Recovering economy, reinforcing Chinese equity opportunities
Looking at China’s economic recovery and the beneficiaries in the long term.
Two key words are worth bearing in mind in the search for yield1 in uncertain markets while managing risks:
Seeking yield1 is generally among the topmost priority for investors. With an uncertain investment outlook, they are increasingly looking at strategies that can invest flexibly across the fixed income universe for potential yield opportunities.
But this would require moving along the risk spectrum. And it is important to focus on quality within fixed income, without overstretching for yield1.
The JPMorgan Funds – Income Fund strives to be risk-optimised, investing opportunistically across multiple debt markets and sectors with a view to making portfolio income a viable outcome3. Our investment approach centres on our belief that bond portfolios, managed by a globally integrated, research-driven fixed income team within a disciplined risk-controlled framework, would be better positioned for optimising risk-adjusted returns.
The Fund aims to deliver income through a diversified2 combination of fixed income securities, as the chart shows.
Harvest high-conviction ideas across the fixed income universe4
The Fund invests in debt securities that we believe could have higher potential to produce income, and have lower or negative correlations to each other in order to reduce risk through diversification2. By investing in a broad range of sectors and harvesting risk premiums across fixed income markets globally, we believe the portfolio is better positioned to optimise yield1 with lower volatility (or risk) than other single-sector or more concentrated strategies.
In this Fund, we have an income bank mechanism to save our monthly coupon income for rainy days, giving us more flexibility to pay income in a sustainable manner5. This mechanism could protect against changes in interest rates, smooth cash flow distributions and facilitate sector rotation.
In our Income Fund, allocation to corporate high yield6 and securitised assets have been the major performance contributors year-to-date4,7. These sectors have continued to be positive contributors for the year even as we sold some of our high-yield and emerging market (EM) credit positions for gains.
We have been very active in duration management, utilising duration as another form of diversification2. During 2019, duration has traded in a range of 3-6 years. The Fund has maintained an active hedge position within US high-yield corporates6 that was initiated following trade escalations in May and June 2019 which contributed due to the modest spread widening.
As market volatility increases and the global economy moves deeper into the late cycle, we have been reducing risk year-to-date by trimming both high-yield corporate6 and EM debt exposure and allocating to higher credit quality4.
A spectrum of fixed income yields8
We continue to prefer the securitised market given the enhanced yield1 pick-up, short duration, and faster amortising nature of the securities we are able to purchase. The securitised market has largely been unaffected by growing trade tensions compared with other fixed income sectors.
The resilience of the US consumer9 supports the yield1 pickup in MBS, making it one of the asset classes investors could consider in their broader asset allocation, based on their investment objectives and risk appetite. Healthy household balance sheets and low debt-servicing costs have kept mortgage delinquency rates in check.
For now, we believe consumer credit and real estate fundamentals remain somewhat insulated from broader concerns of a possible recession. Still, we are allocating to higher credit quality in our ABS holdings and looking to reduce delinquency risk. Instead of student or auto loans, based on current market conditions we have taken an out-of-index exposure for ABS, targeting loans for timeshare financing and equipment tied to aircraft leases.
Market volatility and lower yields are here to stay. Investors could seek a diversified2 fixed income portfolio based on their investment objectives and risk appetite. In addition to seeking exposures to a range of uncorrelated asset classes, securities selection within each asset class is also crucial. And it is important to focus on quality, without overstretching for yield1.