Mike Gitlin, Capital Group’s head of fixed income, sets out the importance of investing in bond funds that deliver on their stated objective. He also explains what differentiates Capital Group from industry peers.
We’ve heard you talk about the four roles of fixed income. Why is this concept important in today’s environment?
The world is changing rapidly. Amid historically high global inflation levels, major central banks turned increasingly hawkish, raising interest rates to levels not seen in years. In fixed income markets, yields have risen, while geopolitical and recessionary risks may lead to persistent volatility. In this environment, the four roles of fixed income are critical.
We believe fixed income plays four roles in portfolios:
- Diversification from equities
- Capital preservation
- Inflation protection
Total return should not be the most important part of a bond strategy. That’s why, we believe, clients hold equities. We often say; take your risk and generate return in equity, and preserve your capital and generate income in bonds, while also diversifying away from equities and mitigating inflation.
We recognise that for clients to construct portfolios that address different risk and return drivers, they need confidence that the fixed income strategies they employ will do what they claim to. And it is where we believe we are different. Our bond funds do not diverge from the stated objective. Our focus is on creating portfolios that provide predictable outcomes and deliver on our clients’ expectations.
Bond funds that engage in scope creep and hold too much credit risk have a real possibility of disappointing their clients when their clients need them most.
In practical terms, what does this mean for Capital Group’s bond portfolios?
In our core bond and core plus bond portfolios we are mindful of equity correlation. We construct these portfolios to be a ballast against equity market volatility. Our investment grade portfolios are pure in style and are not reliant on non-investment grade spread to deliver returns. Our high-yield and emerging market debt strategies are focused on generating high and consistent income.
In short, we remain faithful to each strategy’s style and adhere to portfolio objectives throughout market cycles.
How has Capital Group’s fixed income platform grown over the years?
We are the fourth largest active fixed income investment manager in the world, offering a full suite of fixed income strategies. We have US$2.1 trillion in total assets under management (AUM) and US$444 billion in fixed income assets1.
Our significant size and strength have enabled us to dedicate substantial resources and expertise to growing thoughtfully. As a privately owned company, we are not beholden to short-term shareholder interests, which allows us to be truly long-term oriented. We have invested through periods of significant uncertainty, at times when other investment managers have held back.
Over the past decade, we have invested in our people, processes, and risk management systems to build the best-in-class fixed income platform we have today.
We have a team of 236 fixed income professionals, which includes 30 portfolio managers and 56 research analysts.1 We have a team of 43 dedicated traders across trading desks in New York, London, Los Angeles and Singapore.2 Furthermore, our traders are not simply execution traders but are an integral part of the team, adding insight on markets, liquidity, and relative value. The breadth and depth of our investment professional team has never been stronger.
1. As at 30 September 2022. Source: Capital Group. Capital Group manages equity assets through three investment groups. These groups make investment and proxy voting decisions independently. Fixed income investment professionals provide fixed income research and investment management across the Capital organisation; however, for securities with equity characteristics, they act solely on behalf of one of the three equity investment groups.
2. As at 30 September 2022. Source: Capital Group. Trading professionals includes traders, trading analysts and head of global fixed income trading.
High income with diversification on multiple levels
Risk factors you should consider before investing:
- This material is not intended to provide investment advice or be considered a personal recommendation.
- The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment.
- Past results are not a guide to future results.
- If the currency in which you invest strengthens against the currency in which the underlying investments of the fund are made, the value of your investment will decrease. Currency hedging seeks to limit this, but there is no guarantee that hedging will be totally successful.
- Depending on the strategy, risks may be associated with investing in fixed income, emerging markets and/or high-yield securities; emerging markets are volatile and may suffer from liquidity problems.