How to create a high-conviction fixed-income portfolio ?

By Felix de Gregorio, Iberia Head for Jupiter AM

In an inherently and increasingly complex financial environment, actively managed high-conviction strategies emerge as a beacon of stability amid uncertainty. True to our hallmark, which is the investment freedom of management teams, our mission at Jupiter AM is to support investors regardless of the current financial environment, always considering their specific needs and objectives. In this context, constructing a high-conviction fixed-income portfolio appears as a prudent option with interesting opportunities.

In our view, the current macroeconomic situation provides new opportunities for fixed income. The imminent transition from restrictive to expansive monetary policies, expected to materialize over the coming months, coupled with projections of slower economic growth and more contained inflation, should favor this asset class.

Although fixed income has gone through – and continues to do so – challenging times, especially in 2022, which was one of the worst years on record for this asset class, not everything has been adverse. Certainly, investors have witnessed a paradigm shift in fixed income, with unusual fluctuations that challenged traditional investor expectations accustomed to positive returns or, at the very least, limited declines. On the other hand, the current starting scenario, in terms of expected medium-term yields across all fixed-income segments, has not been as attractive in over a decade.

Whether in government or corporate debt, in developed or emerging markets, in investment-grade or high-yield issuers, and even in more specific categories such as CoCos, we believe that the current levels of yields to maturity present a genuinely interesting opportunity – and a new one for many less experienced investors – to achieve truly attractive medium-term returns through active and conviction-based management that allows for avoiding the ‘traps’ that will undoubtedly appear on the horizon in the form of defaults.

In times of global economic slowdown, it is essential to include assets in portfolios that provide stability and protection, such as sovereign bonds. Furthermore, when considering riskier options like high-yield bonds, the ability to thoroughly analyze the fundamentals of issuing companies to be selective in portfolio construction becomes a paramount criterion. Choosing defensive sectors, such as pharmaceuticals or telecommunications, can mitigate risks and ensure stable performance regardless of the economic environment.

In the face of the complexity of the current financial environment, diversification and a long-term perspective become essential. Just as flexibility in strategies becomes a critical aspect that must be integrated into any portfolio to navigate successfully in uncertain environments.

Ultimately, the ability to identify opportunities, maintain a long-term perspective, and adapt to market fluctuations becomes the fundamental pillars for success. That’s why we are convinced that investors who, like us, continue to focus on pure active management and selective diversification will be better positioned to face the challenges of tomorrow and thrive in a constantly evolving financial landscape.