Extract Value From the Corporate Bond Market With KORP

The corporate bond market could finally be taking a turn for the better if hedge funds’ bets are correct. More capital is pouring back into bonds as certain debt issues are flashing value-oriented opportunities in a challenging market environment.

According to a Financial Times article: “Big-name hedge funds are snapping up bargains in junk bonds and other corners of the corporate debt market, as they bet a sell-off sparked by the darkening global economic outlook has gone too far.” Central banks around the world could be pumping the brakes on tightening monetary policy, which has been eating into bond income as rates go higher.

Hedge funds are finding opportunities in riskier debt, which investors have been shying away from in a murky market full of unknowns. Recession risks have been pushing investors further away from corporate debt, but some hedge funds are finding value in high-risk debt, betting that high rewards are ahead.

“We find the current opportunity set in high-yield credit attractive,” said Third Point LLC’s Daniel Loeb. Third Point is essentially betting on a corporate bond market recovery, but doesn’t see it happening quickly, so patience in the long game is in order if investors want to mimic the same strategy.

Given the tenuous bond market, investors don’t have to fly blind when it comes to looking for opportunities in corporate bonds. An active management style can essentially put a fixed income investor’s portfolio on autopilot mode.^SPASXCOB Chart

Navigating a Tenuous Bond Market

No doubt bonds in general have seen better days. Nonetheless, as mentioned, the weakness in the overall bond market could be giving way to value propositions, particularly in the corporate bond arena.

Corporate bonds can still offer investors a healthy dose of yield, and with debt at depressed prices in the current market environment, there’s value to be had for fixed income investors. The question now is: Where do investors start when getting corporate bond exposure?

The American Century Diversified Corporate Bond ETF (KORP) answers this question by giving investors exposure to an active management strategy. This puts the debt holdings in the hands of investment professionals rather than individual investors or advisors hand-picking the bond holdings themselves.

KORP offers yield while also adding diversification in holdings of mostly investment-grade quality. Per its fund description, it seeks current income by emphasizing investment-grade debt while dynamically allocating a portion of the portfolio to high yield.

Per its product website, KORP creates a systematically managed portfolio that integrates fundamental and quantitative expertise that:

  • Adjusts investment-grade and high yield components to balance interest rate and credit risk.
  • Screens individual credits to seek those with sound fundamentals, reduced default risk, attractive valuations, and liquidity.
  • Adjusts industry and duration exposures as risks and opportunities emerge.
  • Offers cost effectiveness with a relatively low 0.29% expense ratio.

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