Matt Sheridan: We always look, when we build a portfolio, to find positive-yielding assets that have low to negative correlation. And in today’s markets, pairing US Treasuries with US high yield is a good starting point. But it’s not sufficient if you want to deliver a high level of income and take advantage of all the diversification benefits that exist.
Gershon, we’re coming to the end of 2020 and rolling into 2021. Which sectors are you most optimistic about generating income for your more aggressive income solutions?
Gershon Distenfeld: So Matt, as you know, the beauty of our strategy is that we get to look across all the different income sectors. And the one that has done, by far, the best over the past couple of years has been the US high-yield market.
And we still see attractive opportunities there, but it’s the wrong time to double down and put all of your eggs in that basket, as many investors tend to do when they look for income. This is exactly the time that you want to diversify, and we are investing in many opportunities outside of the US high-yield market.
So emerging-market debt, of all flavors, we think is pretty attractive. The weaker US dollar, fiscal stimulus, bilateral support all over the world [are] all contributing factors, in addition to more attractive levels than the US high-yield market.
MS: It’s not just EM. We also liked securitized assets in the US. Our confidence in the US recovery story to US balance sheets, confidence that the Fed will keep interest rates low and supportive to the US recovery story means that securitized assets look attractive for the investor who’s focused on the long term. Securitized assets being both residential and commercial.
GD: And even in Europe, we see opportunities: the financial space, banks, the subordinated part of bank capital structures. Not a very interesting equity story, as there’s not a lot of growth in banks, but that’s actually a pretty interesting fixed-income story. Much more predictable earnings from banks that can support the amount of debt that are on those balance sheets.
So all in all, this is the time that you want to diversify those sources of income. You don’t want to put all your eggs in one basket. And the strategy that had worked the best over the last couple of years—that being predominantly in the US high-yield market—is unlikely to be the strategy that works the best over the next couple of years.
MS: As the calendar year turns into 2021, we’re excited about the investment opportunities in some of the non-domestic US high-yield sectors to play offense and to take advantage of attractive yields and spreads in diversification, and limit idiosyncratic insolvency risks. Volatility equals opportunity. We think many of these uncertainties, we will have much more clarity in the first half of 2021.
