Pursuing Alpha: Our Active Fixed Income Approach

Pursuing Alpha: Our Active Fixed Income Approach

MFS’ Co-CIO of Fixed Income, Alexander Mackey, shares attributes of our active fixed income capabilities and our assessment of the opportunities and risks for global fixed income investors.

 

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Hello, I’m Alex Mackey, Co-Chief Investment Officer of Global Fixed Income at MFS Investment Management. I’m very pleased to share with you the defining attributes of our global fixed income investment organization, and how these are informing our assessment of the opportunities and risks for global fixed income investors.

 

Q: What are the strengths of MFS’ active fixed income approach?

For more than half a century, MFS has been a trusted provider of active, value-added fixed income management. Today, we serve institutional and retail investors across the world, providing multi-sector, sector-focused and customized portfolio management for global and regionally-oriented fixed income strategies.

While the fixed income solutions we deliver at MFS are diverse, they share a common approach centered on budgeting and allocating risk intentionally and prudently. We actively calibrate risk, aligning our fundamental viewpoints and valuation assessments.

Diversification is a hallmark of our investment philosophy, as we believe that performance consistency is most reliably achieved through a balanced approach to allocating active risk across rates, currencies, regions, sectors and issuers. Critically, we seek to avoid poorly compensated risk, even at the cost of missing out on short-term gains. We continuously and rigorously monitor these risks through firm-wide, multi-level oversight to ensure compliance with strategy targets and client expectations.

A defining attribute of our fixed income approach is the structured manner with which our highly specialized portfolio management, research and trading teams intensively connect and share information with each other and across our entire MFS investment organization. We call this unified environment our “Global Investment Platform.” Through active collaboration and robust debate, a diversity of viewpoints is captured from asset and sub-asset class investment teams. This deepens our insights across global markets and strengthens our long-term fundamental investment convictions.

These bottom-up fundamental investment viewpoints are reinforced through top-down macro-economic analysis. This is essential to effectively take risk across regions at the sector and issuer level. While the convergence of top-down and bottom-up viewpoints reinforces conviction, there are also times when a divergence exists, and this may be an important early signal of shifting market developments and influence our risk budgeting and allocation.

We consistently apply a long-term view across all facets of this investment approach. By maintaining portfolio flexibility, we opportunistically take advantage of short-term periods of marketplace volatility. At all times, we prioritize investment process discipline and transparency, portfolio liquidity and alignment with client objectives and expectations.

 

Q: How are MFS’ current investment views expressed in portfolio positioning?

Overall, we believe that the global investment environment for fixed income investors continues to be positive. Principal support pillars for global fixed income markets include: gradually declining inflation approaching central bank targets; moderate, albeit slowing economic growth, which is supportive of stable issuer credit quality; attractive nominal and real yields; and ongoing strength in investor demand.

Despite this positive general backdrop, we believe that opportunities and risks across global rates, currencies, issuer credit quality and valuation are not uniform, thereby requiring sharp differentiation and active allocation and portfolio positioning.

Monetary policies around the world have generally become more accommodative during the past year; however, the pace and magnitude at which central banks have lowered policy rates has varied. For instance, while rates in the European Union have already declined significantly, policy rates in the US and Australia have remained higher. These distinctions provide an opportunity to favor relative duration exposure to those regions most likely to benefit from a potential convergence of global interest rates. We are also focusing on steepening global yield curve dynamics and believe that intermediate duration exposure is relatively attractive. As developed market policy rates continue to decline, we believe that emerging market local yields offer increased opportunity.

The depreciation of the US dollar relative to both developed and emerging market currencies has been a significant development during the first half of this year, This has been fueled by volatile trade policies and concerns about growing fiscal deficits. In response, we have marginally increased our emerging market currency exposure across both global and emerging market portfolios in response to favorable underlying fundamental support and the potential for continued dollar challenges.

Perhaps the greatest tension currently facing global fixed income investors is the trade-off between stable credit fundamentals and historically narrow risk premiums, which offers little cushion against future economic slowdown and geopolitical risks. We are taking a balanced view with respect to our current credit positioning, maintaining sufficient exposure to provide yield advantage relative to our benchmarks, while adopting a conservative approach in the context of our through-cycle risk budgets. We are expressing this through targeting levels of credit exposure at the low end of our strategic ranges, raising credit quality and applying a focus on more defensive issuers, while increasing the liquidity profile of our portfolios.

 

Conclusion

Thank you for putting your trust in MFS. As the investment landscape for fixed income continues to evolve, we remain committed to incorporating comprehensively researched investment insight across global markets and a prudent balance of active risk in meeting our clients’ long-term objectives and expectations.

 

 

 

Investments in debt instruments may decline in value as the result of, or perception of, declines in the credit quality of the issuer, borrower, counterparty, or other entity responsible for payment, underlying collateral, or changes in economic, political, issuer-specific, or other conditions. Certain types of debt instruments can be more sensitive to these factors and therefore more volatile. In addition, debt instruments entail interest rate risk (as interest rates rise, prices usually fall). Therefore, the portfolio’s value may decline during rising rates. The views expressed are those of the author(s) and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation to purchase any security or as a solicitation or investment advice. No forecasts can be guaranteed.

 

The views expressed are those of the speaker and are subject to change at any time. These views do not necessarily reflect the views of MFS or others in the MFS organization, and should not be relied upon as investment advice, as securities recommendations, or as an indication of trading intent on behalf of any MFS investment product.

 

This material is for information only with no consideration given to the specific investment objective, financial situation and particular needs of any specific person. Any securities and/or sectors mentioned herein are for illustration purposes only and should not be construed as an investment recommendation. Investment involves risk. Past performance or any prediction, projection or forecast is not indicative of future performance. The information contained herein may not be copied, reproduced or redistributed without the express consent of MFS. While reasonable care has been taken to ensure the accuracy of the information as at the date of publication, MFS does not give any warranty or representation, expressed or implied, and expressly disclaims liability for any errors or omissions. Information may be subject to change without notice. MFS accepts no liability for any loss, indirect or consequential damages, arising from the use of or reliance on this material.

 

The views expressed are those of the author and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation to purchase any security or as a solicitation or investment advice. No forecasts can be guaranteed.

 

Unless otherwise indicated, logos and product and service names are trademarks of MFS® and its affiliates and may be registered in certain countries.

 

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