Fixed income yields remain low, and the rate outlook appears nebulous, according to Fidelity’s Adam Kramer, which is why he thinks it could be the right time to seek opportunities among high-yield bonds.
“Yes, you’re taking on more credit risk in the higher-yielding segments, but I feel more comfortable owning bonds where I feel the fund is being adequately compensated for exposure to potentially negative market news,” says Kramer, who, along with Ford O’Neil, is co-lead manager of Fidelity® Strategic Income Fund (FADMX).
He believes many lower-yielding and lower-risk bonds simply aren’t paying investors enough to make owning them worthwhile. He thinks the best values—and the best way to generate favorable fund returns while still seeking to preserve shareholders’ capital—is investing in what he calls “plus” segments.
The way Kramer measures value and income is to compare the option-adjusted spreads of high-yield bonds and investment-grade securities relative to their duration years. Using this method, he’s found a much better spread cushion for high-yield bonds for much of 2021—especially among securities rated BB+.
The portfolio aims to generate a high level of current income and may also seek capital appreciation, strategically diversifying assets across a broad swath of fixed income markets. As of September 30, the fund is tactically overweight floating-rate leveraged loans, high-yield bonds, and emerging-markets debt, while maintaining an underweight in U.S. government and investment-grade securities.
“We’re earning yields in these segments that we think can either partly or wholly offset the negative performance impacts of wider spreads, higher rates, or both,” Kramer explains.
Kramer acknowledges that prioritizing riskier assets might seem like a counterintuitive way to try to protect shareholders from negative market events. Yet he concludes that accepting the low yields currently offered by higher-quality bonds could be riskier.
“We feel good about the fund’s positioning, but we won’t hesitate to make shifts as the market environment evolves,” he says.
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