Morton Olsen, Head of Multi-Sector Portfolio Management, Northern Trust Asset Management, and Colin Robertson, Head of Fixed Income, Northern Trust Asset Management, discuss their 2021 market outlook update and opportunities in fixed-income.
When the economy began to recover from the pandemic, there was a spike in inflation well over 2% in 2021. Robertson advises investors to anticipate that the volatility present so far in 2021 will persist throughout the year, and eventually settle down somewhere in 2022. After that inflation settles, low inflation will persist, despite government aid and monetary accommodation by the U.S. central bank.
With these projections in mind, there are important challenges to be aware of in the fixed-income market. With a solid understanding of the state of rates and yields, investors can meet these challenges with the right decision making. The most attractive investment in the fixed-income market currently is a high yield investment. The average monthly returns for an allocation to high yield fixed-income for all time periods are roughly the same as that of global equities’.
Robertson explains, “What’s really intriguing is when global equities are positive, you get a lot of the upside of that return, but you get much less of the downside… So on a risk adjusted basis, high yield fixed-income is very attractive. In fact, being most risky of the fixed-income asset classes, but least risky of risk asset classes makes it a desirable position in anyone’s portfolio.”
The high yield market has never been of higher quality, and it’s an attractive asset class for a number of reasons. Even though it’s the riskiest of the fixed-income asset class, its risk level has been dropping.
“We have a safer type of market in high yield, and a market that is unlikely to spike in the negative direction,” says Robertson. Moreover, investing in cash, ultra-short duration fixed income, and short duration fixed income can be combined to segregate the client’s liquidity pool.
“Money market funds are used for immediate liquidity needs, ultra-short funds are used for 6-12 months liquidity needs, and short duration bonds funds are used for liquidity needs that are outside 12 months,” says Olsen. Ultra-short and short duration fixed income strategies offer potential for a higher yield than money market funds, focus on capital preservation, and prioritize risk management.
Northern Trust Asset Management is a leading global investment manager with over one trillion dollars of total assets under management. Northern Trust prioritizes their client-centric culture, which is rooted in its fiduciary history.
To learn more, register and watch Northern Trust Asset Management’s presentation, Mid-Year Check: How to Improve Portfolio Income as the Economy Surges.
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