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Alternative Investment

2022 IIC coverage: Diversifying fixed income portfolios with alternatives

While Guignard said alternative fixed income is often ill-defined, he offered up his own definition. “For the benefit of this presentation, we are going to define it as everything fixed income outside of traditional investment grade and publicly traded Canadian corporate, federal and provincial bonds. As you can imagine, that leaves us with a big opportunity set.”

Read: Inflation driving interest in alternative fixed income: white paper

He then pointed to private credit as one of the most popular and better known alternative fixed income asset class. As a result of regulatory changes in the aftermath of the Global Financial Crisis, banks have materially tightened their underwriting standards, he noted, leaving the door open for non-bank lenders. “Investors have stepped up and provided the capital.”

Another alternative asset class highlighted by Guignard was securitized assets like mortgage-backed securities, asset-backed securities and collateralized loan obligations. “They’ve had pretty bad press following the 2008–09 financial crisis but, since then, there’s been significant changes in both the regulation, as well as the underlying structure of the securities. At current valuations, they look quite attractive right now.”

For institutional investors in the search of yield and with a higher risk tolerance, he suggested considering high-yield bonds. “They’re just standard bonds, but issued by below investment grade companies.”

Another option he recommended for yield-seekers was bank loans. “They’re similar to our yield bonds, but with two major differences. The first one is that they’re secured on the capital structure — typically, assets are backing these loans. The second important difference is that the interest rate that is being paid on these loans is typically floating.”

Read: Considerations for integrating ESG into fixed income

Throughout the first 10 months of 2022, the popularity of bank loans increased, said Guignard, noting that the aggressive rate hike cycles by central banks certainly helped. “As interest rates were rising, the interest paid to investors was also rising.”

Alternative fixed income is commonly regarded as a niche strategy, he said, which is one reason institutional investors may not be taking full advantage of these opportunities. “Some of the asset classes within this universe certainly are, but there are also others that are quite big, especially when you compare it to the traditional Canadian fixed income market.”

The U.S. bank loan and high yield bond markets are both valued at around C$2 trillion – significantly larger than the entire corporate Canadian fixed income market, he noted. “Alternative fixed income is really an opportunity that spans the risk and return spectrum. Each of these asset classes are quite interesting and not all are niche.”

Read more coverage of the 2022 Investment Innovation Conference. 

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