Gershon Distenfeld: Adversity and volatility. When we think back to everything that’s happened in 2020, those words pretty much boiled down what we’ve seen this year.
Matt, we definitely expect volatility around the election, assuming we even know who won the day after. How should we think about managing our portfolios through the expected volatility?
Matt Sheridan: Volatility usually means opportunity. And in the near term, with uncertainty being elevated and risk premiums trading at long-term or wider than long-term averages, that’s a pretty attractive opportunity for us to look at high yield in non-US high yield multi-sector opportunities. But an allocation to US Treasuries or global treasuries also makes sense in the context, if volatility does rise, then we want to mitigate portfolio drawdowns.
Having an allocation to US Treasuries can do a lot of beneficial things to your portfolio. [It] can retain liquidity, can mitigate downside drawdowns, it can also allow us to rebalance into much more attractive spread sectors, if and when markets present those opportunities for us.
GD: How can investors get comfortable with being okay with that volatility even as they need to generate income for the long-term?
MS: We want to remain liquid. We want to be able to play offense, if spread sectors come under a continued selling pressure in 2021. This is an attractive environment, if you need to generate income in a balanced approach.
The amount of support coming from central banks means that it’s more likely than not, the treasury yields are going to remain reasonably rangebound.
Uncertainty in markets in the near term certainly creates long-term investment opportunities. And in today’s world, we think it’s a pretty attractive time to be a global multi-sector investor.
But it’s also a pretty good portfolio technique to make sure that you have an allocation to US Treasuries. In case uncertainty remains elevated in the near term, having an allocation to US Treasuries can mitigate and help portfolio volatility in stress markets.
GD: Matt, we often talk about volatility as if it’s a negative, and in many senses it is. It does unnerve investors and has to be managed. But I think that we’ve proven over a long period of time that volatility could also be our friend.
Volatility creates opportunities. Volatility causes, sometimes, other investors to make suboptimal decisions. And we’ve taken advantage of that. Because volatility causes people to buy and sell away for reasons that do not align with fundamentals.
MS: We can use this as an opportunity to build portfolios, to take advantage of attractive long-term income. We also want to be cognizant of how to limit some of that downside volatility in case uncertainty persists in early 2021.
GD: The one constant is we are going to do what we always do. We are going to use our deep-seated research to look at the long-term impact of what’s going on, on a fundamental basis, and try and filter out that short-term noise to make the best decisions that we can on behalf of our clients.
Gershon Distenfeld is Co-Head of Fixed Income and Matt Sheridan is Portfolio Manager—Global Multi-Sector at AB.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. Views are subject to change over time.