- We expect full-year returns of between 5-7% for opportunistic fixed income, driven by yield
- Speculative-grade default rates triggered by commodity sectors
- Our portfolios have low exposure to the UK and potential Brexit fallout
The City National Rochdale opportunistic fixed income strategy’s focus on generating high levels of current income continues to be a winning strategy. With stabilization in commodity markets, the UK voting to leave the EU, sluggish global GDP growth, and our expectation for global interest rates to remain lower for longer, opportunistic fixed income is still expected to generate a 5-7% total return for the year.
In May of this year, global speculative-grade default rates surpassed the long-term average as many non-investment grade, commodity-centric corporations are grappling with restructuring operations and struggling to remain solvent. As such, 12-month forward default rates for the Oil & Gas industry are expected to be nearly 8.6%, with the Metals & Mining corporate default rate expected to be 10.2%. Interestingly enough, the aggregate default rate 12 months from now is expected to be just 4.2%. Therefore, excluding the commodity-related sectors, default rates are expected to remain below the long-term average, while the amount of risk compensation we receive remains elevated for both the U.S. High Yield and Emerging Market High Yield allocations. Quarter-end U.S. HY credit spreads of +594 basis points are slightly higher than the long-term average, while the quarter-end EM HY credit spreads of +617 basis points are significantly better than their long-term average. High income generating assets are very attractive in a world where very low interest rates have spread across Europe and Japan, and corporate top-line earnings growth is muted even though credit metrics remain relatively solid.
The opportunistic fixed income strategy continues to be well diversified from an issuer, asset class, and country exposure perspective. The strategy’s geographical exposure was nearly 60% to U.S.-domiciled assets, with just 3% exposure to the UK and 6% to the Eurozone. The strategy deliberately held nearly 9% in cash at the end of May in preparation for a potential surprise Brexit outcome. Cash holdings serve as a means to hedge potential price volatility and are available to take advantage of distortions in market prices. The Brexit vote created the potential for continued spread volatility. City National Rochdale expects this volatility to result in buying opportunities across our opportunity set.
The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This presentation is not an offer to buy or sell, or a solicitation of any offer to buy or sell, any of the securities mentioned herein.
Certain statements contained herein may constitute projections, forecasts, and other forward-looking statements, which do not reflect actual results and are based primarily upon a hypothetical set of assumptions applied to certain historical financial information. Certain information has been provided by third-party sources and, although believed to be reliable, it has not been independently verified, and its accuracy or completeness cannot be guaranteed.
Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as on the date of this document and are subject to change.
There are inherent risks with equity investing. These risks include, but are not limited to, stock market, manager, or investment style. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. Investing in international markets carries risks such as currency fluctuation, regulatory risks, economic and political instability. Emerging markets involve heightened risks related to the same factors as well as increased volatility, lower trading volume, and less liquidity. Emerging markets can have greater custodial and operational risks, and less developed legal and accounting systems than developed markets.
Concentrating assets in the real estate sector or REITs may disproportionately subject a portfolio to the risks of that industry, including the loss of value because of adverse developments affecting the real estate industry and real property values. Investments in REITs may be subject to increased price volatility and liquidity risk; concentration risk is high.
There are inherent risks with fixed income investing. These risks may include interest rate, call, credit, market, inflation, government policy, liquidity, or junk bond. When interest rates rise, bond prices fall. The yields and market values of municipal securities may be more affected by changes in tax rates and policies than similar income-bearing taxable securities. Certain investors’ incomes may be subject to the Federal Alternative Minimum Tax (AMT) and taxable gains are also possible. Investments in below-investment-grade debt securities and unrated securities of similar credit quality, commonly known as “junk bonds” or “high-yield securities,” may be subject to increased interest, credit, and liquidity risks.
Investments in emerging markets bonds may be substantially more volatile, and substantially less liquid, than the bonds of governments, government agencies, and government-owned corporations located in more developed foreign markets. Emerging markets bonds can have greater custodial and operational risks, and less developed legal and accounting systems than developed markets.
As with any investment strategy, there is no guarantee that investment objectives will be met, and investors may lose money.
Returns include the reinvestment of interest and dividends.
Investing involves risk, including the loss of principal. Diversification may not protect against market loss or risk.
Past performance is no guarantee of future performance.
The Standard and Poor’s 500 Index (S&P 500) is a market capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent U.S. equity performance.
The U.S. Treasury 10 year note is a debt obligation issued by the United States government that matures in 10 years. A 10 year Treasury note pays interest at a fixed rate once every six months and pays the face value to the holder at maturity.
The MSCI World Index captures large and mid-cap representation across 23 Developed Markets countries.
The Barclays U.S. Corporate High-Yield Index covers the U.S. dollar denominated, non-investment grade, fixed rate, taxable corporate bond market and includes securities with ratings by Moody’s, Fitch and S&P of Ba1/BB+/BB+ or below.
The Barclays Emerging Markets USD Aggregate Bond Index is a flagship hard currency Emerging Markets debt benchmark that includes fixed and floating-rate U.S. dollar denominated debt issued from sovereign, quasi-sovereign, and corporate EM issuers.
The Bloomberg CFETS RMB Index is an index replica of the trade weighted CFETS RMB Index, which tracks the yuan against 13 currencies.
The U.S. Dollar Index is an index (or measure) of the value of the United States dollar relative to a basket of foreign currencies.
Indices are unmanaged, and one cannot invest directly in an index. Index returns do not reflect a deduction for fees or expenses.