- Embrace a diversified portfolio of higher-income asset classes and strategies (e.g., levered loans, emerging market debt, mortgage REITs, etc.). Recognizing that this excess yield does not come free, we believe an approach that focuses on actively managing risk is critical.
For example, in Newfound’s Multi-Asset Income strategy, we diversify across 16 high-income asset classes and strategies, and use a trend-following overlay to remove exposures deemed to be a risk to capital safety, even introducing short-term U.S. Treasuries if necessary to reduce portfolio volatility.
- For investors looking to use income to satisfy withdrawal and spending needs, a target income approach can satisfy income needs and take investor focus off the principal.
For example, in Newfound’s Target Excess Yield suite, we build portfolios that seek to consistently achieve specific yield targets while minimizing fluctuation in principal. An investor could leverage this portfolio almost as a personalized liability-driven investment approach, covering withdrawal and income needs without having to focus on the principal.
For diversification, we believe investors can look both toward alternative asset classes (e.g., equity long/short, relative value and event-driven strategies) and alternative means of managing risk. Instead of relying on a static fixed-income position to manage downside risk, investors can reduce some of that exposure and introduce an active approach to managing risk.
For hedging/crisis alpha, there are few exposures that “pop” like Treasuries in a flight-to-quality period. That said, there may be opportunities to introduce exposures like managed futures, which have historically performed well during crisis periods.
Having identified solutions for each of our fixed income needs, we can then rebundle the approaches based on a mix that targets our specific goals and outcomes, hopefully avoiding a decade-long purgatory of low bond returns.
At the time of writing, Newfound Research owned positions in all the ETFs mentioned above. The company is a Boston-based quantitative asset management firm focused on rules-based, outcome-oriented investment strategies. Newfound specializes in tactical asset allocation and risk management solutions. The company offers a full suite of tactical ETF managed portfolios covering global equity, U.S. small-cap equity, multi-asset income, fixed-income and liquid alternative asset classes. For more information about Newfound Research, call us at 617-531-9773, visit us at www.thinknewfound.com or email us at [email protected]. For a list of relevant disclosures, click here.