For Investment Week, Sarang Kulkarni, the Lead Portfolio Manager of the Vanguard Global Credit Bond Fund, shared some thoughts about active fixed income and the current state of markets. Overall, his goal is to identify and invest in the best credit opportunities to generate consistent, risk-adjusted returns over the long-term. He is agnostic in terms of geography, sector, duration, credit quality. Instead, the fund has a bottom-up approach with a bias towards value. 

Recently, the fund has been investing in European financials due to favorable valuations and an improving regulatory environment. Additionally, it sees improving credit trends in the consumer discretionary sector and believes there’s upside in the bonds of companies in this sector. 

In terms of its edge over other active managers, Kulkarni believes that other funds rely on betting on the direction of the bond market to ‘generate alpha’. Over the long-term, these strategies tend to underperform the benchmarks and can perform poorly in more volatile environments. 

In contrast, Vanguard seeks to generate alpha over an entire market cycle in a transparent way. It avoids beta even at the expense of short-term returns. The fund also seeks to replicate the risk-return profile of the asset class which is key to consistent, long-term performance.

Finsum: Sarang Kulkarni, the Lead Portfolio Manager of the Vanguard Global Credit Fund, shares some thoughts on active fixed income and what makes his fund unique relative to its competitors. 

More and more, in recent years, especially, model portfolios are finding their mojo, according to wealthsolutionsreport.com.

Within the financial advice industry, they’re hitting traction and, for wealth managers, have evolved as a solution – and a compelling one, at that.

In 2020, the estimated value of assets under management in model portfolios hit $3 trillion. The catalyst? To a degree, exchange traded funds don’t take as big a hit out of the wallet. Not only that, the fact the trend toward comprehensive financial planning strategies is ongoing.

Meantime, a little time travel, anyone?

In the next five years, the model portfolio realm of money management is expected to balloon to a business of $10 trillion, BlackRock Inc, expects, according to advisorhub.com.

“It’s going to be massive,” said Salim Ramji, global head of iShares and index investments at the asset manager, on Bloomberg Television’s ETF IQ. “It’s the way in which more and more fiduciary advisers are doing business, and, as a result, that’s the way in which we’re doing business with them.”

Share and share alike?

Well, tell that to exchange traded funds. While they burgeoned in popularity, when it comes to sharing equally – or consistently – in the billions of dollars investors pluck down on them monthly, they don’t exactly participate, according to thinkadvisor.com.

An ETF focused on environmental, social and governance investing was one that trailed the pack. Year to date, it experienced the largest withdrawals. “(That suggests) that there may be some backlash against ESG from investors,” said Sumit Roy, senior ETF analyst at ETF.com.

In any event, as an investor, want a cost effective way to diversify your portfolios across various asset classes: you’ll get that from top ETFs, according to Investopedia.com. The work of ETFs, it seems, is never done. Not only does it track a particular index, sector or commodity and trade on a stock exchange, the way in which it goes about it mirrors that of a regular stock, putting investors in a position to wield greater flexibility.

On a shorter timeframe, oil has been enjoying a nice rally as it’s up nearly 30% since late-June. It’s largely being driven by the same catalyst that is affecting the stock market and bond market - recession risk in 2023 and early 2024 is being priced out, at least in the United States. 

While the worst-case scenario for the economy has been taken off the table in the last couple of months, it’s also clear that the best-case scenario of a re-acceleration of growth is also unlikely given the spate of weaker than expected economic data released this week. The other major factor supporting prices is production cuts from OPEC+ countries who are looking to push prices higher. And, there are rumors that Russia and Saudi Arabia are expected to announce further cuts in the coming weeks. 

On the bearish side, the major development is the deluge of data showing that China’s economy is much weaker than expected. Some of the weak data points include a drop in exports, consumption, and a nascent crisis in its real estate market. China is the world’s second-largest consumer of crude oil so this has major implications for its supply/demand dynamic.

Overall, oil is in a similar place to stocks and bonds. Amid a mix of bullish and bearish factors, it’s tough to determine whether this is a resumption of its bull market or simply an oversold bounce. 

Finsum: Crude oil prices are up nearly 30% since late June. However, it’s tough to be confident about its long-term direction given the mix of bullish and bearish factors. 

A recent challenge for the market and economy has been the surge in long-term Treasury yields. It implies higher costs for borrowers and corporations and if it persists, would certainly lead to a spike in defaults at some point.

Some key factors behind the ascent are resilience in the economy and inflation, rate cut odds in 2023 being priced out, and expectations of increased Treasury supply in the coming months due to large deficits. 

Yet, there has been some relief in the fixed income market due to a series of dovish economic data. This includes the August nonfarm payrolls report, jobless claims, inflation, and consumer spending data. In essence, there were some who believed that the economy may have been entering a re-acceleration period as evidenced by the 10-year Treasury yield rising from 3.2% to 4.4% between April and August. 

Yet, this week’s economic data undermines this narrative. The August employment data shows that hiring is clearly slowing, wage gains are decelerating, and the unemployment rate ticked higher. The 10-year Treasury yield declined from 4.4% to 4.1% as the breakout gets faded. 

Just as those who were confident about a recession have continually been frustrated over the last couple of years, those who are looking for a re-acceleration of the economy are likely to be as well. 

Finsum: There was some relief for the fixed income market this week due to a series of dovish economic data which support the notion of continued economic deceleration.