Displaying items by tag: fixed income

Most of the attention and chatter in the energy sector have been focused on issues like the price of oil, a potential renaissance for nuclear energy, and whether electric vehicles (EV) will displace gas-powered vehicles. 

However, the proliferation of solar energy is less discussed but in many ways, it could be more impactful in the long-term. According to the Solar Energy Industries Association, there were an additional 12 gigawatts of installations in the first-half of 2023. This is a 20% increase from last year’s first-half.

A major factor is the Inflation Reduction Act (IRA) which boosted subsidies for home and corporate solar projects. It’s also boosting the domestic production of solar panels. In 2022, there was production of 10.6 gigawatts of domestic capacity, but this is projected to increase to 108.5 gigawatts by 2026. It’s also notable that capital expenditures in the solar industry were bigger than that of oil & gas last year. 

According to the industry group, the solar industry in the US is projected to grow 15% annually. It sees the full-scale benefits of the IRA to start hitting the industry by late 2024. In terms of challenges, it identifies interconnection of grids and cost-prohibitive batteries as bottlenecks for future growth. 

Finsum: A trend in the energy sector is the boom in solar due to lower costs and the Inflation Reduction Act. In particular, domestic manufacturing is a major beneficiary.. 

In theory, active fixed income offers the best of both worlds. It has all the inherent benefits of an ETF structure leading to more liquidity, transparency, and lower costs, but it still gives managers flexibility to find the best opportunities in the fixed income space. 

The category is seeing substantial growth in terms of inflows and new issues. Institutions and advisors are becoming increasingly comfortable with the asset class. Additionally, it’s well suited for this particular moment given the uncertainty about the Fed and the economy’s direction which should create more opportunities for alpha for active managers. 

The latest mega-institutions to jump on the trend is the Bank of Japan. The central bank is shifting $62 billion of passively managed fixed income into active management. It believes this will help it finetune the risk profile of their holdings. It’s also consistent with its recent policy to gradually let yields rise in an effort to combat inflation. 

In fact, this change in monetary policy is also contributing to bond market volatility. And, this jump in volatility is what is leading to opportunities for active managers that the Bank of Japan is keen to capitalize upon. The Bank of Japan is considered a trailblazer, so it will be interesting to see if other central banks follow suit and increase allocations to active fixed income. 

Finsum: The Bank of Japan is converting some of its passive fixed income holdings into active fixed income. Find out why and whether other central banks will follow.

Fixed income markets have faced a major headwind over the last 21 months given the Federal Reserve’s aggressive rate hikes. Regardless, money poured into fixed income ETFs at a record pace even outpacing equity ETFs for the first time in history. Investors were willing to overlook poor, near-term performance due to attractive yields and a shaky economic outlook.

Now, this trend could accelerate further given that the Fed seems to be in the final innings of its tightening campaign, while concerns about valuation in equities linger. Therefore, many believe that the growth of fixed income ETFs relative to equity ETFs is not a blip, but the start of a multiyear trend. And, asset managers are responding with a bevy of new fixed income ETF launches.

Overall, inflows to fixed income ETFs are up nearly 10% compared to last year. Many are eager to lock in these elevated yields especially in areas with lower risk like Treasuries. Of course, the major challenge for fixed income investors is assessing if a pivot in policy will arrive imminently or are we due for a period of ‘higher for longer’. In the latter scenario, short-duration bonds will outperform, while long-duration will struggle. 

Finsum: Fixed income ETFs are seeing a surge in new issuances and inflows. Find out why many expect this trend to continue over the next few years.

One of the biggest surprises of 2023 has been the resilience of the economy and inflation despite the Fed embarking on the most aggressive rate hike campaign in decades. For fixed income investors, it’s been a challenging environment. 

Inflows have been strong and sustained given higher rates and expectations that a recession was imminent. Yet, returns have been mixed especially with there being no change in the Fed’s stance despite some encouraging data on the inflation and economic fronts. Specifically, shorter duration bonds have outperformed, while longer duration bonds have underperformed.

According to Vanguard, it’s simply a case of short-term pain equating to longer-term gains. The selloff in fixed income will lead to higher returns over the intermediate and long-term while generating decent income for investors. Ironically, it’s an inverse of what we experienced over the past decade when bonds were in a decade-plus bull market due to the Fed’s dovish policies. In this environment, there was no value and limited income opportunities in the asset class. 

The firm recommends that investors have exposure to a mix of short and long-duration bonds. The factors that resulted in shorter duration outperformance are unlikely to continue especially given that the labor market is rapidly cooling and yields are at historically attractive levels. 

Finsum: Fixed income has been particularly challenging in 2023 due to the Fed continuing to hike rates. Here are Vanguard’s thoughts on how to navigate the market.

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.