Sandy Liang: Maximizing Return in a Rising Rate Environment

 

Sandy Liang, portfolio manager, Purpose Investments, talks about the nature of his investment strategy given the rising interest rate environment, and provides shares insight on what he's investing in his core mandates.

"Right now, there is a secular bear market in bonds going on, so interest rates are going up, and that bear market started in 2016," says Liang. "Since we spoke earlier this year, that view has not changed, so we feel that we're well positioned as a fixed income manager, because we do alternative fixed income."

"A lot of what we do is not sensitive to rates rising, and some examples of that would be the preferred equity asset class, which is really fixed income," explains Liang. "Those coupons go up as rates go up, so if the Bank of Canada continues to raise rates, bond yields go up, prices come down, but the great thing about the preferred equity asset class, is that the coupon rates go up so the price of those securities will be fine [will not go down, like with bonds]."

"We're also involved in high yield debt in the U.S. High yield debt is an asset class where when rates are going up, the credit risk is more important than the interest rate risk, so, if rates are going up, that means the economy is moving, then credit quality is improving."

"We continue to view this environment as a bear market in bonds, we think rates will continue to go up, and we're not really in the business of forecasting what the central bankers are going to do next, because the one thing about central bankers, that's become very apparent, especially over the last ten years or so is that, they are looking at the same data as every one else, and they even say that they're data dependent."

"When they say 'data dependent' they're looking at inflation and employment, and right now in the U.S., the U.S. is full employment and we have an inflation rate that's reached the target, so we think that the central bankers globally will continue to make the environment less accomodative."

The opportunity in corporate credit and high yield is largely misperceived or misunderstood. Even in charter programs like the CFA, a lot of the emphasis in the curriculum is focused on government bonds, and on interest rate risk.

In the alternative fixed income investing space, where Liang has earned his stripes investing in corporate credits and high yield, his team's focus is on discovering deep value and determining risk, according to valuing assets versus debt, to determine how much of a margin of safety there is in terms of asset coverage when you lend a company money.

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