“A second benefit is the ability and flexibility to expand into other asset classes to take advantage of temporary dislocations,” Hartviksen added. “For example, in 2014 the municipal bond market experienced outflows [that]caused prices to be pushed to extremely low levels. This meant that even without the tax benefit traditionally seen from municipal bonds, the raw yield was very attractive. Due to the flexibility of our structure, we were able to invest 5% of the total portfolio into this asset class, which gave us strong returns for the year in a sector that may have been ignored by most investors.”
One way investors can get exposure to the debt markets is two ways: using a centralized, multisector approach or looking into niche markets.
“A multisector credit strategy is a credit-based strategy, so it will broadly follow the returns pattern of the credit markets,” said Ken Hill, senior portfolio manager. “This type of strategy will have a normal duration range and invest predominantly in fixed-income credit markets. An unconstrained fixed-income strategy will generally have a much wider band for duration (including negative duration in some cases) and will sometimes have an allocation to equities or esoteric securities. In addition, unconstrained will generally have much more volatility as currency, duration and yield-curve bets are expressed in large measures.”
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