Market Insights

Although buying individual bonds may seem compelling in the current environment, understanding these under-the-surface risks is essential to choosing the right investment solution and ensuring investment portfolios can generate the best value, especially for long-term investors.

In this new series, we summarize notes from the trading desk to provide a brief overview of the macroeconomic environment and examples of our positioning in our strategies. This past quarter, contradicting economic data sparked a tug-of-war between inflation and growth, and markets priced in the projected "higher-for-longer" environment as we navigate continued uncertainty.

Despite disappointing recent performance for bonds, pension plans find themselves in an overfunded position for the first time in years. As many plan managers look to safeguard these gains through liability-driven investing, we believe fixed income - and active credit strategies in particular - can play a role in de-risking portfolios further.

The third quarter ushered in a broad-based selloff, as central bank projections of a higher-for-longer interest rate environment, fiscal deficit concerns, and unfavorable supply-demand dynamics reignited interest rate volatility. While this may make fixed income investors weary of what's to come, in a series of charts, we highlight why we believe high-quality credit is more attractive than it has been in a long time.

Central bank policies and their effect on economic activity and growth is continually creating dislocations in credit markets. Our research team highlights how we are opportunistically acquiring high-quality bonds in less understood areas of the financials sector and realizing profits through highly active tactical management.

In response to the unprecedented speed of rate hikes and tumbling bond valuations, many investors have turned to GICs for their attractive yields and capital preservation. However, with inflation moderating, we believe investors should consider looking beyond GICs and pivot back to bonds, particularly Active Credit, which can offer higher yields, capital preservation, and portfolio diversification.

Bond markets are extremely attractive from an all-in-yield perspective, and we genuinely believe the current opportunity set in fixed income provides investors with an excellent entry point. Nonetheless, the valuation dispersion across and within asset classes requires a tactical approach to identify and exploit the best risk-adjusted opportunities.

P&C firms face more complex investment decisions than most institutions due to regulatory capital guidelines, but now must re-evaluate their investment playbook in the context of today’s market volatility and weaker macroeconomic outlook. Based on the three P&C investment dimensions: return, risk, and capital charge, we believe P&C insurers can benefit from the relative opportunity in high-quality Active Credit, providing a better risk-reward profile.

There is no denying that the income is back in fixed income. Investors may feel compelled to lock in attractive bond yields by overweighting portfolios to certain securities. However, we believe the still uncertain market backdrop calls for a more balanced approach when constructing a bond portfolio.

In the 2023 Federal Budget released in late-March, a surprising tax measure was proposed, where Canadian insurers will be expected to pay the full tax rate for common and preferred share dividends, treating them as ordinary business income. We believe losing the tax advantage of these instruments gives insurance companies another good reason to rethink their preferred share allocations. We believe actively managed fixed income solutions can deliver better risk-adjusted returns for P&C firms, with a much lower capital requirement.

At RPIA, we believe risk management and hedging are critical elements of corporate credit investing. We seek to understand the varying risks in each underlying portfolio with precision, and then sell or hedge the specific sources of risk if our investors are not being adequately compensated for the cost of bearing them. In this paper, we review how we address explicit and unforeseen risks through our hedging program.

The recent failure of ESG darling, SVB, prompted an important discussion on the importance of making governance considerations a priority. Fixed income investors have growing influence to engage with issuers and strengthen governance practices. In this paper, we include a detailed example of our own engagement practices.

Financial instability and uncertainty from the bank liquidity crisis ignited further volatility in bond yields in the first quarter of the year. As we continue to monitor the far-reaching implications of recent events on growth and markets, we’ve recognized some opportunities amid the credit risk repricing.

The unprecedented volatility in bond markets over the past two years has resulted in many bonds trading at discounts to their par values. These bonds can offer a tax-efficient approach to generating returns for investors over the coming years. We explain this through a hypothetical scenario and by comparing the after-tax returns for discount bonds vs. GICs.

2023 has been a year marked by extremes. In early March, the market was fixated on the possibility of central banks having to increase the “terminal rate,” but the collapse of Silicon Valley Bank and the potential financial contagion risks that emerged from it, resulted in the quickest interest rate repricing in nearly 40 years. We discuss our views on the impact on the financials sector specifically and the market environment broadly.

As the year begins on a hopeful note, the shift away from artificially low interest rates and liquidity-flushed markets is making this a credit-pickers market once again. In this newsletter, we discuss how our game plan is evolving and the emphasize need to be flexible, selective, and targeted in this environment.

By increasing credit allocations and reducing equity exposure, investors can make their portfolios more resilient to continued market volatility. They can also capture value from the fact that fixed income yields are much more attractive today than equity earnings yield by historical standards.

2022 was a challenging year for the markets, but we believe there are a number of reasons to be optimistic about fixed income and credit in 2023. Through a series of charts, we highlight the credit market themes and opportunities we are focused on today.

A culture of inclusion is key to retaining talent in this competitive job market and several studies have persuasively argued that diversity in a team leads to better performance. Many firms are proactively looking to broaden the diversity of their teams with this goal in mind. In this article, we revisit why inclusion matters and suggest ways for managers to foster more inclusive environments.

For years, businesses have been discussing the changes in consumer behaviour as younger generations become decision-makers; the same is true for wealth and investment management. We are in the midst of the largest wealth transfer in history – by 2030, American women will likely control $30 trillion of inherited financial assets from baby boomers. What does this mean for those helping families manage their wealth?