Staying nimble and staying responsive to opportunities as they arise is a key aspect of Neuberger Berman’s Adam Grotzinger’s current positioning within global credit.
In his recent meeting with Livewire Markets during a visit to Sydney, the lead portfolio manager detailed the current positioning of his multi-asset portfolios.
Comparing and contrasting his exposures now versus a year ago and before the pandemic, Grotzinger discusses two of his favorite sectors. As volatility has returned to debt markets, these corporate debt sectors have highly motivated management teams and are rocked by long-announced interest rate moves. A key question Grotzinger asks – and answers – is what has already been valued by the market? Keep reading to find out.
What are your current favorite debt markets and why?
Adam Grotzinger: Given the volatility we have seen in the markets this year, relative value has moved quite smoothly. And so right now I would say the preferred areas where we see good value in the market based on the repricing of interest rate risk, and based on corporate spreads or credit lines that are widening as the market needs to price higher probabilities of recession over a forward horizon is that you can lean into the higher quality segments of the credit markets and get better value.
Thus, BBB corporate credit in the US market attracts us today. Things like the telecom sector in particular, where not only have you had interest rates widening or yields rising and spreads widening, but you’ve had a lot of new issuance, which has created a technical distortion in this market.
Other areas are the high-quality ends of the high-yield market. The mortgage market also presents value opportunities now that spreads have widened.
And even things like mortgages are starting to show value, due to a combination of macro, rate and supply factors, creating better prices in these markets and better protection against prospective downsides.
Why are telecoms and mortgages two of your favorite exposures?
Grotzinger: There have been a lot of new issues from telecommunications companies this year on the back of early-year returns. They are tight and widening due to rising yields and rates in the US market. And we think a lot of those names are solid BBB credits.
Management teams have been very clear that they do not want their companies to be downgraded to BB. Management teams therefore have an incentive to remain BBB and their bonds have weakened considerably this year, partly due to new issues in a more volatile market environment.
In the mortgage market, we think it’s starting to look interesting. You have seen mortgage spreads widening due to market concerns about interest rate volatility. So there’s a combination of interest rate volatility, devaluation of a lot of things, but also quantitative tightening and the implications that will have as the Fed pulls back as a big buyer in the mortgage market. You must be wondering what’s already in the price? And in our opinion, some of that is already in the price and therefore offers better value.
How is your portfolio positioned today compared to 12 months ago and compared to the pre-pandemic period?
Grotzinger: Let’s start now compared to about last year. Until 2021, we had a fairly aggressive risk posture. We thought it was an environment conducive to risk taking. We are close to the maximum allocation of our strategies to high yield credit, for example. And the 2021 regime rewarded that, namely volatility, repression, and central banks that were still dovish and strong underlying credit fundamentals in those markets.
As we entered the second half of 2021, through the third and fourth quarters, our outlook was changing. And the outlook before the start of 2022 was that while fundamental growth may still be resilient and strong (consumers are good and corporate balance sheets are good), the macro landscape is changing, especially Fed policy. And the removal of volatility from 21 was probably not the case in 2022. And the directionality of interest rates would be difficult. Rising yields are simply a challenge for a wide range of bond markets.
In response, we reduced the risk in our portfolios at the end of 2021, placing a large portion of these products in cash and cash equivalents as ballast heading into 2022. And to be better able to allocate to dislocated opportunities such as BBB bonds, telcos, and mortgage paper as we discussed earlier. But we’re also aware that we’re in no rush to return to the 2021 risk budget, which was high for a reason. It’s more about nibbling at opportunities using tactical management, looking for areas of significant dislocation and gradually redeploying to those opportunities is our mentality during this year.
Going back to March 2020, it’s a very similar dynamic. We entered this environment, which was late in the business cycle, and then COVID hit. Much of our existing portfolio was in well underwritten credit. We weren’t looking for yield at the time. So when COVID hit, we had a moderate risk budget. We saw some declines, but more importantly, these declines were more marks than reflections of depreciation of our existing positioning. And we had adequate cash to raise through our cash positions to again be better buyers of the dislocations that emerged. And then we were buying quality mortgages at the start of the crisis. This was the first area of deployment, especially when the Fed started to step in and support the markets and add liquidity.
That sums up our approach, focusing on relative value and prudent risk management in these environments, and being able to be better risk buyers at the right time to increase revenue and improve returns over time.
Learn more about the Neuberger Berman Strategic Income Fund
the Neuberger Berman Strategic Income Fund is a flexible, multi-sector bond strategy that seeks consistent monthly income by investing across the broad bond market with an emphasis on exploiting mispriced securities. If you want first access to Adam’s insights, click “FOLLOW” on Adam Grotzinger’s profile.