Fixed Income

What to Do with Fixed Income

In this issue of Insights, Keith Patton, Managing Director, Global Head of Unconstrained Fixed Income, BMO Global Asset Management (EMEA), discusses why Canadian investors searching for a more effective fixed income strategy should consider a non-traditional multi-sector approach.
April 2019

Keith Patton

Global Head of Unconstrained Fixed Income, BMO Global Asset Management

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In this issue of Insights, Keith Patton, Managing Director, Global Head of Unconstrained Fixed Income, BMO Global Asset Management (EMEA), discusses why Canadian investors searching for a more effective fixed income strategy should consider a non-traditional multi-sector approach.

 

The bond market, at the best of times, can be difficult for investors to navigate. In the current economic environment there exist cautionary indicators, such as yield curve inversions or employment rates, which have foretold recessions in the past, but at present are not yet indicating anything that severe.

Uncertainties and complexities are the new reality, as fixed income investors wrestle with the end of an era of central bank intervention. Of course, every cloud has its silver lining. In this case, the unprecedented environment has fueled extraordinary innovation by fixed income fund providers to satisfy continued demand for effective solutions from concerned institutional and retail investors.

BMO Global Asset Management has been successful and proactive, pulling together global resources and thought leadership to drive innovation and create new solutions that satisfy traditional expectations of the fixed income sleeve in most portfolios. This includes BMO Core Plus Bond Fund, for those seeking modestly higher income and more growth potential with a bias towards Canadian interest rate exposure, BMO World Bond Fund for clients seeking diversification away from Canadian interest rates, BMO Global Multi-Sector Bond Fund, an income-oriented, mandate achieving well diversified credit exposure from within the main credit asset classes that can be considered a core component of a forward-looking bond portfolio, and BMO Global Absolute Return Bond Fund (GARB)*, to act as an asset allocation vehicle for clients looking to de-risk but still maintain a highly flexible strategy towards market allocations. These strategies offer our clients the ability to emphasise exposures to the different drivers of return (interest rates and credit) to meet their specific needs as economies move through the cycle.

These products are displayed in the chart below:

True Diversification Requires Dexterity

For all our funds with a credit emphasis, the starting point, not surprisingly, is diversification. We take an unconstrained approach to our investment universe; however, unconstrained doesn’t mean risky and reckless but diversified and risk controlled. We achieve this diversification by investing across by investing across global marketplaces, whether it is euro, sterling, US and Canadian dollar denominated, and all the sectors within those geographies, and all credit ratings with a bias towards BBB/BB (crossover).

Generally, fixed income managers hoping to achieve a multi-sector approach will allocate to the major asset classes, investment grade, high yield, emerging debt, investment-grade securitised, and loans, and run them as a single-asset-class fund. At BMO, we exploit the integrated structure of our credit teams to seek out anomalies from within these asset classes, leaving aspects of these asset classes that do not meet our requirements. One such anomaly is in the crossover space where passive portfolio construction rules and investment restrictions create opportunities, as issuers move between investment-grade and high-yield rating categories forcing investors to buy or sell as the issuer moves between the investment-grade and high-yield indices.

An unconstrained approach also has distinct advantages, as we can adjust our exposure to different interest rate markets to benefit from or avoid the many different fiscal-monetary-policy, political, growth and inflation cycles across a variety of global markets.

Your clients might be surprised to know that there is very high correlation, and therefore little diversification, in owning both Canadian and global bond funds hedged to Canadian dollars – both of which are typically long duration with little credit exposure. A multi-sector or global absolute return strategy can change the profiles dramatically, making them a meaningful complement to a traditional Canadian or global bond fund.

Our Global Absolute return fund has the flexibility to take a short position to benefit from rising yields or rising credit spreads, providing real diversification benefits to a traditional index-based strategy.

 

Bottom-Up Focus on Issuers – Not Asset Classes

By not restricting our investment decisions to allocations between fixed income asset classes, we place greater emphasis on security selection. This “bottom-up” approach to achieving a desired amount of credit risk avoids some of the less attractive characteristics that are often present during the cycle. As an example, the high proportion of low-rated CCC securities in the high-yield index are less attractive towards the end of an expansionary cycle, as these securities will become distressed and default as the economic environment deteriorates. Similarly, within investment-grade markets, the most credit-worthy bonds – AAA and AA-rated securities – offer limited credit premium. As such, our portfolios tend to take a focused approach around BBB within investment-grade and higher-quality BB securities from the high-yield asset class.

In addition, this security selection approach seeks to ensure that a higher proportion of our portfolios are allocated towards those bonds that we consider to offer attractive risk/reward relative to the market. The alternative of allocating to asset classes usually means accepting a high number of very small holdings, many of which do no more than help “fill a bucket.”

Our multi-sector approach provides value-add to your fixed income investments by embedding yield from a global universe of corporate securities, adding diversification, and setting an appropriate risk management strategy that works with the overall portfolio though a combination of “bottom-up” security selection and top-down allocation to the core drivers of fixed income portfolios, interest rate and credit exposure. The benefit to your clients is more sophisticated and deeper diversified exposure that provides true diversification, peace of mind, and the ability to optimize the return of their fixed income allocations over the long term.

BMO Global Asset Management: Core Active Fixed Income Mandates

  • Core Canadian fixed income that adds yield and diversity with its Plus (i.e., foreign, emerging market debt, high-yield bonds
  • Non-traditional levers to protect from volatility and to hedge risk
  • ETF Series: ZCPB • Advisor Series: GGF99159 • Series F: GGF95159
  • BMO Core Plus Bond Fund Monthly Update
  • Offers flexibility across 5 sectors, based on relative value, to capitalize on market inefficiencies: investment-grade, high-yield, emerging market debt, securitized and government bonds
  • Prudent use of credit as buffer against rates
  • Attractive and relatively stable level of income
  • ETF Series: ZMSB • Advisor Series: GGF99162 • Series F: GGF95162
  • BMO Global Multi-Sector Bond Fund Monthly Report
  • Focuses on minimizing different sources of risk, such as interest rate, credit, sovereign, and foreign exchange, to best deliver long-term outperformance
  • Low correlation to major asset classes can enhance diversification benefits and improve overall
  • Exposure to the highest quality global bond issuers
  • Advisor Series: GGF99716 • Series F: GGF95716
  • BMO World Bond Fund Sales Aid
  • Access to a global universe of bonds – opportunity for higher returns relative to traditional Canadian bonds
  • Strategic allocation to shorter-dated securities – providing greater portfolio protection by reducing the impact of cyclicality
  • Flexibility – ability to generate returns in both a positive and negative market environment (including rising rates) through short or negative duration
  • Diversification – both within corporate bonds and among overlay strategies to improve risk/return profile
  • Core focus on capital preservation – greater risk avoidance than traditional bond funds and alignment of outcome
  • Series F: JHI202
  • BMO GARB Fund Profile
  • Managed by PIMCO Canada, a strategy focused on generating predictable monthly income
  • Invests in asset classes that can buffer against rise in rates; flexible and tactical access to global investment-grade, high-yield, emerging market debt
  • The same team and process as BMO Monthly Income Fund, but more credit focused with higher yield
  • ETF Series: ZGSB • Advisor Series: GGF99736 • Series F: GGF95736
  • BMO Global Strategic Bond Monthly Report

* Important information about the BMO AM Global Absolute Return Bond Fund is contained in the offering memorandum including. Eligible purchasers will need to qualify as “accredited investors” and “permitted clients” under applicable Canadian securities laws.

Disclosures:

This article is for information purposes. The information contained herein is not, and should not be construed as, investment advice to any party. Investments should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance.

Any statement that necessarily depends on future events may be a forward-looking statement. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Although such statements are based on assumptions that are believed to be reasonable, there can be no assurance that actual results will not differ materially from expectations. Investors are cautioned not to rely unduly on any forward-looking statements. In connection with any forward-looking statements, investors should carefully consider the areas of risk described in the most recent simplified prospectus.

Important information about the BMO AM Global Absolute Return Bond Fund is contained in the offering memorandum including, a detailed description of the Fund’s investment objectives, investment strategies and portfolio metrics. This document pertains to the offering of the funds described in this document and in the Information Memorandum only in those jurisdictions and to those persons where and to whom they may be lawfully offered for sale, and only by persons permitted to sell such Shares. Eligible purchasers will need to qualify as “accredited investors” and “permitted clients” under applicable Canadian securities laws. This document has been prepared for information purposes only and should not be construed as a solicitation for, or offering of, an investment in securities in any jurisdiction where such offer or solicitation would be prohibited. While the information contained in this document is believed to be reliable, no guarantee is given that it is accurate or complete. This document is not, and under no circumstances is to be construed as an advertisement or a public offering of the Shares described in this document or the Canadian Offering Memorandum or Information Memorandum in Canada. No securities commission or similar authority in Canada has reviewed or in any way passed upon this document or the merits of the Shares described in this document or the Canadian Offering Memorandum or Information Memorandum, and any representation to the contrary is an offence. Prospective investors are advised to read the offering memorandum and to consult with an independent financial advisor prior to making any investment decision based on this document.

BMO Global Asset Management is a brand name that comprises BMO Asset Management Inc., BMO Investments Inc., BMO Asset Management Corp., BMO Asset Management Limited and BMO’s specialized investment management firms.

Commissions, management fees and expenses (if applicable) all may be associated with investments in mutual funds and exchange traded funds (ETFs). Trailing commissions may be associated with investments in mutual funds. Please read the fund facts, ETF Facts or prospectus before investing. Mutual funds and ETFs are not guaranteed, their values change frequently and past performance may not be repeated. For a summary of the risks of an investment in the BMO ETFs, please see the specific risks set out in the prospectus. BMO ETFs trade like stocks, fluctuate in market value and may trade at a discount to their net asset value, which may increase the risk of loss.

BMO Mutual Funds are offered by BMO Investments Inc., a financial services firm and separate entity from Bank of Montreal. BMO ETFs are managed and administered by BMO Asset Management Inc., an investment fund manager and portfolio manager and separate legal entity from Bank of Montreal.

®/™ Registered trade-marks/trade-mark of Bank of Montreal, used under licence.

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