How Balanced Income Can Help in Today’s Markets
If clients have income needs, then it makes most sense today to look at a balanced approach.
A balanced approach to income generation in today’s market offers about 70 percent of the yield of a US high-yield-only portfolio. That’s a pretty attractive distribution that we can build that protects much better against potential drawdowns due to credit-sensitive investments.
We’re 10 years into the cycle. The yield curve’s inverted. Valuations aren’t very provocative in US high yield. So, if we can build a portfolio that distributes 70 percent of that income, and do it in a balanced fashion, that makes a lot of sense in today’s markets.
Historically, when credit spreads widen in the high-yield world, they often mean revert very quickly and very sharply. And that’s where having a concentrated position in US Treasuries, preferably in a six-to-nine-year portion in today’s market, makes a lot of sense—to deliver income in a balanced fashion to protect against potential unforeseen credit-spread stress.
This is the type of market where you want to protect against downside for unforeseen geopolitical risk that investors aren’t quite fully aware of, potentially, yet. Limit how much concentrated exposure you have in issuers that could potentially default.
Other techniques when the US Treasury yield curve is flat: Move away from long-duration bonds. We don’t think the income per unit of duration makes a lot of sense to own 20- and 30-year US Treasuries. Concentrate your Treasury exposure in the six-to-nine-year portion of the curve. That offers much better yield per unit of duration.
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The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.
When Senior Vice President and Portfolio Manager Matthew Sheridan joined AB in 1998, he'd been drawn by its reputation for fundamental research. That commitment to rigor on both the fundamental and quantitative side remains front and center at AB today. As a Portfolio Manager for Income Strategies, Sheridan has been instrumental in evolving AB's investment practice to manage risk and intentionally build global and multi-sector portfolios that are generally currency hedged and focus on delivering a high level of income consistently over the long term.
Sheridan's investment philosophy centers on a research-driven, global and multi-sector approach to portfolio construction in the quest to provide clients with a high level of income. This necessitates an intense focus on using technology to weed out unattractively priced bonds, and team collaboration to reduce idiosyncratic risk.
"We want to work well together," Sheridan says of his team. "It's not one person picking bonds in a silo," For him, AB's solid process, its focus on tech, and its long-term view create more opportunities for alpha and differentiate AB from its peers.
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