This is a sponsored article from J.P. Morgan Asset Management.
Seeking yield1 is generally among the topmost priority for investors. With an uncertain investment outlook, they are increasingly looking at strategies that can invest flexibly across the fixed income universe for potential yield opportunities.
But this would require moving along the risk spectrum. And it is important to focus on quality within fixed income, without overstretching for yield1.
The JPMorgan Income Strategy strives to be risk-optimised, investing opportunistically across multiple debt markets and sectors with a view to making portfolio income a viable outcome2. Our investment approach centres on our belief that bond portfolios, managed by a globally integrated, research-driven fixed income team within a disciplined risk-controlled framework, would be better positioned for optimising risk-adjusted returns.
Fixed income amid market volatility
Our Income Strategy aims to deliver a stable and consistent income through a diversified3 combination of fixed income securities, as the chart shows.
Source: J.P. Morgan Asset Management. As of 30.09.2019. The Strategy is an actively managed portfolio. Holdings, sector weights, allocations and leverage, as applicable, are subject to change. Provided for information only, not to be construed as investment recommendation. Investment involves risks. Investments are not comparable to deposits. Not all investment ideas are suitable for all investors. MBS: mortgage-backed securities, ABS: asset-backed securities
The Strategy invests in debt securities that we believe could have high potential to produce income, and have low or negative correlations to each other in order to reduce risk through diversification3. By investing in a broad range of sectors and harvesting risk premiums across fixed income markets globally, we believe the portfolio is better positioned to optimise yield with lower volatility (or risk) than other single-sector or more concentrated strategies.
One of the approaches we take to achieve this is by harvesting uncorrelated, or at times negatively-correlated risk premiums from the global fixed income landscape. Our aim is to harvest the risk premia, and incorporate them together in a balanced way which could help reduce risk while striving to achieve a consistent return. This is a critical outcome of our portfolio construction process, and the results bear real risk reduction through this diversification3.
In this Strategy, we have an income bank mechanism to save our monthly coupon income for rainy days, giving us more flexibility to pay income in a sustainable manner4. This mechanism could protect against changes in interest rates, smooth cash flow distributions and facilitate sector rotation in order to manage risk, take profits or capture market opportunities. This could help pave the way for an income stream with much less volatility.
In our Income Strategy, allocations to corporate high yield5 and securitised assets have been the major performance contributors year-to-date6. These sectors have continued to be positive contributors for the year even as we sold some of our high-yield and emerging market (EM) credit positions for gains.
We have been very active in duration management, utilising duration as another form of diversification3.During 2019, duration has traded in a range of 3–6 years. The Strategy has maintained an active hedge position within US high-yield corporates5 that was initiated following trade escalations in May and June 2019 which contributed due to the modest spread widening.
As market volatility increases and the global economy moves deeper into the late cycle, we have been reducing risk by trimming both high-yield corporate5 and EM debt exposure and allocating to higher credit quality.
Source: Barclays live, J.P. Morgan Asset Management. MBS: mortgage-backed securities, ABS: asset-backed securities, EM: emerging market. For illustrative purposes only. Based on representative index level data, except for esoteric ABS and non-agency MBS which reflect our proprietary yield calculations. US 10-year Treasury, ABS and non-agency MBS are yield to maturity. Investment-grade corporate, EM corporate and US high-yield corporate bonds are yield-to-worst. EM sovereign bonds is a blended yield. As of 30.09.2019. Yield is not guaranteed. Positive yield does not imply positive return. Past performance is not a reliable indicator of current and future results.
We continue to prefer the securitised market given the enhanced yield1 pick-up, short duration, and faster amortising nature of the securities we are able to purchase. The securitised market has largely been unaffected by growing trade tensions compared with other fixed income sectors.
The resilience of the US consumer7 supports the yield pickup in MBS, making it one of the asset classes investors could consider in their broader asset allocation, based on their investment objectives and risk appetite. Healthy household balance sheets and low debt-servicing costs have kept mortgage delinquency rates in check.
For now, we believe consumer credit and real estate fundamentals remain somewhat insulated from broader concerns of a possible recession. Still, we are allocating to higher credit quality in our ABS holdings and looking to reduce delinquency risk. Instead of student or auto loans, based on current market conditions we have taken an out-of-index exposure for ABS, targeting loans for timeshare financing and equipment tied to mobile and aircraft leases.
Market volatility and lower yields are here to stay. Investors could strive to be dynamic2 and invest opportunistically across the fixed income universe based on their investment objectives and risk appetite. But this would require moving along the risk spectrum. It is important to focus on quality within fixed income, without overstretching for yield1.
1 Yield is not guaranteed. Positive yield does not imply positive return.
2 For illustrative purposes only based on current market conditions, subject to change from time to time. Not all investments are suitable for all investors. Exact allocation of portfolio depends on each individual’s circumstance and market conditions.
3 Diversification does not guarantee investment return and does not eliminate the risk of loss.
4 Dividends are based on Asset Managers discretion and are not guaranteed.
5 High yield credit refers to corporate bonds which are given ratings below investment grade and are deemed to have a higher risk of default. For illustrative purposes only, exact allocation of portfolio depends on each individual’s circumstances and market conditions. Yield is not guaranteed. Positive yield does not imply positive return.
6 Source: J.P. Morgan Asset Management, data as of 30.09.2019. Yield is not guaranteed. Positive yield does not imply positive return. Past performance is not a reliable indicator of current and future results.
7 Source: FactSet, FRB, J.P. Morgan Asset Management, Bureau of Economic Analysis. US household debt service ratio was 9.7% for 3Q 2019 versus 13.2% for 4Q 2007. US household net worth for 3Q 2019 was about US$115 trillion versus around US$71 trillion for 3Q 2007. 3Q 2019 figures for debt service ratio and household net worth are J.P. Morgan Asset Management estimates. Data reflect most recently available as of 30.09.2019.
For Professional Investors and Financial Intermediaries only.
This advertisement or publication has not been reviewed by the Monetary Authority of Singapore and the Securities and Futures Commission in Hong Kong. Investments in funds are not comparable or similar to deposits. Investment involves risk, value of units may rise or fall including loss of any or all of the amount invested. Not all investment ideas are suitable for all investors. Past performance is not indicative of future performance. Diversification does not guarantee positive returns or eliminate risk of loss. Investors should make their own evaluation or seek independent advice before investing. The opinions and views expressed here are as of the date of this publication, which are subject to change and are not be taken as or constructed as investment advice. Issued in Singapore by JPMorgan Asset Management (Singapore) Limited (Co. Reg. No. 197601586K) and in Hong Kong by JPMorgan Funds (Asia) Limited. All rights reserved.
This is a sponsored article from J.P. Morgan Asset Management.