Yield Reset Spurs the Return
of Multisector Fixed Income

MULTISECTOR AND MULTI-ASSET CREDIT (MAC) ASSET LEVELS

The growth of MAC assets—and the plateauing of multisector fixed income assets—coincided with the surge in negative yielding government debt. But now that yields are significantly higher across the globe, multisector strategies are increasingly attractive in our view.

Source: Bloomberg, eVestment; data as of 31 March 2024. Used with permission from Bloomberg.
This material is for informational purposes only and should not be construed as investment advice. Information obtained from outside sources is believed to be correct, but Loomis Sayles cannot guarantee its accuracy. This material cannot be copied, reproduced or redistributed without authorization.

Higher Yields Improve Bonds’ Risk/Return Profiles 

Now that yields have reset away from the zero-bound floor, risks have become more symmetrical across fixed income sectors. One dramatic effect of this shift is that adding higher-quality bonds can now do what was unthinkable just a few years ago—improve a bond portfolio’s potential risk/return profile.

Higher yields across fixed income sectors help to dampen a bond portfolio’s volatility by providing a cushion from the impact of interest rate and spread volatility on total return. As the exhibits below show, using the Bloomberg US Aggregate Index as a proxy for the broad fixed income market, a 100-basis-point (bp) rise in interest rates in 2024 could result in approximately a quarter of the loss it would have in 2021. Similarly, as spreads widen, income has a more powerful effect of maintaining a positive return: 100 bps of widening in credit spreads in 2021 would have resulted in a roughly -2% anticipated return for the index, while the same widening in 2024 could still yield an anticipated positive return of 1.2%. Using the median of the eVestment Combined Multi-Sector and Unconstrained Universes (bottom charts below), a multisector portfolio, by way of adjusting risk factor exposures based on market conditions, improves the downside expectations even further, with a 100-bp rise in interest rates or 100 bps of spread widening, resulting in an anticipated return of approximately 2-3%.

Source: Bloomberg, eVestment, Loomis Sayles; data as of 31 March 2024.
This material is for informational purposes only and should not be construed as investment advice. Information obtained from outside sources is believed to be correct, but Loomis Sayles cannot guarantee its accuracy. This material cannot be copied, reproduced or redistributed without authorization.

Wider Opportunity Set Unlocks More Ways to Enhance Returns and Diversification  

In our view, one of the greatest benefits of multisector investing is the ability to be nimble and pursue diverse opportunities in fixed income portfolios. Thanks to their flexible mandate and focus on total return, multisector strategies allow investors to pursue opportunities across geographies, sectors, issuers, capital structures, credit qualities and currencies. 

SOURCES OF TOTAL RETURN: SECTOR ROTATION AND SECURITY SELECTION

Leadership among fixed income sectors—and dispersion among sectors—varies dramatically across economic cycles. These dynamics highlight the benefits of a flexible approach to pursuing relative value in fixed income markets. As depicted in the grey bars, the average dispersion between the highest and lowest return in a calendar year has been 24% over the past 20+ years. Increased dispersion creates potential opportunities for active management across sectors and issuers.

Source: Bloomberg, eVestment; data as of 31 March 2024. Used with permission from Bloomberg.
This material is for informational purposes only and should not be construed as investment advice. Information obtained from outside sources is believed to be correct, but Loomis Sayles cannot guarantee its accuracy. This material cannot be copied, reproduced or redistributed without authorization.

Multisector strategies also allow investors to diversify their risk factor exposure through one allocation. Narrower fixed income strategies emphasize one primary risk factor, such as credit risk with MAC or duration risk with core bond allocations. Multisector strategies offer an efficient way to harness credit, duration and currency risk premia and dial these exposures up or down as market conditions change. We believe a more balanced approach to managing risk exposure, one that goes beyond just embracing credit risk, is prudent in the current uncertain environment. The ongoing yield curve normalization suggests an opportunity to add interest rate exposure back into fixed income portfolios. These dynamics also position fixed income to once again be an effective tool to help cushion against equity drawdowns.

ANALYZING RISK FACTOR EXPOSURES IN FIXED INCOME STRATEGIES

The Bloomberg US Aggregate Index is dominated by interest rate risk, and the risk profile of a multi-asset credit proxy is almost entirely driven by credit spreads. Multisector strategies can embrace different risks at various points of the market cycle, which has the potential to deliver more diversified, and uncorrelated, exposures over time.

**33% Bloomberg Corporate High Yield Index, 33% JP Morgan EMBI Global Diversified Index, 33% Credit Suisse Leveraged Loan Index. 
Source: Bloomberg, JP Morgan, Credit Suisse, Loomis Sayles; data as of 31 March 2024. Used with permission from Bloomberg.
This material is for informational purposes only and should not be construed as investment advice. Information obtained from outside sources is believed to be correct, but Loomis Sayles cannot guarantee its accuracy. This material cannot be copied, reproduced or redistributed without authorization. 

Uncertainty Calls for a Flexible Approach  

Fixed income investors currently face major uncertainty on multiple fronts. Will central banks have the flexibility to cut interest rates in the face of unstable inflation? Will tight financial conditions and elevated real interest rates trigger a recession? If so, how quickly and how much will central banks decrease interest rates to mitigate the economic downturn? How might rising geopolitical risk factors, including elections, affect financial markets?

The lack of clarity into these questions highlights the value of having the flexibility to draw on multiple risk factors in a fixed income portfolio and the importance of having access to different risk/reward profiles across the credit quality spectrum as well as up and down the capital structure. Given the macroeconomic uncertainty, a multisector strategy can take advantage of dislocations across the globe, alleviating the time it may take investors to reallocate from other parts of their portfolios. For large institutional investors that require board approvals and lengthy manager searches, the multisector approach can help provide an element of tactical management to their broader asset allocation.

Today’s conditions support a case for multisector strategies to become an increasingly central part of investors’ fixed income portfolios. When making these allocations, we believe investors should seek strategies that embrace broad sector exposure with flexible guidelines and managers that have experience investing through all phases of the credit cycle.  

FIXED INCOME PORTFOLIOS THROUGHOUT THE CREDIT CYCLE  

Multisector fixed income strategies allow investors to be nimble in reallocating portfolio risks as interest rates, credit spreads, currency dynamics and macroeconomic conditions change.