ETF Trends spoke with Mark Pawlowski, an Investment Strategist for Natixis Investment Managers, about the Natixis Loomis Sayles Short Duration Income ETF (LSST). Pawlowski explained where the portfolio managers are concentrating their efforts, as well as the role volatility, among other things, will play in the coming months.
The Loomis Sayles management team focuses its energy on sector allocation and security selection. It’s less about trying to predict where interest rates are going, and they’re not trying to manage the duration of the portfolio. Instead, the team is attempting to target a two-year duration, and add value through security selection and their sector underweights or overweights.
“That’s an easier position to take, nowadays, given recent uncertainty about interest rates,” Pawlowski says.
Having seen a lot of volatility in the yield curve, it makes sense. Even looking at the area Natixis operates in with this fund — the two-year Treasury — there’s been a delta of almost 40 basis points in this past month.
Essentially, volatility has been heightened in the market. This can be seen in the MOVE Index, which measures volatility in the Fixed Income sector. The team expects volatility to persist for the next 12 to 18 months.
As a result, they have altered their risk budgets based on some of those factors. LSST is actually at the lower end of its risk budget. This is consistent with the managers’ belief that when focusing on short duration, investments should be high quality and have ample liquidity.
“If someone asks you what keeps you up at night, the answer should probably be, ‘Not a lot,’ because this ETF has diversification of not just issuer but sector diversification of issue,” Pawlowski states. “And that’s how the team runs it, believing that if someone wants to allocate to a short investment to meet a future liability they’re going to focus on names that can earn a yield advantage and provide some alpha, but also something that is higher quality and high liquidity.”
Current Strategies In Lowering Rate Risk
In answering many questions regarding current strategies, whether considering if there’s time to go short or extend the duration, these are not areas managed in the portfolio. At the same time, with investors seeing the yield curve move down by 100 basis points, seeing the fixed income benchmarks up high single digits, and wanting to take their interest rate risk down, it would be wise to invest to achieve yield advantage, as well as some capital appreciation, compared to a money market.
Looking at what kinds of opportunities there are when it comes to short-term yields from these different sectors, Pawlowski believes it is good to look at this from the perspective of the economic cycle. Things are in the late expansion phase, which tends to be associated with peaking profit margins, more mergers and acquisitions activity, and a larger build-up of debt to finance activities that are more accretive to the shareholder as opposed to the bondholder.
“Typically, in that type of environment, the investment team in this portfolio would want to take some of the risk down, become more defensive, build liquidity into the portfolio, and provide a solution that is prepared for the next phase of the cycle, which would be a downturn,” Pawlowski explains.
This is not necessarily the primary expectation in the next 12 to 18 months, but some volatility will likely define that period. Allocations in the portfolio are underweight U.S. Treasuries, where yields are meager. But with decent growth and solid fundamentals, opportunities are more available in investment-grade credit and securities related to the consumer.
Ultimately, it is the consumer that’s been the engine keeping things going. Consumer spending drives GDP growth, and when looking at metrics such as low unemployment rates or solid wage growth, these have all been positive signals for the consumer. The portfolio holds asset-backed securities which benefit from the strength of consumers, while also earning a little extra yield over Treasuries. That’s considered a nice exposure.
As Pawlowski notes, “Obviously there are more possibilities because, for example, if you have a car loan, you’re probably dealing in that shorter area of the curve, as most car loans are 3 to 5 years. So there are ample opportunities for investments based on the interest rate or duration the managers are trying to achieve. But the other area where we still have a decent exposure is investment-grade credit. That’s something that this team and Loomis, in general, think that they do very well, and have done since the 1920s.”
The point is to identify new opportunities and find issues that will hold up based on the changing market environment. The team remains focused on names that continue growing and will maintain that balance sheet strength, and pivot the allocations accordingly between different industries.
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