K. Sean Clark, CFA®, Chief Investment Officer
What is Clark Capital’s philosophy, process and approach to the fixed income markets in the Fixed Income Total Return strategy?
We believe that investors should be actively managing their fixed income exposure from a credit basis rather than a duration basis, especially in a low interest rate environment. In today’s environment we do not feel investors are being properly compensated for extending out on the yield curve, but they are being rewarded for moving down into the lower credit fixed income sectors.
The Fixed Income Total Return strategy has an unconstrained asset allocation policy that tactically rotates between low quality debt, high quality debt, and treasury bills to actively manage risk in the fixed income markets. Our research process seeks to identify the fixed income sectors that are exhibiting the strongest relative strength. We use a proprietary quantitative relative strength model to analyze these fixed income sectors on a daily basis. After determining a fixed income sector, our research process seeks to find the ETF or mutual funds that provide the portfolio with optimal exposure. The strategy seeks total return with a secondary goal of current income.
What fixed income sectors are in the portfolio’s investable universe?
Our low quality sector universe includes domestic and international high yields, emerging market bonds, preferreds and bank loans. The high quality universe is investment grade corporates and treasuries. When the portfolio is defensively positioned we will be allocated to treasury bills or money markets.
How do you think the portfolio will perform if interest rates begin to rise?
The portfolio is actively managed with the ability to be 100% allocated to treasury bills or money markets to protect principal in a rising rate environment. Our unconstrained tactical approach provides us with the ability to be flexible and opportunistic when the fixed income markets experience volatility. In addition, the high yield fixed income sector may mitigate interest rate risk. Over the last 20 years, each time the 10 year Treasury yield rose by more than 1%, the Barclays U.S. Corporate High Yield index posted positive returns as opposed to significant negative returns for the 10 year Treasury.
Why is the strategy appropriate in today’s climate?
Fixed income has been in a 30-year bull market and the prospect for this bull market to continue has diminished considerably. Interest rates are near record lows and rates will likely remain low as long as the Federal Reserve continues its quantitative easing policy. With that being said, eventually the Federal Reserve will have to stop repressing rates and we believe our tactical approach to managing fixed income will be necessary to manage the volatility of a rising interest rate environment. In addition, while interest rates are low our strategy seeks to provide opportunity for above average income by way of low quality debt exposure while also managing downside risk.
Where does this portfolio fit in a diversified asset allocation?
Navigator Fixed Income Total Return strategy can be a complement to a core fixed income portfolio as well as being the core allocation for more aggressive investors.
Can the portfolio target a specific income requirement for clients?
No. The strategy is not designed to meet specific income needs because of its tactical approach; however, in a low or rising rate environment, investors may be able to generate more income with less risk than in high quality bonds.
What is the portfolio’s exposure to credit risk?
The strategy utilizes credit risk as opposed to duration risk in an effort to mitigate interest rate risk. It seeks to utilize broad-based liquid funds to gain exposure. If portfolio managers feel there is excess risk in the low quality debt space, the strategy will allocate to treasury bonds and/or cash-equivalents.
Past performance is not indicative of future results. This material is not financial advice or an offer to sell any product. The relative strength measure is based on historical information and should not be considered a guaranteed prediction of market activity. It is one of many indicators that may be used to analyze market data for investing purposes. The relative strength measure has certain limitations such as the calculation results being impacted by an extreme change in a security price. Not every client’s account will have these exact characteristics. The actual characteristics with respect to any particular client account will vary based on a number of factors including but not limited to: (i) the size of the account; (ii) investment restrictions applicable to the account, if any; and (iii) market exigencies at the time of investment.
Clark Capital Management Group, Inc. reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. The information provided in this report should not be considered a recommendation to purchase or sell any particular security, sector or industry. There is no assurance that any securities, sectors or industries discussed herein will be included in or excluded from an account’s portfolio. It should not be assumed that any of the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of the securities discussed herein.
Clark Capital Management Group, Inc. is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about Clark Capital’s advisory services can be found in its Form ADV which is available upon request.