With Bonds, It’s Combine and Conquer - Context

It’s a very different environment from a valuation standpoint, and I think overall a healthier environment. Because the market is now, instead of looking at “What are the central banks going to do?” they’re looking at, “What is the real economy going to do?” That’s really a better backdrop for all sorts of investing.

I think in this period of somewhat calm, is a good time to start talking about it, which is, not only does it matter that our views on the credit cycle, for the return-seeking assets, and our views on the interest-rate cycle, for the risk-mitigating assets, but also the interplay between both of those.

And it’s the interplay between both of those, when we mix them together in one portfolio, that actually creates a little bit of the secret sauce for AB in terms of managing portfolios that have a little bit of extra income, but they still have that risk-mitigating factor behind them.

The beauty of the two buckets is they tend to be negatively correlated. That means that when one is doing well, over time, it tends to be that the other’s not doing as well. But the management of the barbell-style portfolio is that we tend to get the best of both. So we can do rebalancing within the portfolio: when one does well and the other does poorly, we sell the one that does well, we buy the one that does poorly.

Now it’s also important to manage the overall risk of these portfolios. So if both tend to look expensive at this point, then we mitigate the overall risk in the portfolio. So, it’s a very active approach, but it’s a combination of those two areas, those two factors that tend to be negatively correlated. And the rebalancing between those two, over time, adds to returns in the portfolio.

So, there are the cycles and the interplay between these two cycles, which are really, really important, and over time, we’ve become quite adept at understanding that here at AB.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.