Value is in the eye of the bondholder
US-headquartered Allspring Global Investments made an impressive showing at Asia Asset Management’s (AAM) Best of the Best Awards 2023. The firm received awards in the best performing US Credit, Investment Grade (3 years and 5 years), and US High Yield (3 years and 5 years) categories. In an interview with AAM, George Bory, chief investment strategist for fixed income at Allspring, highlighted the firm’s comprehensive fixed income offerings which span from money markets at the front end of the curve, to global fixed income, and cover a broad range of strategies up and down the taxable and tax-exempt scale.
Bory highlighted Allspring’s strengths in liquidity and short-duration management, which extend from overnight to five years. The company’s credit-intensive strategies, he notes, encompass investment grade, high-yield, and structured products, and allow for customisation in terms of risk and duration. He also emphasises the growth of Allspring’s climate transition and ESG investment strategies, which includes analysing companies across investment grade and high-yield segments to provide clients with a full spectrum of strategies catering to various investment objectives and risk preferences.
“Our size and scale, alongside our bottom-up portfolio building approach allows us to be agile in fixed income investments,” he says, stressing the importance of individual security selection, predictability of cashflow, alignment with client objectives, consistent alpha generation, tight risk controls and efficient risk-adjusted returns.
“In addition, our competitive advantage lies in applying these principles across various market segments such as ESG, traditional taxable and tax-exempt channels in the US municipal market,” he adds.
Portfolio strategy and research
With corporate credit a cornerstone for Allspring’s fixed income portfolios, research is conducted in-house to determine the creditworthiness of issuing entities and the value proposition of bonds. Active management and a bottom-up approach is also a key part of the business, focusing on matching unique cashflow streams with clients’ liabilities.
“We also consider ESG factors using our proprietary ESG IQ to assess the ESG variables of bond and loan borrowers. The research team is central to this process, ensuring consistency and methodology to drive returns,” he explains.
In the high yield sector, the focus is on companies with higher leverage and more variable cashflow, where fundamental analysis and market prices are critical. For US investment grade credit, the process is similar but focuses on marginal trends in credit quality, credit migration and monitoring market risks. Indeed, Allspring has over 50 analysts making up global fixed income research team with coverage spanning across all sectors and regions. And while some analysts may cross over between sectors depending on industry volatility or concentration, flexibility and nimbleness, says Bory, are essential in the research team structure, allowing for continuous and smooth risk assessment.
And while in Europe and Asia investments cover a wide range of sectors and risk profiles, in Asia, investments tend to be more opportunistic and dollar-denominated, with local currency allocations being more tactical.
“The focus remains on currency and credit considerations as additional layers of decision making,” Bory adds.
The return of fixed income
Commenting on the overall current macro environment, Bory is in no doubt that fixed income is back. Where low interest rates forced investors to take on more risk in less liquid segments of the market resulting in negative returns last year, Bory explains that bonds are performing as advertised.
“Bonds are providing investors with three important benefits: generating income, acting as a buffer against future volatility, and diversifying portfolios. And with bond yields higher than they were last year, expected returns for the asset class are much better,” he says.
Overall, Bory believes that fixed income is once again becoming relevant, and expects mid to high single-digit, and even double-digit total returns over the next one to five years. However, the challenge, he says, for clients within fixed income markets will continue to be inflation and liquidity, as central banks battle to contain inflation via monetary policy. The global economy, he says, remains vulnerable to exogenous shocks that could stress supply chains and create more friction.
But out of challenges come opportunities. And Bory retains a glass-half-full attitude, as bonds offer predictability and the ability to meet immediate cash requirements without taking on excessive risk. In the short-term high-yield market, he believes a winning strategy involves generating income that can outperform inflation while controlling capital loss, achieved through a combination of deep fundamental research, downside protection and avoiding defaults.
“The focus should be on staying within the triple Bs, double Bs and single Bs while excluding triple Cs. We believe this approach will result in a high and predicable source of income within the portfolio,” he concludes.