a nice trade so far in 2014.

How can T. Rowe Price customise a Global Multi-Sector strategy according to an institution’s yield requirements and risk appetite?

We have the ability to customise these portfolios based on client needs. They might say they really like the basic strategy, but perhaps they want a shorter duration version. So we created a zero to four year range custom duration Global Multi-Sector strategy for that particular client. We can construct it at, say, two years duration to show them the type of yields and spreads they could expect in this portfolio.

Another example would be, taking it to the far extreme on the other side, someone might want all high-yield and emerging markets. They may not want to add more investment grade to their fixed income allocation.

Then there’s everything in between. There are some investors that can’t use certain instruments: maybe they don’t want bank loans, or maybe they can’t use non-domestic currency exposure so we exclude the EM local. We currently manage all of these different fixed income sectors for institutional clients around the globe, so we can simply mix and match the various sectors and alpha levers to meet a client’s specific needs.

If it’s a smaller client they might prefer the off-the-shelf strategy but if it’s a very large client, with very specific needs, they will ask us to customise for them. We’ve built the infrastructure over the past several years to be able to manage many different customised portfolios.

How does T. Rowe Price view interest rate volatility going forward this year, especially in the light of the US Federal Reserve winding down its bond-buying stimulus programme?

On Fed tapering, we’re in line with the market consensus of US$10 billion per month. But think about the market environment in late autumn when the Fed is finished tapering, the market is going to start seriously wondering when the Fed will start increasing short-term interest rates – it will focus like a laser. There are a couple of points to keep in mind here: not only when the Fed starts, but how fast the pace of tightening will be. There’s the lift-off date, there’s the pace of tightening, and then there’s also the debate right now over the terminal rate – at what level does the Fed consider its long-term neutral rate?

At the end of the year when the discussion shifts to this, there is the possibility for more volatility in interest rate markets. That is unless the Fed does a good job of clearly telegraphing their intentions via its communication policies, and we think that Janet Yellen will likely want to enhance this.

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