THE CORE CONUNDRUM - Guggenheim Partners
THE CORE CONUNDRUM - Guggenheim Partners
THE CORE CONUNDRUM - Guggenheim Partners
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SECTION 3<br />
Future Investment Blueprint<br />
While it may seem that increased credit and duration risk have become<br />
prerequisites to generate yield, there is a more sustainable, long-term<br />
strategy that relies on the ability to uncover quality, investment-grade<br />
opportunities outside of the traditional benchmark-driven framework.<br />
Short-Duration Strategy<br />
Predicated on our view that the risk to interest rates<br />
is to the upside, we would advise investors to<br />
shorten portfolio duration and look for innovative<br />
ways to approach core fixed-income investing.<br />
Shortening duration offers a buffer against rising<br />
rates, but this generally comes at the expense<br />
of yield, particularly in corporate credit securities.<br />
The presumed positive correlation between yield<br />
and duration in the investment-grade universe has<br />
driven demand down the credit spectrum into<br />
lower-rated, high-yield bonds. A broader investment<br />
focus beyond the traditional core fixed-income<br />
framework demonstrates that lowering duration<br />
and producing attractive portfolio yields do<br />
not necessarily have to be mutually exclusive<br />
investment objectives.<br />
Within the investment-grade universe, floating-rate<br />
collateralized loan obligations (CLO) and shortduration<br />
asset-backed securities (ABS) offer similar<br />
yields to longer-dated corporate bonds with significantly<br />
less interest rate risk. While traditional<br />
securitizations of credit card receivables, student<br />
loans, and auto loans represent the majority of the<br />
ABS market, the sector has diversified into more<br />
specialized, niche segments of securities backed<br />
by various types of collateral, such as aircraft<br />
and shipping container leases, timeshare vacation<br />
ownership interests, and franchise fees. Largely<br />
owing to its association with the subprime crisis,<br />
these types of lesser-known, “orphan” credits suffer<br />
from a lingering negative connotation. The illiquidity<br />
and complexity of these non-traditional, “off-therun”<br />
sectors provide opportunities to generate yield<br />
in excess of comparably rated corporate credits.<br />
While corporate bond investors are exposed to the<br />
credit risk of a specific issuer or entity, idiosyncratic<br />
risks are mitigated in CLOs and ABS through large,<br />
diversified collateral pools. Additionally, these<br />
securities offer significant downside structural<br />
protection during stressed economic environments<br />
10 | FUTURE INVESTMENT BLUEPRINT GUGGENHEIM PARTNERS